“True capitulation involves extremely high volume and sharp declines. It
is usually indicated by panic selling. The word is a derived from a military
term which means to surrender.” —Investopedia
It appears the gold market, despite the occasional good day, has entered a
phase of true capitulation. Gold has fallen 40% since its $1,921 high in
September 2011. GDX, the gold miners’ ETF, is down a numbing 78%. Many gold
stocks are now selling at their 2008 lows, with some back at their 2001 lows
(and major miner Barrick Gold is now at its 1992 price).
This will wreak havoc on the industry. If current price levels remain
through the end of the year, we will see:
- More asset impairments and reserve reductions,
- Reduced or eliminated dividends,
- Further job cuts, especially in exploration,
- Suspension of high-cost shafts or even entire mines,
- Reduction in credit ratings, and withdrawal of credit
lines,
- Slow or no board approval for new development projects,
- Difficulty meeting debt payments,
- Bank-required hedging on marginal assets, and
- Junior companies closing their doors.
We are massively long, of course. But should we be? And does it make sense
to hold when market fundamentals are crumbling so fast?
Assuming you own companies that can survive a period of low prices, our
answer is most definitely, YES!
Here’s why:
- Selling locks in losses. It also leaves
most people too emotionally stunted and financially weak to reenter.
It’s a mistake to let one’s emotions prompt the realization of
unnecessary losses and premature exit from the sector, especially when
signs of capitulation indicate that the market is close to its bottom.
- This downtrend is unsustainable. Many
producers are selling below their current all-in costs, and others are
dangerously close to slipping into the red. According to CitiGroup,
about 75% of gold mining operations are not profitable at sub-$1,200
gold. Unless 2.6 billion people in China and India suddenly change their
minds about gold, something’s got to give.
- We’re not alone. Both the US Mint and
Royal Canadian Mint saw a surge in demand in late October. Silver Eagles
are temporarily sold out. German dealers report a sharp increase in
demand and expect to announce delivery delays. Russia’s September
purchase was the biggest ever and greater than their own production.
Demand in China and India continues unabated—current prices are
“irresistible” for shoppers in both countries, says Standard Chartered.
- Gold is the ultimate currency. It’s less
about inflation vs. deflation and more about crisis—and the
risk of multiple currency crises around the world is extremely elevated.
Gold will respond in a massive way when that risk becomes reality.
These and other factors are all valid reasons to hold on. But there’s
another reason that may be the most exciting of all…
How Do You Spell Capitulation? O-P-P-O-R-T-U-N-I-T-Y!
The gold selloff has been so brutal that we’re now approaching a true
“blood in the streets” moment. That phrase is widely attributed to Baron
Rothschild, who made a fortune after the Battle of Waterloo against Napoleon.
With the blood of dead soldiers literally staining the streets, he bought
when almost no one in their right mind wanted to. We may not be quite there
yet with gold, but we’re close.
To get an idea of the kind of profits contrarians can earn under such
circumstances, let’s look at five top examples from history…
- In 1939, while Hitler was invading Europe, John
Templeton invested $100 in every stock trading below $1 on the New York
and American stock exchanges. His portfolio was partly junk: of the 104
companies he would purchase, 34 were in bankruptcy. But four years
later, his $10,400 investment was worth over $40,000.
- Marty Whitman, manager of the Third Avenue Value Fund,
paid about 20 cents on the dollar for Kmart bonds bought before and
after the company filed for bankruptcy protection in 2002. Needless to
say, many investors considered him a fool, as it looked certain the
company would fail. However, when Kmart emerged from bankruptcy and his
bonds were exchanged for stock, those shares jumped higher by an order
of magnitude before being taken over by Sears.
- Following the 9/11 attacks, airline industry sentiment
reached abysmal lows. It took Boeing stock about a year to bottom. But
those who did their research and acted boldly quadrupled their money on
Boeing over the next five years.
- Warren Buffett bought a stake in the Washington Post
Company during the 1973-1974 bear market, an investment that increased
tenfold a decade later.
- As we’ve outlined before, the gold market fell for
roughly two years in the mid-1970s. Bearish sentiment pervaded, gold
bugs were mocked, and chart patterns were negative. After bottoming on
August 25, 1976, gold rose a staggering 721% by January 21, 1980, just
three years and five months later. As you might surmise, Doug Casey made
a fortune in gold stocks during this period, partly due to him buying
shares at the 1976 bottom.
In each example above, investors made a fortune by buying when
things were at their most pessimistic. Note that none of the
successful investments above required the investor to know, or even guess,
where the bottom of the market was. All they had to do was buy deeply
undervalued assets when others would not.
The current situation for gold stocks is similar. Multiyear low prices,
extreme pessimism, panicked selling, scornful media… you get the picture.
The “blood” may not be done flowing in the gold sector, but the
opportunity emerging is similar to these extreme scenarios in history.
Every investor keen on extraordinary gains should be prepared to capitalize
on this opportunity. That’s exactly what I and many others at Casey Research
are preparing to do. As Louis James likes to say, you don’t try to catch a
falling safe; you let it smash and then pick up the treasures scattered
about. It’s not easy, but that’s why there’s so much profit in it for those
who have the cash and courage to follow through.
As for the physical metal, in a world as chaotic and dangerous as ours,
we’d argue that everyone should maintain a store of physical value under
their direct control—one no government can inflate away. It’s only a matter
of time before this game central bankers and politicians are playing is up
and a fuse is lit under the gold price. Owning gold is as important as ever,
if not more so. And it’s on sale.
On that subject…
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This offer can strategically—and inexpensively—position you for the
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