In Part I of this series, I discussed three investment sectors that I think investors should avoid in the near term. I laid out my case for minimizing exposure to asset classes that appear to be in bubble territory, including stocks, bonds and real estate. The FED has pumped up these assets with artificially-low interest rates, money printing, debt monetization and other stimulus tools. This type of growth is not sustainable and these bubble are likely to burst as interest rates increase and the FED embarks on quantitative tightening.
In today’s article, I will discuss three asset classes that I believe investors should be accumulating over the next 12 months. These are sectors that are oversold, undervalued and face negative investor sentiment. They are significantly below their recent highs, are non-correlated to mainstream assets (to varying degrees) and offer significant upside potential in my view.
#1 – Precious Metals and Mining Stocks
This shouldn’t come as a surprise to anyone that follows our research. Precious metals have been money since around 700 BC, are limited in quantity and can’t be printed out of thin air, hold their value over time and are excellent safe-haven assets to hedge against economic and political uncertainty. They act as insurance for your portfolio and deserve consideration, particularly with so many other assets in bubble territory. Precious metals perform well during periods of high inflation or severe deflation.
I advocate holding some physical bullion in your possession. It is attractive as more than just a hedge or for the ability to retain value. Precious metals advance very strongly during bull cycles and can generate significant returns in a short period of time.
For instance, the gold price doubled in just two years from April 2004 to April 2006. Then the gold price nearly tripled in less than three years following the financial crisis, advancing from $680 to $1,924. If you buy during dips and hold through some of these strong rallies, gold can do much more than maintain wealth… it can generate it in a hurry!
The 3-year chart is bullish, with a series of higher lows since bottoming at $1,045 in late 2015. There is an ascending triangle pattern with gold attempting multiple times to breakout above the $1,660 to $1,670 range and failing. As the channel tightens, I expect gold to eventually shoot through $1,370 and climb quickly back above $1,500. The RSI is currently pointed higher with room to run.
Silver has offered even greater returns during its major uplegs. It doubled from around $4 in early 2002 to $8.35 in early 2004. In a short 2.5-year span following the financial crisis, the silver price rocketed roughly 6x higher from $8.40 to almost $50! How many assets do you know that can generate a 500% return in just over two years?
On the 3-year chart, we can see a symmetrical triangle pattern that has narrowed considerably and looks near an inflection point. These charts typically resolve with a major breakout in the direction of the previous trend. When this advance occurs, I believe silver will quickly eclipse $20 and test major resistance at $21.50. I expect this to happen before the end of the year.
Industrial demand for silver rebounded in 2017 for the first time since 2013. This is being driven by demand for solar panels, electronic components, medical devices and military applications. With little supply growth and increasing demand, the next move for silver prices is likely to be to the upside.
Mining stocks can offer even greater returns with proper selection and timing. The HUI Gold Bugs Index (HUI) advanced by 650% in just three years from late 2000 to late 2003. It went up over 300% in the year following the financial crisis and nearly tripled during the first seven months of 2016. Some of the quality junior and mid-tier mining stocks that we tracked during those time periods generated gains of 20x or more!
The 3-year chart for the GDX (Gold Miners ETF) shows a similar chart pattern to silver. But this one is even closer to a major breakout. We like to see mining stocks lead the metals higher and will look to buy aggressively once the price spikes above the resistance line and pushes above the prior high at $24.86.
But mining stocks do not always offer leverage to the gains in gold and silver. I use the HUI-to-Gold ratio to better understand whether mining stocks are likely to offer leverage during the next upleg. When this ratio is above the yellow line and falling, gold is likely to perform better than mining stocks. When the ratio is below the yellow line and climbing, mining stocks are likely to outperform gold.
As you can see, the HUI-to-Gold ratio is very low at 0.14. At this level, mining stocks are more undervalued (vs. gold) than they were during the depths of the financial crisis and on par with the bottom of the dotcom crash. They have only been more undervalued during a brief time period in the back half of 2015. I expect powerful leverage from mining stocks during the next bull-market cycle in precious metals.
#2 – Cryptocurrencies
The second investment sector that I believe is a buy at the current time is cryptocurrency. The price of Bitcoin is down over 60% from the January high of $19,000 to the current price of $6,700. Sentiment has turned negative and the current dip is driven by factors that I believe are transitory and do not warrant this level of price correction.
The chart shows support around $6,500, with lower levels of support at $5,800, $5,000 and $4,450. I believe the current level of support is likely to hold, but anything is possible in a market this volatile. The chart shows the potential for a triple bottom to form, which would be bullish for prices moving forward.
While the hack of the South-Korean exchange Coinrail is certainly not a welcomed event, it is reflective of poor security measures at a single exchange and not a systemic problem. It is not even a top-100 exchange. Plus, this is not a hack of any major blockchain and does not undermine the ability of cryptocurrency to be money or blockchain to disrupt industries.
Prices have also dropped sharply after the announcement that the CFTC is asking major exchanges for trading data in order to root out any potential price manipulation. While this may sound like a negative development at first blush, it benefits the sector as a whole to ensure there is no major price manipulation taking place.
I am not always a fan of government regulation and intervention. But if we get more honest price discovery, it increases confidence and makes it more likely that institutional money starts flowing into the sector. Whether it is individual traders, computer bots, or employees at exchanges, the entire sector is better off when these nefarious actors are identified and removed from the system. We all benefit from trading platforms that are free of price manipulation and fraud.
Bitcoin and cryptocurrencies get their value from the utility they offer and their limited supply. They act as a better form of money, allowing for near-instant transfers of wealth around the globe for just pennies. It is a fair, free-market version of money, decentralized, distributed, open-source and not controlled by central banks and governments.
It costs around $4,800 to mine a single Bitcoin currently, so this price level is likely to act as strong support should the price continue to drop. I don’t believe that prices will drop this low, but we have to consider the possibility and have powder dry should it happen. Either way, the upside potential vastly outweighs the downside risk at this juncture. I believe that Bitcoin is an easy double from current prices and will likely reach back towards $20,000 by year end.
Of course, the opportunity is not limited to Bitcoin alone. We track and analyze dozens of cryptocurrencies, each with unique benefits, specialized abilities and targeted to niche industries they are attempting to disrupt. They often allow the removal of the middle man, making the businesses run more efficiently and cost effectively. The innovation possible via blockchain technology will create tremendous value for businesses and consumers alike over the next decade.
Adoption remains very low for cryptocurrency, as less than 5% of the population owns any or understands how it works. You will notice in the graphic below that adoption of new technologies has been happening at an accelerating pace over time. Instead of waiting 20 or more years for mainstream adoption, I believe that we could see it for cryptocurrency within the next five years.
As adoption increases for Bitcoin and the supply remains capped at 21 million coins, prices are likely to head much higher. At the current time 17 million out of the 21 million that will ever be created are already in existence. When you factor in the 2-3 million that have been lost, destroyed or are otherwise unrecoverable, nearly 90% of all the Bitcoin that will ever exist are already in circulation.
The current market capitalization of Bitcoin is $115 billion, up roughly 3x from when the graphic below was created. Still, this helps to illustrate how small Bitcoin is relative to other major asset classes. Bitcoin would need to go up more than 7x to 8x to reach the current market cap of a single company like Amazon ($821B) or Apple ($940B).
It would need to advance 80x to reach the market cap of physical gold and 300x to reach the same value as physical money in existence. This makes predictions of $100,000 or even $1 million Bitcoin suddenly not seem so grandiose. McAfee might be spared after all.
#3 – Cannabis Stocks
The third investment sector that I believe is undervalued and likely to trend much higher over the next year is cannabis stocks. This emerging sector has enormous growth ahead, both medicinally and recreationally. More than 60% of the U.S. population now lives in states that have legalized some form of marijuana, illustrating both the rising acceptance of cannabis nationwide and the industry’s immense potential growth.
Cannabis sales topped total ice cream sales in the U.S. during 2017 and is projected to eclipse soda sales by 2030. U.S. cannabis sales were estimated at $7 billion to $9 billion, expected to grow by around 50% this year to over $10 billion, then growing to $22B by 2022!
California fully legalized cannabis on January 1st of this year and that market alone is expected to add nearly $4 billion in sales during 2018. I believe many of these projections underestimate the growth that will come from increased awareness of the medicinal value of cannabis.
Just a few days ago, President Trump said he will support a congressional effort to end the federal ban on marijuana. He would be the first president in decades to support removing cannabis as a Schedule 1 substance. One of the lead sponsors is Sen. Cory Gardner (R-Colo.), but this is a bipartisan effort also championed by Sen. Elizabeth Warren (D-Mass.). A removal of this classification that says cannabis has no medicinal benefit and is in the same league as cocaine, speed or heroin, is long overdue.
Many of the largest players are 20% to 40% below their 2018 highs, although it seems like they have already bottomed and started bouncing higher. As you can see in the chart below, the North American Marijuana Index, made up of 41 stocks in this sector, is still down 25% from the January highs.
The Canadian Marijuana Index is down 38% from its January highs, despite the fact that the Canadian government moved one step closer to full legalization last week. The Canadian Senate passed legislation Thursday night that would legalize marijuana for recreational use. The Senate approved the measure, 56 to 30, in a late-night vote. It now goes back to the House of Commons with dozens of amendments. Prime Minister Justin Trudeau introduced the legislation last year.
“We are very much focused on the control and legalization of marijuana, because the current system is not working,” Trudeau said last month.
This will open up the Canadian market, which is estimated to be worth over $6 billion in 2018. This rivals total wine sales and recreational demand will add another $2 billion in the first year and climb to $5B over the next 5 years. The companies that positioned themselves early will enjoy the bulk of this growth and will become attractive takeover targets for larger food/drug/alcohol corporations. Constellation Brands (distributor of Corona Beer), already invested nearly $200 million in a Canadian cannabis company (Canopy Growth) for a 9.9% stake.
I expect more of this to occur over the next 12 months, as companies with stagnating growth seek ways to increase their top and bottom lines more aggressively. These acquisitions are likely to occur as massive premiums, but I would prefer these cannabis companies to continue their growth path without selling out to a larger player. I want exposure to pure plays on the cannabis market, not a large corporation that owns other assets with significantly less growth potential.
I believe cannabis stocks are currently offering an excellent buying opportunity for investors. I think it is important to diversify, both geographically and in terms of particular market segments. I like owning not only the growers, but companies that own strong brands, retail outlets, packaging, software, and other businesses that will support this growing sector.
In summary, I believe that stocks (in general), bonds and real estate are overvalued assets in bubble territory. This doesn’t mean that they can’t climb higher, but in the near term, I view the downside risk as much larger than the upside potential. I also don’t advocate for selling all stocks, bonds or real estate holdings. These are cornerstone assets for any portfolio and how much you allocate will depend upon your individual goals and circumstances. But in general, I believe this is a wise time to start reducing exposure and rotating funds into other assets that are not at such lofty valuations.
My top three picks for investment sectors with strong growth ahead are precious metals, cryptocurrencies and cannabis stocks. I don’t think anyone would recommend going “all in” with these asset classes, but I believe they are priced attractively relative to other assets. I expect prices for gold, silver, mining stocks, quality cryptocurrencies and cannabis stocks, to all appreciate significantly over the next 12 to 24 months. As a cycles investor with a contrarian view, I think this is a good time to start rotating assets out of mainstream stocks, bonds and real estate (especially REITs) and into these other asset classes.
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Wishing you health, wealth, wisdom and happiness!