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No, The Junior Mining Stocks Are Not About To Implode

by Dave Kranzler, Investment Research Dynamics:

One of my subscribers sent an article to me that had been linked on Goldseek.com. The author laid out a case based on the recent events surrounding GDXJ and JNUG that the junior mining sector would likely “implode.”

I get suspicious about an article when the author repeatedly, with much bravado, makes the claim the he is laying out facts and challenges anyone to present challenges to those “facts.” Typically that style of writing belies a conspicuous absence of facts.

The author bases his premise that the GDXJ rebalancing and the related suspension of JNUG shares would strangle money available to finance junior mining shares. Nothing could be further from the truth.

To begin with, investment capital does not flow into the juniors via GDXJ or JNUG. GDXJ is a quasi-derivative security that buys the stocks it holds on the secondary market. It is unequivocally not a capital raising mechanism for companies. Money flows into juniors directly from investors who buy shares issued by the companies. I’ve chatted with several junior mining stock CEO’s – true juniors – and they have all said one thing in common: there is a lot of money being made available to the junior mining companies by both large institutional investors and strategic investors. The rebalancing of GDXJ and the share suspension of JNUG will have zero effect on this.

Too be sure, the author presents some interesting theories about what is happening with GDXJ and JNUG using some charts he presents. But charts only show facts about the directional moves made by stocks. They don’t explain why those moves occurred. The author’s views on why the moves occurred are theories, not facts. To compound the problem, the author uses a 5-day trading period with which to draw conclusions.

The short term divergences shown in the chart comparing JNUG to the various leveraged miner ETFs is most likely explained by the fact that some hedge funds/traders got ahold of the GDXJ and JNUG news and decided to front-run the market. Any seasoned market veteran knows that you can’t use just 5 or 6 days of chart data to make inferences about what may or may not be going on behind the scenes with capital flows and trade strategies. The ONLY conclusion we can draw from that chart is that JNUG underperformed the other ETFs over a 5 day period. So what? There could be any number of reasons why this occurred. The front-running explanation is the most likely.

Read More @ InvestmentResearchDynamics.com

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