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Two weeks ago, I mentioned that I am getting ready to pull the trigger on some new investments and that you will have the opportunity to see what I buy and where I buy it. (see Should You Sell in May?)
Next week I am pulling the trigger and a full report will be released on a junior gold company that I’ll be buying.
More on this story later.
Risk is everywhere. Much of the stock market has been held up as a result of money printing, leaving them extremely vulnerable – especially when the money stops. Currencies around the world are devaluing as a result of government policies. Even leaving your cash in bonds and treasuries will lose you money over time.
The recent jobs report from last week was not only disappointing, but it showed that the US economy is not healing fast enough to sustain a real economic recovery. Stocks fell as a result and in Europe, the EuroSTOXX 50 just turned negative for the year.
Can the market sustain its growth without QE? Can stocks keep moving forward considering minimal growth from the US economy?
While I think the stock market has more room to climb, it will eventually tumble if QE doesn’t come before the November elections. Combine that with the Euro debt contagion and the high price of oil, the downside to stocks is becoming apparent. It may not happen tomorrow, but it will happen.
The stock market is cyclical in nature and motivated by sentiment. When certain sectors move up, others move down as people fuel their money into one sector. People are hardwired to conform. When everyone sees a stock moving up, they jump on the bandwagon. It doesn’t matter if a stock is extremely overvalued, people will buy it if everyone else is. And they’ll buy it as long as it is going up.
But the same is true when stocks begin to fall.
It’s Time to Rationalize
Despite having record growth and strong growth prospects, many of the gold and silver mining shares are now trading at or near 52- week lows.
We’re in a period where the market has become extremely irrational and shares of strong quality gold miners and explorers are falling every day, despite record gold prices and strong outlook. But if you look at history – especially the 1973/1974 bear market – you will know that fundamentals will eventually win.
What’s happening now is eerily reminiscence of what happened nearly 40 years ago: Devaluation of the Dollar, extreme rise in oil prices, UK in a recession, real GDP growth decline, rise in inflation, and money printing (as a result of converting the dollar into a full fiat currency backed by nothing more than a promise by the government.) In the year prior to the 1973 crash, stocks were doing incredibly well with the DJIA gaining 15% in twelve months. How much did the markets climb in the last 12 months?
The S&P has climbed more than 21% in the last 8 months and more than 12% in the last six. The DJIA more than 19% and at 8% respectively. The overall average of the two market combined in the last seven months is 15%
As stock markets peaked in 1972, the bears kicked in and stocks fell dramatically during that time. While stock markets rebounded eventually, the recovery was a slow process. The United States didn’t see the same level in real terms until August 1993: over twenty years after the 1973-74 crash began.
While stocks lost nearly half their value during that time, many gold mining shares quadrupled in value. The surge in the gold and silver sector was dramatic and it changed the lives of the investors who took the risk to participate when no one else would.
Many of today’s investors – the ones whose sentiment change with every news release – don’t understand that fundamentals still dictate true price discovery. The greatest time to be an investor is during these times when novice investors are throwing away mining stocks because they get scared and pile their money into other stocks returning a measly few percent.
They see the stock market moving up, and they see their mining shares going down. So they conform.
Investors will always be more comfortable buying stocks that are trending up – even if the value of the stocks don’t make any sense. With mining shares trending down over the last few years and the lackluster price action in mining shares, investors have sought other places for their money.
But that’s why this opportunity is so amazing. The best time to buy stocks is when sentiment is negative and fundamentals are astoundingly positive.
What I am About to Buy
That’s why I am going to be loading up on shares in the gold and silver space this year.
Next week, I’ll be buying into a company that not only has an incredible management team and money in the bank, but also one of the largest land positions in the Abitibi – the second largest accumulation of gold in the world. This company continues to hit high grades everywhere and they are right next to what will become Canada’s largest gold mine. I have no doubt that they will be a prime takeover target – especially considering that one of Canada’s most significant mining events is about to take place right beside them.
I’ll be loading up on shares on this company shortly after the release of my report next week.
Stay tuned and be sure to check your email next Sunday for this report.
End Note
The similarities between today and 1973 are apparent. The differences? We now have more debt, more leverage, and more financial instruments to manipulate prices. That means bigger swings to both the upside and downside.
When fundamentals take over – as I am sure they will – look out.
Until next week,
Ivan Lo
Equedia Weekly
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