November 30, 2023
The tax loss season is upon us.
As a reminder, tax loss season is the time when investors can receive tax credits for liquidating investments at a loss. During this time, investors clean up their portfolios for tax reasons. Which means that they also sell fundamentally sound stocks, too.
They may have bought them when prices were too high, and now they are tempted to get out of those positions… which has pretty much nothing to do with how good these investments are.
Investing in companies trading at a fraction of their value is an opportunity.
And we believe that it won’t take too long for these stocks to recover. The commodity bull market is one of the long-term trends that we have been following.
Below, we will explain why we expect Canadian mining companies to bounce back in the coming months.
Let’s get into the details...
Since the beginning of the year, gold price has gained over 10%.
It’s not a surprise, given the metal’s safe-haven status. After all, the war in the Middle East and the uncertain economic outlook put gold back on investors’ radars.
They don’t seek to profit from the yellow metal as much as to get protection against extreme market volatility.
No wonder… Gold is called a “fear gauge” for a reason.
However, despite gold’s stellar performance, most gold mining companies are in the red so far this year.
Leading gold mining exchange-traded funds (ETFs) remain underwater. Year-to-date, VanEck Gold Miners ETF (GDX) and VanEck Junior Gold Miners ETF (GDXJ) haven’t performed well. GDX is up 0.4%, while GDXJ is down 0.6%.
This isn’t normal for gold mining companies. They serve as a proxy for the price of the underlying metal and often perform better than it does when the price of the metal goes up.
There is a big disconnect between the price of gold and the valuation of gold-relates stocks right now. It started this summer when gold remained steady, but gold mining stocks have declined along with the rest of the market.
We believe this disparity won’t last long. At some point, investors will realize that the value gap here is too wide and rush to invest in gold mining stocks.
Canadian mining companies will have a unique advantage over their peers once it happens.
Let us explain...
Typically, investors buy stocks they are bullish on or “short” the ones they are bearish on.
The latter requires borrowing the stock and selling it in anticipation of a price drop. In this case, an investor can repurchase the stock cheaper and return it to the initial owner, keeping the difference in price.
It’s a well-known strategy, but there’s a twist...
There is also this “naked short” strategy. In this case, an investor is selling a stock without owning it. Naked shorting is illegal both in Canada and in the States.
However, some brokerages can still do it for their clients through loopholes and trading discrepancies. Regulators can catch this activity, but it’s often too late.
Those trying to manipulate a stock’s price don’t need much time or capital to profit from this strategy, especially in a time of automated trading algorithms.
This high-frequency trading dominates global markets. Over 60% of trades in the U.S., for example, come from these algorithms.
As a result, investors and their brokerages can initiate a lot of transactions before getting caught by a regulator. It is a major flaw in the system.
It’s illegal and dangerous for investors, their brokerage, and the stocks they trade.
This is why Canadian mining companies teamed up in a project called “Save Canadian Mining.”
The group is backed by leading mining executives and financiers, including:
The group has requested a new framework to eliminate “naked short” trades. It will be a major win for the Canadian mining sector if it succeeds.
Canadian mining companies can finally recover their valuations, possibly gaining a lot as a result.
We see a lot of potential in gold mining stocks during the tax loss season. However, Canadian mining companies have another major catalyst here.
The current legal framework used by Canadian stock exchanges is outdated, and it is poised for a review. We believe it’s only a matter of time before regulators close the loopholes for unlawful naked short selling.
This is a legal catalyst that could further lift the share prices of Canadian mining companies, which these days trade at massive discounts.
The ETFs mentioned above (GDX and GDXJ) are good proxies for the Canadian mining sector. Both have a lot of exposure to Canada.
VanEck Gold Miners ETF (GDX) has 42% of its holdings exposed to Canada.
At the same time, 55% of the stocks held by VanEck Junior Gold Miners ETF (GDXJ) are from Canada.
For those who prefer individual stocks, Canadian Mining Report keeps its readers updated on the latest news and developments in the sector, including the stocks with high return potential.
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