In the middle of crisis are the seeds of both danger and opportunity; think precious metals.
Unlike U.S. stocks, Canadian equity markets have already been badly damaged by: 1) unusual seasonal weakness in Oil and Energy stocks (portending global weakness?), 2) a sympathetic (to the U.S.) pullback in Canadian financial stocks, and 3) a massive drop in the Canadian Materials sectors – especially gold and silver stocks. The TSX is now negative Year-to-Date, and flat over the last three years.
As most investors are aware, the Precious Metals sector has been simply awful Year to Date. Gold is down > 16%, Silver is down > 23%, and Canadian Gold-producer stocks are down > 36%.
What a gift this Precious Metals sell-off has been, because a falling market is only bad if you are in it all the way down.
We never, ever like any losses or declines in portfolios but realize that avoiding all losses is not realistic. Risk management is always #1 and we constantly strive to improve it. Taking a few steps back, the massive sell-off in Precious Metals is a tremendous gift to our clients. Once we hit bottom there will emerge an exceptional longer-term buying opportunity – one whose profits should easily fill in the recent small declines and help generate very solid overall portfolio returns through the end of 2013.
There is no shortage of opinions, but the best informed, historically accurate and objective analysts we can find are advising that $1,158 for gold (with a similar or greater % decline for silver) is not only possible, but quite likely. If the $1,158 support level does not hold, then $907 comes into play. Yes, $907 per ounce is possible when looking objectively at market cycles, though hopefully not likely. The volatility is expected to last as long as 6 to 8 weeks.
Many gold propagandists have been denying the possibility of gold and silver dropping, citing the fundamentals of money printing, government indebtedness, massive physical buying, and the rising costs of new supply coming on stream, etc. Declines are blamed on other things, but never do they admit they are wrong. Gold propagandists have essentially turned Precious Metals into a quasi-religious community. Beware the Kool-Aid!
In my life experience, candidly admitting being wrong – when the evidence shows it – is incredibly liberating. Fighting the truth is a losing battle that consumes energy that could be re-directed to more positive and fruitful endeavours.
We’ve been very clear about our longer term belief in the upside of gold and silver, but have also emphasized the need to put “price” ahead of our hopes and opinions, because Precious Metals are a market just like all other markets – they go up and they go down. In investing “PRICE is the only Objective Truth; all else is opinion.”
I’ve written many times about the Mass Emotions of Fear and Greed. Financial risk is lowest when price is lowest, but price is lowest when Fear is at its highest. Whenever and at whatever price level the Precious Metals do finally make a major bottom, the Fear in markets will be palpable. Be on the look-out for some of the following factors:
1) Rhetoric related to the hatred of gold and silver will be extremely loud and PERVASIVE, including name calling such as “barbarous relic,” 2) Some high-cost mining operations may be threatened with closure resulting in supply destruction, 3) Very few quality analysts will have the courage to suggest buying, 4) Those who have held on all the way from much higher levels will look on like a “deer in the headlights”, 5) The TV ads offering to buy gold and silver jewelry will finally go silent, 6) The pain of being a buy and hold PM investor metals will literally make some people scream, and 7) The thought of buying gold could make you nauseous.
We are committed to patiently waiting for an extreme panic bottom – as described above – to form before committing significant capital for patient long-term gains. If the next 6 – 8 weeks show that a bottom is already in place, we’ll admit we missed the bottom and get on board the uptrend. What matters most is not whether or not we sold the top or bought the bottom – that’s ego-based nonsense. All that matters is that we make net gains.
What a gift this Precious Metals sell-off has been. There is a time to buy and a time to sell.
Patience and Discipline are accretive to your wealth, health and happiness; Fear and Greed are destructive.
Andrew H. Ruhland, CFP, CPCA
President, Integrated Wealth Management Inc.