PRICE Is The Only Objective Truth – All Else Is Opinion

April 22, 2013

The interval since my last Views from the Crows Nest has been longer than usual. When one is faced with a family member in a health crisis, financial markets don’t graciously pause while we deal with these priorities. Thus we still need to attend to markets with a calm focus, which left no time for writing.

After a surreal and determined rise in the face of ever-growing fundamental risks, broad U.S. equity markets appear to be nearing the end of seasonal strength. Defensive measures will be taken for any current stock-based positions once the markets confirm the upward trend has been broken. In the meantime, there may be some more upside left to capture. Market tension is high but that doesn’t  preclude a continued rise of prices for a week or two. Eventually we’ll get to that tipping point when bad news begins to get priced in again.

We look forward calmly and patiently to when broad equity markets – especially in the U.S. and Europe –  have suffered significant declines, as our defensive posturing will buffer downside for clients. When most of the bad news has been priced in and few pundits see reasons for hope, we will then be in a position to buy at much lower levels and patiently ride the next uptrend for profits in the face of widespread Fear. There is a time to buy and a time to sell, and a time to do nothing.

While it’s frustrating (for everyone) to miss any market rally, we need to be mindful that markets always provide multiple opportunities each year to make prudent gains. The greater the Fear, the greater the buying opportunity, but patience is required. We are committed to continuously improving the execution of our “offense” game plan when the time is right. For each and every team member, this includes the person we visit with in the mirror.

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.

The Precious Metals sector has been simply awful Year to Date. As of Friday April 19th, Gold is down > 16%, Silver is down > 23%, and Gold-producer stocks are down > 36%. These are just Year to Date returns.

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. In the context of the magnitude of the very recent declines in Precious Metals, I am reasonably happy with our level of portfolio protection. We are constantly searching for every way possible to improve even further upon our downside risk management – even though it has traditionally been one of our strengths.

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.

Now being almost exclusively out of the Precious Metals sector, we patiently wait for a meaningful bottom to form. Clearly, that means we believe there is a distinct possibility of gold and silver both going even lower from the $1321 overnight (Asian market) low of April 15th.

There are no shortages of opinions, but the best informed, historically accurate and objective analysts we can find anywhere 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 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.

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.

In the middle of crisis exist the seeds of both danger and opportunity. A falling market is only bad if you are in it.

As this is being written, Gold has continued its bounce off the lows of April 15th. 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 by closing above recently failed support at $1525ish, 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.

Patience and Discipline are accretive to your wealth, health and happiness; Fear and Greed are destructive.

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