Rambus asked me to fill in for the weekend report. Rather than try to out chart Rambus I thought instead I will offer my perspective on the gold and silver market viewed through the lens of the principles discovered by the great but mostly forgotten market analysts of 100 years ago. I know I mention these men a lot, but that is because I continue to receive value from what they discovered on how markets work. It is a combination of a lot of things: market cycles, market value and psychology.
I could post a list of quotes from these gentlemen, however I do not have access to my notes since I am away from home finishing up a flight course on the Bombardier Global 6500. Yes Fully it’s a Canadian product! I will offer my opinion based upon the principles of these great analyst as to where we are in the bull market. Why is this so important? Well it’s important because it provides us the big picture. I believe the only way to be able to make the BIG money in this bull market is to grasp that big picture in order to have the endurance to hang on during times of high volatility.
Viewing the PM market through this lens has provided me a steady hand on the tiller which has enabled me to capture significant gains in this cycle.
The Three Bull Market Phases
This concept was developed by William P. Hamilton and refined by Robert Rhea in the 1930’s. For me it has been the most valuable tool for investing. Every investor must find what works for himself before he can have the confidence to invest big and go for the big gains. What works for me is finding a sector with great fundamentals that has been abandoned by the market. This works well because once it enters a bull market it essentially becomes a turnaround sector and upside will be pronounced. Once a bull market begins it will undergo three distinct investor psychological phases. The price action will generally mirror these investor psychological phases. Let’s review these.
Phase I: Stocks Return To Known Values. This is where informed investors establish positions anticipating future advances. The general retail investor, for the most part, has no idea that prices are going up albeit slowly and the trend has begun to advance. He is too interested in chasing shiny objects from the maturing bull markets of other sectors. In this phase stocks return to known values.
Phase II: The Mark-Up Phase. This is where stocks begin to advance discounting improved business conditions. This is the longest phase of the three and is also the most deceptive phase. Strangely enough, it is in phase 1 where the easy money is made, In phase II violent secondary reactions will convince investors that the bull is over and they will end up getting knocked off the bull. Somewhere past the mid point of Phase II the point of recognition (POR) occurs and the market surges higher. This is when the retail public finally discovers that a bull market is in effect and they want in. Interesting side note is that Bob Thompson of the mining clock system has stated that people don’t discover that a bull market is in effect until is it 80% into its life cycle.
Phase III: Mania or Blow Off Phase. Think dot come blow off of 1999-2000 or silver in 1979. Those were classics. When your Aunt Hilda wants to trade in her muni bonds to chase what’s hot then you know you are in the mania phase. These don’t last long, three months to a maximum of one year, but if you are in it gains can be impressive and intoxicating.
Where are we now?
It is my opinion that the PM sector is just now ending phase I. That is stocks have now returned to known values. This helps explain why we have witnessed this relentless unchecked rise over the past 3 months. It seems almost like a phase III mania move, but there is little to no public participation so it can’t be phase III. No, what we are seeing is a beachball which has been held under water getting released. Note the words from Eric Sprott: “When gold went through $2,000 the bankers lost their control over the metal. The same thing has now happened with silver when it passed $35 and silver has far more explosive power.”
Using standard valuation metrics of free cash flow per share the PM stocks are now valued at normal valuations. So that’s what this move is all about, just returning to known values. In other words, phase I. But keep in mind that these stocks have not yet discounted future earnings and FCF, this comes in phase II.
Some say this bull market began in 2019. One can make a reasonable case for this and PM bull markets generally run for about 10 years. So comparing it to past cycles it could run to perhaps 2029. I prefer to identify the start of this bull in September 2022. I have shown this chart before and it shows massive capitulation on the weekly count of stocks above the 200 day moving average. From June to November of 2022 stocks were pinned at zero stocks above their 200 MA. This was the psychological washout required to begin a true bull market.
So phase I ran from Sept 2022 to now. That is a three year period. Previously I thought phase I ended in January of this year, however I think it is more appropriate to classify it as now. Time will tell.
Phase II, being the longest phase, should last over two years likely lasting into late 2027 or 2028. Based on previous markets one would expect a significant market break between the phases. This could be sometime over the next few months, but this is speculation.
The new highs/new lows chart also confirms the total washout that occurred in the fall of 2022.
Let’s talk possibilities
Rather than throw out tantalizing outrageous upside numbers let’s talk process. From what I am seeing I do think we will witness unthinkably high levels will be reached in gold and silver stocks in this cycle and next cycle. But to achieve capturing gains from this bull market one must have a vision, a plan and a process. This is serious business because the bull wants to throw you off and reach these lofty levels unaccompanied. I often think of a story Richard Russell once told about riding the bull to the top of the great stock bull market from 1982 to 2000. A seasoned investor could have observed how the DOW went nowhere for 16 years between 1966 and 1982. In this time stocks reached high levels of intrinsic value per share, but price didn’t reflect this. Recognizing this he could have bought all around both sides of the bottom over a two year period between 1981-1983. No need to be a market timer, just buy value. If he was a sage student of the market he could have identified the phases of the market and held his positions riding through the ups and downs waiting for all phases to exhibit themselves. Finally when the bull market fully expressed itself on the upside as it did in 1999 in an obvious mania phase III, he finally sold and took his profits. This would have taken 17-18 years. He would have had to weather the crash of 1987 which occurred in phase II, the Gulf War I, the recession of 1992, several short lived crisis in the 90’s, Orange County bond collapse, Mexican crisis of 1995, tech bash of 1997 and others. But in the end by holding onto his stocks he would have made a family fortune and put his family into another economic class for their remaining lifetime.
If one is a disciplined student of the market Russell believed this is achievable, but likely the number of people that accomplished it could be numbered only in the hundreds.
This is why I write to you today, you should be determined to place yourself into this elite group of investors and believe me it is achievable. Frankly I see this present bull market as the market we have waited and trained for our entire lives and I for one, am not going to let it slip away.
The Method-Buy and Hold
This market sector is so volatile that I don’t believe one should actively trade. Most likely you’ll end up on the sidelines watching your stocks accelerate up without you. It’s the old “in it to win it” principle. Maybe trade around the edges of your core positions when the RSI gets into over bought territory, but stay invested until the bull market fully expresses itself to the upside. Remember scared money doesn’t make money.
Another principle is to have the courage to buy near the bottom when it is out of favor and the endurance to hold for the gain.
Also in regard to owning junior exploration or development companies keep in mind words spoken by Rick Rule saying he has never had a 10 bagger that he did not have to ride through a 50% drawdown at least one time and possibly more.
Another quote that never leaves me is the one by Jesse Livermore: A man doesn’t get very far in this business without the courage of his convictions. This means you can’t just buy stocks willy nilly, you’ve got to know them, the people behind them and how they trade. An example of this is recently a friend of mine bought NAK after its recent smash down around 90 cents. He told me he believed it would recover, I wasn’t so sure too I didn’t buy back the shares I sold a few months back before the smash. When it reached $2 this week I congratulated him on his success then he told me he sold it when it hit $1.10. He was afraid he would lose his profit. If one is going to hold these type of stocks you must be in it for the big gain and have the courage of your convictions. Some people just can’t stand making money I suppose.
What should one buy?
Of course I can’t offer any personal recommendations, but I will mention how I have positioned myself for this bull market. I have spread my holdings across different development stages. I hold all the way from greenfield development to mid-tier production. The mid-tier is to capture the rise in FCF that is occurring right now from the elevated gold price. Companies such as Oceania Gold, K-92, Westdome and Endeavour Mining are hitting on all cylinders yet still don’t reflect a future rise in the gold price which I believe is still ahead of us. Next I hold quality development companies such as ARMN, GMINF and Ivanhoe, which are on their way to becoming tier 1 major mining companies. Of course I also hold a number of quality royalty companies, EMX, Empress, Orogen, TFPM and others. Finally, I hold a number of greenfield to brownfield exploration and development juniors.
The Juniors-How to approach them
Juniors are high risk tricky propositions, but offer outstanding upside returns. The average investor should not consider himself qualified to decide which ones to buy. The sector is fraught with risk and lifestyle companies. There are an army of people out there who would love to take your money and run a lifestyle company. What could be better than to let OPM support you and make you believe you are some kind of a big shot telling stories at conventions and the like. Believe me these people are out there. Instead it is best to let other highly qualified people to pick the companies for you.
This is why I have made a major investment in Dundee Corp (not Dundee PM). Johnathon Goodman has spent a lifetime in the junior sector and is known for his due diligence of development projects. I buy the stock (DDEJF) and let him do the stock picking and management at a discount no less, since the market is not pricing Dundee stock equal to the sum of its components.
I also hold a number of Mike Gentile picks. Mike is known for his detailed analysis of value and the elements it takes to be a successful project. He is going for the 20-50 baggers and makes sure they have all the components to get there. He admits that some won’t work out, but at least they have been properly vetted and you won’t be getting any lifestyle companies.
Finally, for over 10 years I have held a major position in Riverside Resources. This company was started by John-Mark Staude and Rick Rule and is the opposite of a life style company. Tightly run and very conservative with one of the best geologists in the world who also is a superb businessman with an incredible unstoppable work ethic. Many people look at the stock chart and think it has been a dog. What they don’t see is that Riverside is the mothership to spin offs. Just look at Capitan Silver, if you held it you have made a very nice return and it appears to be the most prospective silver play in Mexico run by Mexicans who have an inside track in Mexico.
I personally think Capitan has 100 bagger potential from last year’s lows and 10-20 bagger potential from today’s price once the silver bull gets rolling.
Next up for Riverside is the Blue Jay Gold spin off. This is a unique greenfield and brownfield opportunity in Canada. It will begin trading before the end of this year, I will be adding more to my. already significant position. The greenfield project is in Ontario just down the road from Equinox and has high grade potential. Its brownfield project has already discovered high grade gold in excess of 1million oz in the Yukon. It was purchased for a song this summer. The stock likely begins trading sub $10 million market cap.
One last word on Riverside. One reason the stock hasn’t performed is because its prospect generator business model has been out of favor during the prolonged bear market. This is now changing and Matt Geiger has stated that he believes the prospect generator stocks are about to get rerated higher. Here is a chart of Riverside provided by Rambus. One definitely hasn’t missed the train yet.
Silver
I have saved the best for last. Just remember that silver stocks are the most volatile stocks outside of uranium stocks. Don’t hold them on margin and be able to stomach the volatility. But here is where the biggest gains are likely. We have recognized that stocks return to known values in phase I, well that’s where silver stocks are today IMO. This may seem ironic given that silver just hit an all time high, but one must consider the real price of silver vs inflation and the increase of money supply. Silver has returned to known values right here at $50. Silver price suppression is coming off and price can now run and reflect fundamentals. One thing that the late Ted Butler taught me was that the silver market has the structure to advance to levels we can’t even fathom once it gets going. I will save the explanation why for another day. Ted was not a silver nut he was a reasoned analyst and he described the silver market this way: Silver is a Saturn 5 rocket on top of a nuclear bomb. Silver’s short interest along with its tight fundamentals and minuscule above ground supply, combined with its tiny size gives the market the structure to go to levels you cannot conceive of from past performance.
Because of this potential for price gain I hold a probably reckless sized position in various silver stocks, but I am in at a low cost basis so I can ride the volatility. It is here that I believe huge gains can be made. But silver stocks must be selected well as there are a lot of low quality companies that simply have too much risk. One doesn’t have to own the riskier stocks in search of big gains in silver as the quality ones have plenty of upside leverage. I would avoid the group known as the silver animals. Mexico does give me a bit of caution even though I do own Capitan, First Majestic, Vizla and GoGold. US based Hecla and Coeur are likely fine, however I prefer turnaround candidate USAS. PAAS of course is the big cap play which I also own. Aussie based Chilean Andean Silver (ADSLF, ASE:ASL) is one of my favorites.
However, by far my favorite silver play is AYA Gold and Silver. I believe it has the best of everything, management, grade, size, location, and is very cheap still. Incidentally, Blue Orca’s trapped short position is a cherry on the top!
Final Comments
This PM bull market is still in its infancy. We know this because there is so little public and institutional participation. The rapid move of the past few months is simply the stocks returning themselves to known values. The fact that they have moved so far only reminds us of how low they were at the end of the last bear market and gives us a clue as to how high they have to go in the future. If you determine yourself to be a student of market cycles and listen to the language of the market you should be able to be in that select group of investors that rode it to the top and put yourself in a different economic class… This is your chance…go for it!