I was wrong. Gold has been a terrible investment this year.
When will it end? The historic slaughter in the gold market this year is unprecedented. The headline on Yahoo News below and the 3.46% drop in the metal price during yesterday’s session say it all. It appears the whole world has given up on gold. Or have they?
Recently, the smart money – commercial traders and corporate executives have become the most bullish on gold and mining stocks they have been in years. This month, commercial traders took their most bullish stance on gold since May 2005, an eight-year high. Similarly, 10 gold companies had key insider buying for every one that was selling as of late. That is an astronomically high level of buying. This articlediscusses these topics further.
Meanwhile, into every pull back in gold prices, we’ve seen the demand for physical gold – bullion and coins, rise to epic levels, where investors around the world have been lining up around the block in many cases, to purchase it.
The drop in precious metals seen in the gold bullion fund (GLD) and silver bullion fund (SLV) have been concerning, but the plummeting prices in mining funds has been outright disgusting. The senior gold mining fund (GDX) and its major components like Barrick Gold (ABX), Newmont Mining (NEM) and Goldcorp (GG) appear to be in need of life support at the moment.
An even greater slaughter has occurred in the junior gold mining sector, with the fund (GDXJ) 67% below its 52-week high and 80% down from its all-time high, which was reached less than two years ago. The current 200-day moving average price of GDXJ is sitting at $18.12, more than double today’s low. I therefore believe that unless one’s average price is significantly higher than $18, that over the upcoming months, investors will be happy they didn’t sell into the recent panic. Furthermore, those who have the courage to buy into the gold mining sector at today’s prices are likely to be rewarded handsomely.
Over the past two months, I have been progressively buying these funds at multi-year and this past week, at multi-decade bargains. These rare investment opportunities always feel terrible at first, but have consistently yielded a happy ending.
Following a contrarian investment approach, short-term losses are common as multi-year extremes often extend to find their ultimate point of reversal. Sometimes but rarely, these can turn into multi-decade extremes before turning the corner, as we’re seeing in the precious metals sector now. Fortunately, there remains hope for these positions despite how disappointing they may seem right now. It was only January of this year that GDXJ was last at $20. What goes up must eventually come down. Fortunately, history has proven in situations like we are experiencing right now, that the inverse of this statement is also true.
Furthermore, the recently heralded US dollar appears to have begun its own bear market after reaching 84.498 on May 23. Secondly, US treasuries have been in a tailspin since last summer, with (TLT) down 18% from its 52-week high. Furthermore, the bubble in the previously “can’t go wrong” and beloved defensive stock sectors appear to have popped. What’s left to go up? It looks to me like commodity producers and emerging markets are where the next major gains will appear. I believe the market is just scaring the dickens out of everyone right now to ensure as few investors as possible benefit from massive gains ahead. That’s my story at least and I’m sticking to it.
My mentor and good friend, Steven Jon Kaplan shared these remarks:
“I could cite numerous multi-decade extremes which will probably never be seen again in our lifetimes. The primary reason for buying is not just that we have incredibly compelling undervaluations for gold mining shares, commodity producers, and related equities in similar industries and emerging markets. The mood is so extreme that I can’t describe it eloquently enough; words absolutely fail me here. I know what I want to say but I can’t figure out even approximately how to say it in a way which will match what I’m thinking.
The closest parallel I can find is August 1976 when the whole world was convinced that the rally for gold mining shares had permanently ended and would never be seen again, which was followed by some of the biggest gains in history for mining shares of all kinds. I had certainly never expected this degree of extraordinary behavior which might happen a few times or even less over a lifetime of trading. I fully deserve whatever criticism I have received from subscribers in not recognizing in advance that we would have to go down so far before we went back up. It is essential to remember that the best trades in history have always been made whenever the fewest number of investors are willing to make them.”
I’d like to echo Steve’s remarks and accept any criticism for buying GDXJ and similar funds what has turned out to be too early. Although I wish I could control the markets, I can only act based on the best information available at any given time. In fact, if anyone has a reliable system for determining the short-term direction of the market or a definite way of determining when a final bottom is in, I’d sincerely like to know about it. Over the long term, contrarian investing is statistically superior to any other method I’ve availed myself of. Unfortunately though, short-term pain must often be endured to achieve the consistent long-term gains of truly buying low.
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