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Henry Bonner

‘Frothy’ Gold, Natural Resources Rally Will Pull Back, Says Rick Rule

In his recent market commentary, Chairman of Sprott Global Resource Investments Ltd. Rick Rule warned that the current upswing in commodities and precious metals could be overheating.

Over the last three months, precious metals and natural resources have edged higher. As of March 3rd, gold was up 9% over three months.1 Commodities rose by a similar number, as per the Dow Jones-UBS Commodity Index.2 The AMEX Gold Bugs Index, which tracks gold companies, is up 23% over that period.3

Investors are piling in as a result. Bloomberg reports4: “Hedge funds raised bullish gold wagers to the highest in more than 14 months amid mounting concern that the U.S. economic recovery is weakening.”

Rick believes the rally will face difficult times, testing the courage of investors currently entering the market. “These double-digit gains in many stocks over a couple of months are not sustainable,” he believes. “This recovery will need to consolidate in order to push further, so prepare for the stocks to come down in the near term, yielding attractive entry points in the summer.”

Some stocks are temporarily selling 30 or 40% higher simply because of the excitement brought on by a couple of good months in the sector, says Rick. Some investors may want to use this opportunity to take some gains, especially if you have ‘mistakes’ in your portfolio that you want to get rid of.

He explained his take further during an interview at the recent PDAC convention: “I suspect that the rally we are in now is a false rally,” he said, explaining that we will see more of a drawn-out ‘bottoming’ process than a swift bounce off of a bottom.

This bottoming process could last at least through the summer, he said. Many of the issuers could be ‘challenged’ during that period.

“The lower end of the market is still headed to its intrinsic value, which is, of course, zero,” he explained.

These companies going ‘extinct’ would be very healthy for the market, he says. It would be similar to what occurred in the late 90’s, which eventually set the stage for the bull market for precious metals and natural resources that ensued.

Today, we are still waiting for such an event in natural resources to occur. “Probably 60 percent of [mining] companies on the exchange are trying to stay alive – doing financings to pay the rent and pay salaries – which is not the way to grow,” says Rick.

These companies are able to keep going now because the market has relaxed, Rick believes, but that is unlikely to continue as this intermediate rally dies down.

Investors are mistaking this short move up as a broad bull market for natural resources and precious metals, becoming “too bullish too soon,” says Rick. “The recovery is here… but it’s going to take much longer to take off than people think it is.”

P.S.: Are we in a new bull market for gold? Hear Rick Rule and Eric Sprott respond live on March 4th at 2:00 PM Eastern. Click here to register for this free event sponsored by Sprott Asset Management LP.

Rick Rule is the Chairman and Founder of Sprott Global Resource Investments Ltd., a full-service brokerage firm located in Carlsbad, CA. Sprott Global is an affiliate of Sprott Inc., a public company based in Toronto, Canada.  Mr. Rule leads a team of earth science and finance professionals who form an intellectual pool for resource investment management. He and his team have experience in many resource sectors including mining, oil and gas, water, agriculture, forestry, and alternative energy.

1 http://charts.kitco.com

2 https://www.google.com/finance?q=INDEXDJX:DJUBS

3 http://finance.yahoo.com/q/cp?s=%5EHUI

4 http://www.bloomberg.com/news/2014-03-02/hedge-funds-most-bullish-on-gold-rally-in-14-months-commodities.html

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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