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A long term outlook on gold miners

November 6, 2015

Here is an article from our friend Avi Gilburt that outlines his long term outlook for gold miners. Avi will also be joining us on the weekend show so make sure you tune in for that.

Making a 25-year bet on gold miners

When I read Sam Subramanian’s column about how Will Danoff provided a 20 times return within 25 years, it got me thinking. While the column provides a look back over the last 25 years, it does not help investors today. What can be more helpful to investors today is how to replicate Danoff’s returns into the future. Hence, the idea for this column was born.

So, let’s put our heads together and see if we can come up with a theory as to what will provide us a significant return over the next 25 years, with the potential to see 20 times returns or even more.

Looking for a slingshot

The first question I then ask myself is what sector of the market has been beaten down more than almost any other? If we can have some confidence, from a probabilistic standpoint, that it is bottoming within the next year, could we then have an idea about an opportunity which can outperform the rest of the market for the next 10-20 years?

Before we discuss the specific sector, I want to take a look at the S&P 500 between 2000-2009, which is represented in a chart linked at the bottom of this column. As we now know, in 2009 this index had been the most oversold it had been in many decades. And when that market became that oversold and beaten down, it set itself up for a slingshot type of move that took it back to its prior highs and beyond within only six years. So, as investors, we need to seek out a current opportunity that can provide a similar type of slingshot move over the next 20 years.

So, this brings me to the gold and silver mining sector, which is likely the most beaten down and oversold sector from just about all the charts I follow.

It’s all about timing

Now, before we begin speaking of targets and returns, let’s first take a look at the pattern in the S&P500 during the 2000-2009 period, which is on the left side of the linked fractal comparison chart. In Elliott Wave parlance, this is what we call a “flat” pattern correction.

Let’s take a look at the current chart of the Gold Bugs Index HUI, -4.07%  on the right of the linked fractal comparison chart. Do you see any similarities? In fact, we have an almost exact fractal copy bottom forming in the HUI which would mark a bottoming similar to that which was seen in 2009 in the S&P500 and the overall ramifications should be the same.

So, you may be questioning how I can be sure that what happened in the S&P 500 will happen with the HUI. Well, let me start by saying that if it is certainty you seek, you are in the wrong business. Markets are non-linear beasts which offer no certainty … only probabilities. But remember, while history does not repeat in absolute terms, it often rhymes. If you truly understand that mass sentiment is what controls markets, and sentiment actions are patterned, then you understand that, as an investor, you want to look for similar patterns to suggest what the market can do into the future, at least from a probabilistic perspective.

What is extraordinarily interesting about the comparison between S&P500 and the HUI is not just the fact that the patterns are quite similar, but that the larger-degree flat correction in the S&P 500 took approximately eight years to complete before it developed its sling-shot move.

Now, take a guess how long the larger-degree flat correction has now lasted in the HUI? Yes, for those of you who guessed approximately eight years, you would be right. And for those of you that understand that we use Fibonacci mathematics when we calculate targets and patterns in Elliott Wave, eight is a Fibonacci number.

The conservative view

So, assuming that the fractal and timing similarities will play out as outlined, can we really be higher than the prior highs in the HUI within six years like we were in the SPX? The answer is that it is certainly possible. I would rather work from a more conservative perspective, as presented on the longer-term HUI chart linked below. As you can see, I would rather us expect that we will approach the prior highs over the next four to six years, whereas we can strike our next higher target around 1400 within 15 years. That would be a 14 times return over the next 15 years. Clearly, the market can move much higher, as it did in the S&P 500, but it is more prudent to use the more conservative targets we have set for ourselves in the HUI.

Please understand that this is assuming a much more conservative rally takes hold in the HUI relative to the S&P 500. If we were to assume the HUI attains 33% over its prior high within six years, which is what we witnessed in the S&P500, then we would expect the HUI to provide us with an 800% return over the next six years alone.

Making it work

As a former tax attorney, we had an old joke that the only certain things in life are death, taxes and tax reform. So, while there is clearly nothing certain within our financial markets, from a probabilistic, fractal and Elliott Wave analysis perspective, we may be able to replicate Danoff’s returns over the next 20 years by investing in the gold and silver mining sector.

Now, while the HUI is a cumulative index of all metal-mining stocks, we know very well that a number of stocks will outperform the index. Those stocks are what we are attempting to identify at Elliottwavetrader.net. In fact, back in September, we rolled out our own mining-stock model portfolio, and have suggested deployment of 30% of designated capital into various mining stocks which we expect will outperform this general index. The main reason we only deployed 30% of the funds is because we only see a 30% probability that the index has bottomed, but the stocks we picked had greater probabilities that they have struck their long term bottoms.

One such stock that we entered was Seabridge Gold SA, -5.67% which has provided us over 40% returns since our entry in September, with almost all our other stock picks providing 20%-35% returns over the last month.

This also means that, as of my writing this column, we see a 70% probability that the general index can see a lower low before this long-term correction has completed. We expect to deploy the remaining 70% of our allocated funds into more stocks that we expect will outperform the index once this sector strikes the final bottom we are expecting over the next six months, or proves that the bottom has already been struck within the next six months.

So, now, we have laid out a potential plan for investors which can replicate Danoff’s returns over the last 25 years, but on a forward looking basis for the next 25 years.

See chart illustrating the wave pattern of the Amex Gold Bugs Index (HUI) and S&P 500.

Discussion
17 Comments
    Nov 06, 2015 06:11 PM

    Avi who, up until 2010 was a tax lawyer in the healthcare field. See ANYONE can become a newsletter guru in this industry!!

      Nov 06, 2015 06:30 PM

      AGREED….ridiculous..absolutely ridiculous

      bb
      Nov 06, 2015 06:38 PM

      Of course anyone can be a “guru”, and when they sell enough subscriptions they make a living. This gold silver stuff is finite.

      A person can learn to do due diligence for resource investing. Not too difficult, just time. Which is why someone might pay to get it done for them.

      I can cut my grass but I pay to get someone else to do it.
      Forest Gump always cut his own tho, but he enjoyed it.

    Nov 06, 2015 06:36 PM

    “This also means that, as of my writing this column, we see a 70% probability that the general index can see a lower low before this long-term correction has completed.”
    Don’t want to see a lower low now on index. Want the lower low on gold. Otherwise bear continues into 2016.

    Nov 06, 2015 06:37 PM

    No offense Terry but the best traders I know come from fields far removed from trading.

      Nov 06, 2015 06:51 PM

      None taken Peter. I agree completely. Just not a fan of newsletter gurus. Real money, real P/L is all that matters. The e-wavers say something will go up, but the alternate is they go down, but that only works in world that you don’t have money at risk.

    LPG
    Nov 06, 2015 06:12 PM

    Thanks for posting this Cory.
    Appreciated.
    Best,
    LPG

    bb
    Nov 06, 2015 06:21 PM

    Went and got myself a little physical today.
    There was an actual line up. Extra staff at windows to deal with it.
    Sellers of gold, buyers of silver.
    Again, all a person could want from 100 once bars to 1 oz bars and coins.

    Silver onces with gold plate seem to be getting popular, at least there is a lot of options for that product. They do look good.

    Nov 06, 2015 06:30 PM

    bb….Can I be cheeky & ask what you bought ?

      bb
      Nov 06, 2015 06:08 PM

      I buy gold, got all the silver I want. I buy monthly Frank, usually price goes up just before I buy and drops right after lol
      I did buy one of those silver onces with a gold rabbit on it tho, I get those for gifts.

    Nov 06, 2015 06:00 PM

    Must be a bottom if……bb bought……..

    Nov 06, 2015 06:27 PM

    The only issue with this comparison (WHICH IS A BIG ISSUE) is that the S&P was rescued by trillions of QE in 2009, for some reason I don’t think these mining shares will be bailed out to create the V shaped bottom… nice try Avi

    Nov 06, 2015 06:03 PM

    Interesting articl from Avi. I have been waiting for almost 4 years for gold to up. What another 6 or 25 years LOL.

    Nov 06, 2015 06:23 PM

    will the dollar find the 100 handle?

      Nov 07, 2015 07:10 AM

      Probably. It is 99 and change.

      Gold also now has its 10 handle so by next week they may both have a 10 at the beginning.

    Nov 07, 2015 07:12 AM

    Avi’s chart looks like an attempt to forecast the weather a decade from now based on the last 6 months’ data.