Rick Rule: I think we’re seeing a bullish transition in the junior gold miners

Rick Rule: I Think We’re Seeing A Bullish Transition In The Junior Gold Miners

The below piece comes to us from Tekoa da Silva, who recently joined Rick Rule at Sprott Global Resource Investments Ltd. Rick, Eric Sprott, and John Embry will take part live in our upcoming Sprott Precious Metals Roundtable on October 7th. Click here to register for this free event.

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During a time in which few investors are considering the possibility of a recovery in natural resources, Rick Rule, Chairman of Sprott U.S. Holdings was kind enough to share a few comments.

Speaking towards the overall market Rick noted that, “The market itself is very healthy. You are seeing a transition…a transition that doesn’t suggest, but rather screams that [junior resource issues are] under accumulation—which is a very, very bullish sign.”

When asked if the current recovery might outperform the early 2000’s recovery, Rick indicated that, “[S]tatistically, this market shows it can be done because the bear market that preceded this bull market was a bear market that was more severe… bear markets are the authors of bull markets, and the recoveries in some way, shape, or form are related to the declines.”

Here are his full interview comments with Sprott Global Resource Investment’s Tekoa Da Silva:

Tekoa Da Silva: Rick, we had a meeting at our offices here recently, in which all our brokers, money managers, geologists, sat down around a table for what was a fascinating discussion on the resource markets.

You commented at one point during that meeting that we’re beginning to see a stair step formation building in the charts of the resource market; a series of higher highs and higher lows, suggesting a move of paper from weak hands to strong. Can you talk about that for our readers?

Rick Rule: Sure. I’m not a technical analyst but I have some friends who I think are fairly adept at this, [so I’ll say that], the chart pattern we’re seeing in the junior mining market in particular (but in the precious metals markets as well) is sort of a saucer-shaped recovery that is a slow, gradual recovery featuring higher highs and higher lows.

It’s important to note that the advances then consolidate—and that’s very important. The advances that don’t consolidate tend to [later] consolidate or fall off very rapidly. So what we’re seeing is a market that will advance by 10% or 12%, and then decline by 5% or 6%.

This is unnerving for people who can’t stomach volatility, people who have too much margin in their account, or people who are simply unrealistically impatient with regards to markets. But the fact that it’s frustrating doesn’t have anything to do with the market.

The market itself is very healthy. You are seeing a transition in the better stocks of the GDXJ—a transition that doesn’t suggest, but rather screams that they’re under accumulation which is a very, very bullish sign.

The slowness of the recovery suggests that the recovery is not fragile or over-extended at all. It’s very powerful and very deliberate. So I’m extremely encouraged by that. Most people of course, most speculators, want the later stages of a recovery, the “J curve”. Unfortunately for them, most speculators when they get excited, they buy. So when that J curve takes place, when the strong upward right momentum starts to build in a chart, that’s the time when one should be selling, not buying.

TD: Rick, are there other technical indications that you’re seeing now which suggest the juniors is being aggressively accumulated?

RR: Well, the chart shows just what I’ve described. If you [use] the base of a hundred, the chart would run to 112 or 113 and then consolidate back to 105 and then run to 120 or 121 and consolidate back to 109 or 110…then run to 127 or 130 and consolidate back to 115.

[So] that’s precisely what we’re seeing. It’s interesting that we aren’t seeing extraordinary volumes, just like we didn’t see extraordinary volumes in June, July and August of 2013 which [marked] the bottom.

We saw a situation then where the buyers were exhausted but there was some residual selling. So you had a down to flat market on no volume. Now you have a situation where the sellers are exhausted. It’s going up on limited volume but the buyers have the predominance.

The market will move from this recovery phase to a bull market phase, and exceeding expectations in this market is absolutely inevitable because the expectations for the sector are so low that they can’t help but be exceeded.

TD: Rick, could you comment on your expectations for the strength of this recovery, and do you feel it may be more intense than what we saw in the early 2000s?

RR: That would be difficult. The recovery we saw from the bottom in 2000 through the beginnings of the bull market in 2004 and then through the top of the bull market in 2007 were extraordinarily powerful. That was the best period of performance in my career albeit from a small base.

So outperforming that recovery would be difficult. Now statistically, this market shows it can be done because the bear market that preceded this bull market was a bear market that was more severe. The TSX Venture fell by 75% percent from its top in early 2011 to its bottom in late 2013 and we have seen in a very rough sense that bear markets are the authors of bull markets, and the recoveries in some way, shape, or form are related to the declines.

So from a statistical or empirical sense, I think that what you say could come true. From a practical sense, the recovery from the 2000 bear market was so kind to me personally that it seems disingenuous to expect a replay.

TD: Rick, I was reading the annual statement put together by Ned Goodman at Dundee Corporation who you’ve noted to be a mentor of yours over the years and he indicated that he has learned that you don’t make money when everyone is running into stocks.1 You make money when no one wants to buy.

Despite that statement—few people seem to be interested in investing in resources. What are your thoughts?

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