Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16
Gold vs. Stocks and Commodities, Pre-FOMC - 20th Sept 16
BrExit UK Inflation CPI, RPI Forecast 2016, 2017 - 20th Sept 16
European banks may be more important than the Fed this week - 20th Sept 16
Gold, Silver, Stocks and Bonds Grand Ascension or Great Collapse? - 20th Sept 16
Mass Psychology in Action; Instead of Selling Gilead it is Time to Take a Closer Look - 20th Sept 16
Hillary - Finally Well Deserved Recognition for Deplorables - 20th Sept 16
Fascist Business Model: Reich Economics - 19th Sept 16
Multiweek Correction in Gold and Silver Markets Continues - 19th Sept 16
Stock Market May Turn Ugly This Week - 19th Sept 16
China Is Digging Itself into a Deeper Hole - 19th Sept 16
Yellen’s Footnote 8 Would Put Interest Rates on Autopilot - 19th Sept 16
Central Bank Digital Currencies: A Revolution in Banking? - 19th Sept 16
UK Government Surrenders to China / France to Build Nuclear Fukushima Plant At Hinkley Point C - 19th Sept 16
Stock Market Correction Already Over? - 18th Sept 16
American Economics - 18th Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

The Herd is Wrong About Gold, Wrong About Alaska

Commodities / Gold and Silver Stocks 2013 Feb 22, 2013 - 05:09 AM GMT

By: Casey_Research

Commodities

My message lately has been very simple: buy low.

And do it now.

The essential formula for investing, as you know, is to buy low and sell high. So easy to say, so hard to do.

It takes real mettle to be a successful contrarian, and it's precisely because so many investors are so nervous about our market today that it's a buyer's market.


Let me digress for a crucial, relevant sliver of history.

Seward's Folly

It was literally a deal done in the dead of night: 4:00 a.m., March 30, 1867. The US Civil War was a recent and very raw wound; the South destroyed and desolate, the North broke and bleeding, urgent needs of the people beyond counting. We'll never know the full truth of how the purchase of Alaska came together, but I suspect the true motives of those involved would weave a story worthy of a season of Deadwood: corruption, expropriation, murder… I'm sure it was all there.

Why else would the war-torn USA agree to spend desperately needed funds on a frozen wasteland you had to cross potentially hostile British territory to reach, and was full of hostile natives bristling with weapons once you got there? All the more reason not to pay for a territory so remote and useless that the Russians were willing to sell it for two cents an acre.

Even the British, who were busy settling British Columbia (now the Canadian province between the US states of Alaska and Washington), didn't want Alaska and turned down a Russian offer on the territory. An initiative by then US Secretary of State William H. Seward would eventually seal the deal. This is why the purchase of Alaska became known as Seward's Folly, a name that stuck for many years.

Something interesting happened during the formal transfer of Alaska. A blacksmith named Ahllund witnessed the handover, recounting that the Russian flag got stuck on the pole as it was being lowered. A soldier was ordered to climb the pole and retrieve the flag, but couldn't. A second tried and failed. The blacksmith offered no details on why the flag got stuck or why the pole was so hard to climb. My romantic heart has to wonder if the sharp-eyed eagle of Russia, the imperial symbol of the monarchy, knew its masters were giving away an enormous wealth in minerals for too small a price. Be that as it may, a third soldier succeeded where his comrades failed, and that was the end of it.

It took 31 years, in fact, until gold was discovered in the Klondike, setting off the famous race to prospect, sometimes called the Klondike, Yukon, or Alaska gold rush. The discovery is close to the Yukon/Alaska border, and the deposits, of course, pay no heed to the boundaries drawn on maps by men. Plenty of gold was discovered – and more than 100 years later is still being discovered – on both sides of that imaginary line.

My point, however, is not the independence of geology and politics, but the vision of whoever was really pulling Seward's strings and hence truly responsible for the purchase of Alaska. "Vision" may be the wrong word. I doubt that the interests behind the deal envisioned the gold rush to come decades hence and were placing their bets early. What I'm sure they did see were the Russians being squeezed by their creditors (the Rothschilds), and an opportunity to buy a huge tract of land even cheaper than the three cents per acre Jefferson had paid for the Louisiana Purchase in 1803. In both cases, the sellers had to sell and potential buyers were few – a classic contrarian setup.

The Wall of Worry

People who buy low – especially contrarians who nail the bottom of a market – are frequently called fools at the time, and for very good apparent reason: all the forces that explain the sell-off are well known. Arguments against the contrarian's folly are numerous and backed by recent experience and facts that most find too compelling to ignore. This is what makes the "Wall of Worry" phase of a market cycle so… worrisome.

I see this in the precious-metals market today, with rising mining costs, taxes, royalties, regulatory hurdles, and more, erecting not just walls, but fortresses and citadels of worry. All the reasons why Doug has called mining a "crappy, choo-choo-train industry" keep getting worse. The fact that recent experience for most speculations on mining stocks has been painful, even with high metals prices, makes it even harder to buy low and charge the fortresses of worry.

Imagine trying to convince one of our hunting/gathering ancestors, whose only experience with fire was terror and devastation, that fire would become his or her best friend. That might actually be easier than trying to convince a person who's just lost a fortune on commodities that buying commodities is a great idea. Depending on the timing, it would be true precisely because commodities had just wiped many people out, and the demand for commodities never goes away. It wouldn't matter, though; the prejudice based on painful recent experience is entrenched, the battlements of worry too fiercely defended.

The current market for precious-metals stocks is not quite so bad, in terms of devastation, but it's almost as good, in terms of investor disgust and clear opportunity. That stems from investors placing too much emphasis on their recent experience, rather than on understanding the fundamentals driving the market.

Consider the chart below that shows that relative to the underlying commodity – gold – gold stocks are, on average, about as cheap as they get. They are as cheap as they were at the beginning of this cycle (an opportunity only a few visionaries like Doug were willing to take), and even as cheap as they were during the crash of 2008 (an opportunity few were brave – or liquid – enough to take).

Of course, most of the companies in the Casey Research International Speculator portfolio have outperformed the average; some have been great wins, even while the market has fallen. This emphasizes that just because there's an opportunity to buy low, that doesn't make indiscriminate buying a good idea. Focusing on the best of the best also sets the stage for maximizing gains going forward.

In that context, it's particularly important to remember that after the crash of 2008 it took the market half of 2009 to regain momentum. Yet, the best of the best mining stocks rebounded even before the end of 2008.

All of which is to say that today we are in a classic Wall of Worry trough. It's not an intercycle bottom, but it is an excellent intracycle opportunity for those with the guts and vision to be contrarians – or at least those who recognize a chance to buy on the cheap when they see one.

How Can I Be so Sure?

I see the current market as one of great opportunity because I look at more than the joy or pain of recent experience. You could say that I'm a fundamentalist when it comes to markets. You don't need me to repeat all the arguments we've made time and again in our Casey Research publications. Let me instead just highlight one key, recent development that really underscores the solidity of the trend we're betting on: Japan's incoming government is promising to run the money-printing presses at full speed and print its way into prosperity.

This alone is inflationary; but of course, Japan is not alone. The EU, in spite of the austerity talk, has also pretty much said it will do whatever it takes to prop things up, and the US has thrown caution to the winds with its open-ended QE4-ever. The skids on the slippery slope are fully greased, the slide has begun, and there is no one and nothing on the global scene with the strength and the will needed to stop it.

The crash will come. Maybe not next month, and – if recent economic figures from the US government are to be believed – maybe not this year. But come it will.

As that becomes increasingly apparent, the resulting stampede into gold and gold stocks should exceed even Doug's "trying to pass the contents of the Hoover Dam through a garden hose" expectations.

Everything I see in the global economy today points that direction. Nothing I see convinces me that the governments of the world can succeed at borrowing and spending their way into prosperity – at most, they can delay judgment day a little longer. At most.

So yes, I'm that sure of what's ahead. Only the timing is uncertain. People may call it Casey's Folly now, but I don't think we'll have to wait 30 years – or even three years – for our own "Klondike Moment," when we'll be cashing in on some extraordinary profits on our own investment prospects.

I'll leave it to bigger fools or knaves to declare when the next gold rush will commence. What I can say is that I don't want to be short when it happens.

Louis James serves as chief metals and mining investment strategist for Casey Research, as well as editor of Casey International Speculator, which features junior mining companies Louis has identified as having huge upside potential. The current issue is loaded with buy recommendations – over 30 as of this writing – making now one of the best times ever to leverage precious metals to potentially life-changing gains. Learn more about Casey International Speculator and the strategies Louis uses to pick winning junior miners.

© 2013 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Casey Research Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife