“The main purpose of the stock market is to make fools of as many men as possible.”
Bear market bottoms are marked by frenzied selling after an extended downtrend of 18 months. Caveat venditor! The record amount of precious metal bears and short sellers getting caught up in this emotional panic may forecast that the downward trend for almost two years in the mining stocks and precious metals may be coming to an end. Capitulation and downward gaps many times mark the bottom or end of the previous downward trend.
The majority of investors continue to chase the equity markets (SPY) and U.S. dollar (UUP) higher.
Gold (GLD) and silver (SLV) are undergoing capitulation and a series of downward gaps. Be careful not to sell into hysteria as this panic can not continue for much longer.
The Canadian Venture Index (TSXV) is testing 2008 lows and near 2003 and 2000 gold valuations of below $400 an ounce, $5 silver and $1 copper.
Don’t be fooled the majority of investors getting caught up in this manipulated panic, selling their resource shares for pennies on the dollar to chase the overbought equities, could be capitulating at exactly the wrong time.
Gold is overpriced compared to the mining equities and is more than 50% higher than its pre credit crisis highs, the S&P 500 is now breaking through 2007 highs and the Venture is still discounted more than 70%.
The Venture Index appears historically mispriced and discounted, indicating its buying time for long term value investors, not selling time. The world will continue to need natural resources, precious and industrial metals. The credit crisis has hurt the miners and materials sector more than housing and financials which were pumped up by Central Bank policies. Stable credit markets are needed for the miners. Maybe the U.S. government should look to provide loans and liquidity for domestic mining assets and exploration like they have for the financial and housing industry.
(Click to enlarge)
The only reason to sell miners is if the market or share price fully reflects the value of the underlying assets. The miners (GDX) are trading at historic discounts to net asset value and record low P-E levels.
Investor sentiment in mining shares (SIL) are extremely pessimistic, valuations are priced for a severe collapse, yet the fundamentals show completely opposite. This is a buying opportunity for long term value investors. This is definitely not a time to get caught up in the panic in the resource sector and follow the masses.
Be careful of being shaken out of your precious metals and mining shares during a high volume capitulation. The Gold ETF traded record annual volume and has had a series of downward gaps into new 52 week lows on no news. Waterfall declines like parabolic rises usually mark major turning points. The dumb money usually buys into parabolic moves and sell into waterfall declines. Smart investors must try doing the opposite to buy assets at fire sale prices and sell into public bubbles.
In 2008-2011, we saw a similar bear market and shakeout in U.S. housing, where many investors walked away from their homes at the bottom going into foreclosure, destroying their credit and capitulating. Four years later housing and the U.S. equity markets recovered. Investors who panicked during the 2008-2009 decline should’ve stayed the course.
We could witness something similar in housing back in 2008 with the junior miners and precious metals in 2013. Precious metals funds are seeing a record number of redemptions and the majority may be getting fooled as they may be selling out or near a major bear market bottom.
Selling based on negative sentiment, fear and emotions rather than fundamentals is akin to gambling. We may be witnessing classic capitulation in the junior gold miners (GDXJ) and precious metals, as investors are selling just because prices are falling not because of negative news or fundamentals. The recent gold and silver decline to new lows on a series of gaps could be a trap as the fundamentals for precious metals are stronger than ever.
Despite false reports of Cyprus being forced to sell its gold, the early release of the Fed Minutes, the bank downgrades and the bearish reports on gold and silver, the price could reverse higher as short sellers exit and new value buying enters.
Gold and silver may fake many out as it breaks and gaps into new lows only to reverse higher. These phenomena are called in technical analysis island reversals or exhaustion gaps. They usually occur after an extended downtrend of at least 18 months. Gold, silver and the junior miners have been consolidating for around 2 years.
Short term, the majority of investors may be running to the U.S. dollar and U.S. large caps, but long term capital will step up to support the precious metals and mining sector at historically low valuations in the midst of a fire sale.
Fiat currencies are being actively debased by Central Banks who are quietly purchasing gold as the price declines. They may be using this decline to add to their physical positions.
Eventually, we could see powerful moves back into the Venture Index and the junior miners as the shorts exit and new buying enters.
In conclusion, precious metals and the junior miners may be in the midst of panic selling and capitulation. Savvy investors who study market history look for these fire sales to buy deeply discounted and quality assets. Experienced, long term, value investors know how to control their emotions and think with their head, studying the fundamentals and balance sheets during irrational times and buy assets, while others are gripped with fear, inaction and hysteria.