. . . . . . . Last . . . A Month Ago . . . A Year Ago
Gold . . 1,177,80 . . 1,212.40 . . 1,308.50
Silver . . . 15.78 . . . . 17.24 . . . . 21.66
“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”
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!
- 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 sell-off 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.
1,500 Tons of Gold on the Line in Swiss Vote to Buy Back Bullion (Bloomberg)
The Swiss go to the polls on November 30 in a referendum that will lay down new rules for the country’s central bank concerning its gold reserves.
The “Save Our Swiss Gold” movement wants to force the Swiss National Bank to hold 20% of its total assets in gold, from 8% today. Holding 522 billion Swiss francs ($544 billion) of assets in its coffers, the Swiss National Bank (SNB) would have to buy at least 1,500 tons of gold, costing about $56.3 billion at current prices, to reach the required threshold by 2019.
Those purchases, equal to about 7% of annual global demand, would trigger an 18% rally, providing a lift to gold bulls who’ve suffered 32% losses in the past two years, based on estimates by Bank of America.
With 1,040 metric tons, Switzerland is already the seventh-largest holder of gold by country. According to UBS, a change in the law may force the SNB to buy about 1,500 tons, while ABN AMRO Group and Société Générale estimate the need at closer to 1,800 tons.