Forget GDXJ: Follow The Real Money Into Gold, Silver And Juniors - Dave Kranzler (22/5/2017)

May 22, 2017

Silver Doctors / The News Doctors invited me onto their weekly SD Bullion Metals and Markets show to discuss why both the technicals and fundamentals are setting up for an unexpected rally into the summer in gold, silver and the mining shares, specifically the juniors.

Subsequent to our recording, the weekly Commitment of Traders report released Friday showed that the bullion banks continue to cover their net short positions in both gold and silver rather aggressively and the hedge funds are unloading long positions and piling into the short side. Historically, this has been a set-up for big moves higher in the sector. The hedge funds chase momentum and they are almost never right in the precious metals sector. When they pile into short positions, like they are now, it’s always a valid contrarian indicator. We also discuss why the “summer doldrums” in the precious metals sector is no longer a valid seasonal play.

Another contrarian indicator is the negative sentiment connected to the GDXJ ETF. Adam Hamilton wrote a non-compelling critique of GDXJ and made the assertion that GDXJ was diverting the flow of capital away from junior companies that deserve to get funding. The problem with this analysis is that retail investor buying of junior mining stocks on the secondary market is not a source of capital for junior mining companies. The secondary trading of stocks is not a source of capital for any stock, for that matter. ETFs are a “derivative” of the secondary trading market and thus are also not a source of capital for companies.

Junior mining stocks get their capital from new share issuance or from direct investment by strategic investors. If Hamilton bothered to call on the companies themselves rather than take quarterly filings and throw numbers into a spreadsheet as his primary tool of analysis, he would discover that many junior exploration CEO’s would tell him that they are getting a lot interest from strategic investors. Furthermore, many junior mining companies with investment-worthy stories are having no problem raising capital through primary share-issuance, notwithstanding the recent turmoil connected to GDXJ. GDXJ is a derivative security. Derivatives are a source of fees for their issuer/sponsors, not a capital raising conduit for companies.