The past two days have been rather brutal for those of us trying to make a buck in the precious metals sector. Gold and silver have held their own, but the PM stocks have been merciless in their downward motion. But is it really so bad? Are we justified in our glum assessment of the sector? Let's step back for a moment and try to look at this without emotion.
The first stop with any analysis should be the fundamentals. Technical analysis is great for finding your entry and exit points, but it is of no use when trying to determine if the party is over, or just getting started. So what are the fundamentals? A few weeks back I laid out some facts in regard to the metals, the USD and a few geopolitical items - I invite you to review them here. Suffice to say, nothing has changed one single bit. In fact, let's drift even farther back in our memory - - say back to 2002 or so. Many of us invested in the metals due to the appalling fiscal behavior of the Federal Reserve and our government. We were shocked at the contempt for fiscal discipline, horrified at the sheer volume of money being pumped into the system. Has any of this changed? Did Congress suddenly stop spending like their lives depended on it? (Of course, their lives pretty much DO, but that's a different discussion...) Has peace broken out around the globe? Did Joe America vow to stop visiting Wal-Mart three times a week? Has the energy crunch eased? Is the budget deficit decreasing? Did the national savings rate peek above 1%? The answer to all of these questions, of course, is a big fat NO!
As the saying goes, a picture is worth a thousand words...
So - - why are PM stock prices falling? Well, are YOU buying? No? If you aren't willing to pay more than $42 for a share of Newmont, or $14 for some Goldcorp, or $17 for some Meridian Gold, what makes you think someone else is? While you're sitting there waiting for "the herd" to come along so you can unload your shares at a good price, everyone else is doing the same. We are the herd! (Yes, it's a shameless day for self-reference...)
When do prices turn and move up? When the masses (us) finally give up and sell at rock-bottom prices. Why do prices move up then? Because the investors with deep pockets smell the fear and step in to buy. They have loads of cash to invest, and that kind of money moves markets. Quiz time: Why do they have such deep pockets?
Because they are successful investors that know how to play the game!
Yes, boys and girls, the reason they have more money than you or I is because time and time again, they "buy low and sell high". A simple concept that is extremely difficult to execute when you're sweating over the 50% loss you've taken because you bought in when there was no fear....also known as, The Top. We need to follow their example - buy low, sell high!
I remain bullish on the metals - - right or wrong, it should be an interesting ride!