Sunday, November 2, 2014

Gold Sector Decimated But Juniors Are Being Accumulated

Last week the entire gold sector was decimated. Speculators were throwing gold stocks in the towel.
Many very good companies (low cost producers with decent reserves / resources) went down 10 - 20%. Simply, the sector crashed.

Now it is impossible to find a single positive opinion on gold, silver and related companies. Even PM perma bulls expect gold to fall to $1000 or around that number.

In my opinion, these days we observe a typical picture of the bottom in the gold sector forming. What is more, it should be a very hard bottom, which means that the prices would not go below this bottom for many years to come.

One of the best signs of that process is the strengthening of  juniors shares. Look at the chart below:

The chart shows a few juniors (exploration and development companies) - in most cases their shares have been going up since the end of 2013. The strength in that sector is better visible in the charts below - they show the relative strength of the sector against the whole PM sector:

It seems that juniors are being accumulated and the main reasons for that are:

- big producers extract gold and silver all the time, no matter the prices of gold and silver (it is quite different behaviour than, for example, this seen in the uranium sector - the uranium miners in most cases are not extracting uranium due to very low uranium prices - this is very logical and economically right decision)

- therefore they are depleting their resources

- in the last years there are practically no big discoveries of gold / silver deposits

- so the only way to replenish the resource base is to acquire juniors' shares

- during the last leg down in PM sector (which started in 2011) the juniors shares were decimated

- presently their shares are very cheap

 - therefore it is time to acquire juniors shares by big PM producers

- the recent strength in their shares supports that thesis.

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