There's Nothing Magical About Contrarian Investing and Other Lessons Gold Investors Learned in 2015

The Gold Report |

As we at The Gold Report interviewed the investing stars in 2015, we saw some patterns develop. Whether it was in the wake of terror attacks, bond defaults, currencies (we are looking at you, Swiss Central Bank and China, decoupling from the euro and dollar respectively), political drama in the U.S., Iran, Turkey, Ukraine and Germany or the long-rumored Federal Reserve interest rate hike, the call seemed to be for patience. Crises come and go, cycles have their way with commodities and then move on only to return again under another headline. Smart investors, according to the experts we interviewed, know that the way to weather these storms is to be diversified. The way to profit from them is to be contrarian. Let's take a stroll down memory lane and see what it tells us about the road ahead.

Gold Price Over 20 Years

Currency War Fallout

Two perennial favorites, Rick Rule and Porter Stansberry, joined forces in a popular article in June to talk about protecting portfolios from currency wars. Rule called the currency wars "particularly good for precious metals, which have traditionally fared well in times of fear. It's worth noting that precious metals, unlike most other commodities, respond to both greed and fear. But in my experience, fear has usually been the catalyst that begins to move precious metals higher." He reiterated the need to invest when markets are down. "Equities markets and commodities markets generally are cyclical. A market that's down by 90% is exactly 90% more attractive than it was before."

Stansberry was waiting for the dollar to blink before betting on gold. "I don't believe we're likely to see a rise in the gold price in periods where the dollar is radically strengthening. I think it's far more likely to see gold rally when there is uncertainty in the currency markets, volatility and a falling dollar." To prepare for an eventual rally, Porter suggested that this would be "a fantastic time to build expertise in the resource space."

Boomer Lessons

In our annual Father's Day feature with Chris and Michael Berry, authors of the Disruptive Discoveries Journal, we asked how natural resource investing has changed over the decades and what approach they are taking at this stage in the cycle. While acknowledging the challenges raised by both boomers and algo traders, they were optimistic about the opportunities available today.

The son focused on the energy metal space. Chris explained it this way: "Lithium is an oligopoly. When you look at the major producers, they're really chemical or agricultural companies with lithium as a side business. The opportunity lies in the fact the major producers are all facing challenges. Companies looking to compete will have to meet or beat their production costs. I think this requires leveraging technology to do so."

The father was willing to take an optimistic long-term view on a larger commodity suite. "In a world with seven billion people seeking a higher quality of life, I think copper, gold and silver eventually will be more valuable than ever. Gold is constant. Gold is going to continue to be valuable because even now, China is buying as much gold as possible. It is rumored to have purchased the equivalent of the total mined gold production in 2014. The Chinese want their currency, the yuan, to be part of the reserve currency standard, and it will be eventually. They are going to have to have enough gold to back it. Silver, in addition to its monetary character, is used in so many industrial and health care products. I think oil will bounce above $100/barrel again. Prices will go up and down, and you have to play it as it moves. But I think those liquid markets are easier to manage than smaller markets like graphite." Michael Berry also had this forecast: "Technology is coming to mining, and it will separate the men from the boys."

A Cyclical Perspective

Exploration Insights founder Brent Cook is always good at bringing investors back to reality. In this July article, he told the hard truth that "Mining and commodities are cyclical. The most money I ever made was from the stocks I bought in the bust between 1997 and 2002. It was extremely hard to do because it was scary. I would buy a stock and then it would drop by half again. You are all alone and the market gives you no encouragement at all. We are walking across the wasteland in the heat of the day into a dust storm while nearly everyone you know is back at the ranch buying Apple and biotech stocks. We are in a similar situation now. People have given up all hope. I suspect most of your readers have no desire to buy another junior exploration company, but there are some companies out there that have the cash to survive, strong management that knows what a deposit looks like and the ability to make those discoveries. If you can buy them for near cash, that's a screaming deal."

A Silver Lining

When it comes to silver, David Morgan, founder of silver-investor.com, always has interesting insight on where the metal is going and what companies will get there first. In a September interview, he explained how he knew that silver is undervalued: "If you take the true money supply versus the amount of silver aboveground, we're at as low a price today as we were at the bottom of the market in the early 2000s. This means that the amount of paper money that has been printed is the same on a per-ounce equivalent. Based on the overspending that all the world's governments have done, you're actually buying in a very safe zone. We're also very undervalued in the gold market. Both of these sectors have lost a lot of interest from the investment community. A lot of them have left the sector, but those who really analyze the markets have a little bit of an edge. They realize what the true picture is. So I would say the remainder of this year is a good time to be buying into these markets."

Historic Swings

321gold co-founder Bob Moriarty set goldbug hearts aflutter in this February article when he explained the magnitude of the currency swings we were experiencing and the ultimate impact on mining stocks. This is "the beginning of the end of something bigger. With the Swiss franc tied to the euro, as the dollar went up, the euro went down. This required Switzerland to buy more euros to protect its currency. Switzerland ended up owning nearly as many euros as the country's annual GDP. The Swiss National Bank got out before the European Central Bank (ECB) could increase its quantitative easing. The real key is the size of the movement. The best record that I've seen indicates a 38% move in the Swiss franc against the euro in 12 minutes. A move that big has never happened before in history. The Bank for International Settlements showed $3.954 trillion ($3.954T) in Swiss derivatives. Somebody was long $4T and somebody was short $4T. As soon as the announcement was made, computer trading kicked in and blew out all of the positions that were short the Swiss franc. Essentially, a trillion dollars disappeared in 12 minutes. Compare that to the 3.25% rise in the U.S. Dollar Index on Jan. 22 and 23. That's a $5.3T day in the currency markets. $1.5T of value disappeared on those two days. These moves are unparalleled in financial history. The swings are getting bigger and far more dangerous."

Moriarty credited the "highest bull consensus in recorded history on the Dollar Index" for depressing commodity—and by extension natural resource mining stock—prices. "When it turns, they [those betting on the dollar] will get wiped out," he warned. Still, he had words of hope for investors in the junior markets. "Miners will be in better condition over the next year because of lower energy costs and the drop in the price of iron."

In November he clarified which mining companies would come out on top. "The companies aggressively moving projects forward right now are going to be the leaders tomorrow," Moriarty said.

He also had some choice words for investors. "The people who make money in investments are contrarians. What you need to understand is popular psychology. When everybody wants to buy something, sell it to them. When everybody wants to sell something, buy it from them. It is that simple. There are no gurus. There's nothing magic about the market. When everybody's screaming, buy page 1; when everyone is happy, you want to be selling page 1 and buying page 23."

Source: The Gold Report Staff

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