Tag Archives: Contrarianism

Searching for the marginal seller

Sentiment falls to two-year lows for gold miners as shown by $BPDGM

When searching for opportunity, mispriced companies, and “value” (getting more than what you pay risk-adjusted as defined by me), a good place to look is where the marginal seller has sold. Below, gold has fallen for seven months from almost $2,100 to $1,670 recently or about a 20% decline. Now there are fewer calls for $2,500 gold. Pervasive bearishness abounds.

Notables such as Mark Cuban, owner of the Dallas Mavericks said, “I hate gold. Gold is a religion. I do not see it as an alternative to currency.”. 

Other sentiment indicators register new lows:
Albert Edwards@albertedwards99
·#gold I was asked if there was an update to the Hulbert Gold Newsletter Sentiment Index (HGNSI). This recent post from @LawrenceLepard highlights HGNSI has slumped to MINUS 41.7%. “Only time lower since 2000 is 2013 collapse when it was -50 or so.” Wow!

Below is the Gold Optix sentiment index plumbing new lows.

The Gold Commitment of Traders report below shows a big swing between speculators selling their long positions and adding to shorts while commercials do the reverse. An investor or trader needs to track these figures over time to place them into context. I view the figures as contrarily bullish–my opinion.

Finally, despite gold declining and bearish sentiment rising, gold miners have steadied relative to precious metals.

Gold miners (GDX) relative to gold (GLD)

All the sentiment indicators and price action of miners relative to gold seem to indicate that the market may be absorbing the most marginal seller. This is the seller who either by panic or strategy is willing to sell at the lowest price. There is no certainty that the market for gold or miners has bottomed but an investor can begin to look in this area.

March 16: added sentiment indicators. Never a timing device but shows the tilt in odds to payoff for owning gold and/or miners.

New Gold (NGD) Trading at 6 times Enterprise Value to operating cash flow.

Six times operating cash flow of $295 mil. divided into 676 mil. shares times $1.70 per share (NGD) plus $665 mil. in net debt or $1.15 bil. market cap plus net debt of $665 mil. or $1.815 bil. in enterprise value / by 295 of operating cash flow. Management estimates the company will generate $1.5 billion in free cash flow over 2021 to 2025–almost enough to cover the current market cap and repayment of total debt. The company has $490 mil. in liquidity. New Gold had gold hedges that capped their selling price at an average $1,623 per ounce. Those hedges are closed now so higher gold prices will benefit. New Gold is also leveraged to the price of Copper.

New Gold has mines in Canada or in safer jurisdictions. This seems like a bargain–and I believe it is–but there are risks. This is not a recommendation but an example of what appears in depressed markets. Also, NGD trades below $5 per share so some money managers are precluded from owning the shares. An investor should start with the presentation below (see link) and then study the financials. Look at management. Do your own work so as to learn and gain confidence because when or if NGD falls 30%, you will not know whether to add, sell, or buy? There is one obvious risk with one of the mines owned by New Gold–so know about that particular risk! And know the other risks too.

Gold miners may be in the middle of a long-term bull market. Another sign of continuation perhaps is that precious metals mining companies have become more prudent in their capital allocation as managers use growing free cash flows to retire stock as shown below

There are no certainties, of course. One simply seeks to place the odds of finding bargains in one’s favor. Good luck and good hunting!

P.S. March 12, 2021 Expect bearish headlines on gold: Don’t Expect Gold to Bounce Back Anytime Soon | Barron’s

Update on March 31st, 2021

fred hickey@htsfhickey
A normal multi-mo. correction following August gold record highs ($2065) has created many doubters. Best time to buy is at darkest sentiment moment(HGNSI -45, Ned Davis Research Gold Sentiment Composite 0% bulls) Doubts with deficit spending &money printing thru the roof? Buck up

Special Situation Quiz Question; An Overcrowded Trade


 Rags make paper,
Paper makes money,
Money makes banks,
Banks make loans,
Loans make poverty,
Poverty makes rags.

Interview at Special Situations Hedge Fund

You have been working so hard to have an interview with Buffo and Greensplat Special Situations Hedge Fund and now you are in their offices.   The interviewer sits down and then asks, “Can you please tell me what you think was the greatest special situations trade/investment of the past thirty years and what was the catalyst for the trade?”  Hint: This made huge multiples on the original capital.  Few recognized the opportunity until too late.

An overcrowded trade in the search for yield. http://truecontrarian-sjk.blogspot.com/

Tuesday, August 2, 2016

THE FIRST AND THIRD SHALL BE FIRST, WHILE THE SECOND SHALL BE LAST (August 1, 2016): There is a fascinating pattern to the trading during the first seven months of 2016. The strongest sectors by far have exclusively been silver and gold mining shares, in that order, followed primarily by other commodity producers and mining-related emerging-market equities. The second-biggest percentage winners have mostly been high-dividend, low-volatility assets including consumer staples, utilities, REITs, tobacco shares, telecommunications companies, and long-dated U.S. Treasuries. The third-best performers of 2016 have been mostly energy companies and a variety of emerging-market stocks and bonds.
This is puzzling is because the first and third groups are inflation-loving assets, whereas the second group performs well when deflation reigns. How can the financial markets be both inflationary and deflationary?
The deflation trade is nearly over, but it has remained in a bull market due to huge inflows from investors desperate for yield.
High-dividend and low-volatility assets including FXG and XLP (consumer staples), IYR and RWR (REITs), XLU, IDU, FXU, and VPU (utilities), along with TLT and ZROZ (long-dated U.S. Treasuries) have been among the second-best performers of 2016. They have also been among the top winners of the past five years. Many of those who have retired or who need to pay their monthly expenses have become overly dependent upon income-producing investments to generate yield. That’s fine as long as high-dividend assets are either bargains or reasonably priced, but it creates a dangerous situation when they are trading at all-time highs even compared with previous historic peaks. There have been all-time record inflows into high-dividend and low-volatility funds which have far outpaced their previous records. A person who has retired with a half million or a million dollars might perceive that he or she “needs income” in order to maintain a basic lifestyle, and most of these investors don’t realize that if everyone goes to their financial advisors and wants the same level of “safe” income then they are all going to end up owning the exact same assets. What would be reasonable for a tiny minority of investors has become an inevitable catastrophe since millions of others are acting similarly without realizing the consequences of collectively being in such an overcrowded trade.
The inflation trade has only been in a bull market since January 20, 2016, and has a long way to go to recover its losses since April 2011.
Unlike most high-dividend assets which had bottomed in the first quarter of 2009, most commodity producers and emerging markets had been in severe downtrends from April 2011 through January 20, 2016, and even after their subsequent strong rebounds remain far below their previous peaks. Earlier this year, many of these assets completed multi-decade nadirs, with some of them touching levels not seen since the 1970s. Therefore, they remain substantially below fair value. Silver and gold mining shares including GDXJ, SIL, GLDX, SILJ, and GDX have tripled on average in just over a half year, and have thereby outpaced nearly all energy producers which had initially rallied but have gone out of favor along with most emerging-market equities during the past several weeks. This has created the best bargains for those assets which are in the process of completing important higher lows including URA (uranium), GXG (Colombia), FCG (natural gas), and FENY, a more diversified and less volatile fund of energy producers.
The Daily Sentiment Index for crude oil, indicating the percentage of traders who are bullish toward any asset, plummeted to 10% at the close on Monday, August 1, 2016. This is an incredibly low level for anything which is in a primary bull market, as energy commodities have been since February 11, 2016. The shares of energy producers mostly approached or reached multi-decade bottoms on January 20, 2016. Whenever it is possible to buy at higher lows during a major uptrend, this is ideal because a sequence of several higher lows is often followed by an accelerated rally.
The high-dividend and low-volatility bull markets are very stale and incredibly popular, while few know about the uptrends for commodity producers or emerging markets.
Almost everyone knows that high-dividend shares have been the biggest winners of the past several years and are still eager to jump aboard the bandwagon, while few realize how overcrowded this bandwagon has become. Historically, the most wildly trendy and popular trades have always proven to be disappointing. Although it is rarely compared with the internet bubble of 1999-2000, the Nifty Fifty overvaluation of 1972-1973, or the blue-chip top of 1929, high-dividend and low-volatility names have become the bubble of the decade. The total assets in USMV, a frequently-touted low-volatility fund, have tripled in one year. Just as in 2000, almost no one who has invested in these securities realizes that they can lose half or more of their money. Almost no analysts, even those who know how overvalued these popular securities have become, can emotionally imagine them plummeting. They might know intellectually that it is possible, but they can’t really imagine it happening any more than anyone at the beginning of the century could envision the Nasdaq plunging by more than 75% within three years. Alas, a similar fate awaits those who are participating in high-dividend and low-volatility shares and funds.
Just because you’re in the water to get exercise doesn’t mean you can ignore the great white sharks.
When I point out the dangerous of owning high-dividend and low-volatility shares, I often hear the refrain that “I’m not in these due to their extreme popularity” or “I only own these to generate the income I need to pay my expenses.” The market won’t treat you differently just because your motivations are allegedly pure. You might be the nicest person on your block, you might generously donate to charities, and you might frequently help old ladies to cross busy streets. Even if you’re swimming in the water just to get your daily exercise, you’re not magically exempt from being eaten by hungry great white sharks that are lurking nearby. If any given trade has become desperately overcrowded, then no matter why you’re involved in it, you’re going to be as badly hurt as the ignorant buyer who is doing it to keep up with his poorly-informed friends. As Warren Buffett has stated, when we strip off the clothing and pretense, we’re all fully exposed underneath. When the U.S. housing bubble collapsed in 2006-2011, as it about to do again in 2016-2021, it won’t spare those who are nice to animals or who do good deeds. I will discuss real estate in more detail in the near future.

The Secret to Success: Being Ridiculed on Social Media; Hedge Fund Analyst Quiz; The End


Jesse Felder, a Contrarian Trader   Listen to the podcast and explore The Felder Report

Hedge Fund Quiz

The only way to win a date is to become a hedge fund analyst.  Your interview process requires you to analyze a real estate/mining company.

You look first at the balance sheet (Thanks Mr. Graham).   You notice that this mining company bought claims under a ski resort (Park City, Utah) where it bought acres in 1907 at five dollars an acre.

Then you notice that the company issued 20-year corporate bonds when interest rates were 9% for AA corporates about fifteen years ago.  Now similar companies can issue bonds at 5%.

How would you conduct your analysis? Good luck.

Interest rate decline

The End

So how will it all end? Dollars are created by computer key stroke when the Fed buys bonds, but the dollar is backed only by bonds (and a tiny bit of gold) and the bonds are payable in Federal Reserves Notes (the dollar) or just another form of debt. So debt is created to buy debt which, in turn, is payable in debt. Whoa?! No way this could ever be a problem. It’s magic. One thing bothers me, though, why do we need legal tender laws TO FORCE people to use dollars? I got a bad feelin’ on this.

But WHAT if more and more debt creates less and less “GDP” (let’s pretend it means something–govt spending creates economic growth, Ha Ha.) until each dollar of debt creates 0 or negative GDP growth. The Fed has to print to pay interest on the debt or the tail consumes the tiger.

Hemingway: We go broke slowly, then suddenly!

Anyone using CPI to gauge reality needs a reality check. You are a fool to buy gold as an “investment against “CPI inflation.” You own gold as a form of money to store wealth IF you lack confidence in central planning. So when it all comes down is when gold goes into permanent BACKWARDATION in gold. Holders of gold go NO BID on dollars. But don’t worry, the dollar derivatives like the Yen and the Euro will be earlier casualties. Meanwhile hope that the dollar rises against in order to buy more ounces. For others, Pray.
Now those who read the above my disagree, but know exactly fiat currencies do NOT go to 0 (or NO BID).

Mid-Day at the New York Metals and Mining Conference May 12th

Single SpeakerWorkship

2 people conference hall

As you can see above, attendance was sparse this year at the New York Metals and Minerals Conference:  http://www.metalsandmineralsevents.com/ehome/index.php?eventid=81632&

A Clue?


Time to dig in…………and uncover opportunity in the neglected, abandoned sector.

Studying Pre-Production Mining Companies

See videos: http://www.goldsilverdata.com/mining-101.html




How to read a technical report: Mining Fundamentals