…at least that’s what everyone tells me.
We all know it hasn’t been much fun being a precious-metals investor this year. As the strengthening global economy has put many quantitative easing programs on hold, much of gold’s luster has diminished.
And that’s why most investors are staying away from sectors like junior gold miners. But with so much bearishness facing the gold sector, you have to wonder if there’s finally value to be had. After all, as the old investing adage goes, “Be greedy when others are fearful.”
I think the famed contrarian investor David Dreman sums up my thoughts on junior gold miners best.
[Benjamin] Graham’s observations that investors pay too much for trendy, fashionable stocks and too little for companies that are out-of-favor, was on the money… Why does this profitability discrepancy persist? Because emotion favors the premium-priced stocks. They are fashionable. They are hot. They make great cocktail party chatter. There is an impressive and growing body of evidence demonstrating that investors and speculators don’t necessarily learn from experience. Emotion overrides logic time after time. – David Dreman
The evidence Dreman speaks of resides in studies like investing “by the numbers” guru Mebane Faber’s recent report.
Mr. Faber did the math on returns from buying asset classes beaten down 60%, 70% and even 80%, like the junior gold miners. His findings were impressive, to say the least.
- Average three-year returns after buying a sector following a severe crash would have rewarded an investor nicely – from 57% to an incredible 240%…with the highest returns following the most severe beat-downs.
- Returns after buying a similarly beaten-down industry were also huge – between 71% and 115%.
- And returns when buying an entire country after a serious crash? A cool 107% to 156%.
So according to Faber’s studies, if you are a long-term investor, there’s lots of money to be made in beaten down asset classes like junior miners. (Over the past six months I’ve collected over 25% in income selling puts for my High Yield Trader subscribers while I wait for the miners to hit my price).
Investors willing to take near-term losses for the potential for long-term gains should look towards the junior miners. The risks are greater — as these smaller firms may not survive the rout in gold prices — but the rewards are significantly higher. The Vectors Junior Gold Miners ETF (NASDAQ:GDXJ) offers exposure to the small guys.
One thing about which I am certain: Over the past three years, gold has gone from the asset du jour to the most hated investment on the planet. The longevity of that dour attitude towards the precious metal could be a signal it’s time to buy the golden ticket. And the biggest bang for your buck looks to be in the junior mining sector. I can’t think of a better way to play the potential bargain in the industry.
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