In 2018, Colombian guerrillas murdered four people working for Canadian miner Continental Gold…
The guerrillas were battling for control of the region’s more valuable mineral resources… including gold mines.
Continental got a contract to mine in an area full of illegal mining operations. It was working to close down these competitors. And so the Colombian guerrillas retaliated…
Guerrilla warfare isn’t a typical risk on a company’s balance sheet. But it’s just a hazard of doing business for junior gold miners like Continental Gold…
These small mining companies must overcome extraordinary challenges to deliver their product. They work around political instability, foreign governments, and high operating costs.
All of this translates to a lot of volatility in gold-related stocks…
When junior gold miners fall, they fall hard. But when they rise, they can absolutely soar.
The latter is exactly what we’re seeing today…
Junior gold miners are going stratospheric.
Gold has been outperforming in recent months, surging 12% since March. But junior gold miners have skyrocketed 28% in the same period.
These returns show how junior gold miners can amplify the gains of gold itself. They act as a leveraged bet on the metal.
That’s because when gold prices rise, these miners can earn a lot more in profits without any increase to their costs. Of course, this same leverage can punish these companies severely when gold declines.
Based on the recent price action, these companies have more upside ahead. Here’s why it’s worth the potential risk…
During their recent rally, junior gold miners went on a rare win streak. They rose five days in a row into April… after rising six days in a row into March.
We can see these win streaks by looking at the VanEck Junior Gold Miners Fund (GDXJ). This exchange-traded fund (“ETF”) contains a basket of junior gold miners. It’s a useful way to track the sector as a whole.
In the chart below, you’ll see the fund’s two multiday win streaks since February. Check it out…
Gold miners strung together six days of increasing prices from February to March. And then they made a second streak of five days from March to April.
I wanted to know what the more recent streak meant for junior miners going forward. So I tested every example of GDXJ rising for five days in a row going back to 2009. I didn’t use a rolling five-day period… meaning if GDXJ rose for six days, like in March, I only used Day 5 as a trigger.
In short, five-day win streaks are rare for GDXJ. The fund has only generated this signal on 1% of days in the past 15 years.
However, the signal has a chance to lead to outperformance in the near term. You just have to dig a little deeper into the numbers. First, check out the broader outlook…
Overall, junior gold miners tend to lose money in the long term. The category falls about 4% in an average year. But buying on a five-day win streak tends to generate a positive near-term return.
Junior miners are up 1% on average three months after a five-day streak. And they’re up 2% on average in six months after the signal.
But buying on a win streak comes with some risk. GDXJ was only up 50% of the time in three months, and only 45% of the time in six months. So your odds are a little worse than a coin flip if you hold for six months.
However, if you do hold that long, you might be in line for some serious outperformance…
The average positive return for a six-month period was 35%. The average loss was 19%.
But what’s most striking is the maximum return after this signal. After a five-day win streak in 2016, junior miners went on to return 133% in six months. That significantly outweighs the maximum six-month loss… which was just 45%.
With good timing, you can use the volatility in junior gold miners to your benefit. And based on GDXJ’s recent run to the upside, now looks like an excellent time to go long.
Good investing,
Sean Michael Cummings
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Source: Daily Wealth