This Is It

Eric Muschinski |

This is one of the more important issues I’ve written and I’m glad I waited to write out my thoughts now versus right after the significant drop in gold two weeks ago. I will dovetail into why I believe that is important emotionally and why it ties into our viewpoint over the short and long term. I titled this issue “This Is It” because the decisions made in this coming, call it 6-18 months or so, will separate the men from the boys in this great gold bull market, and our resolve will be tested. I believe this scary market environment and correction is setting up the bubble/mania/third phase of the precious metals secular bull market where prices go parabolic in metals and mining stocks. However, the downside action in gold is likely not over yet and we may be in for a tough summer for those hoping for an immediate rebound in precious metals prices.

One main goal of this issue is to help you crystalize your plan, patience, and risk tolerance as it pertains to the next few-five years in the gold/silver/mining stock markets. If gold traded to $1,000 an ounce in the next year, would you throw in the towel then? Use it as a buying opportunity and be prepared and liquid in order to acquire more? Be of the mindset that it would be within the bounds of a ‘normal’ correction for gold? Well, gold trading to $1,000 an ounce is a possibility! And, if it did so, I would view it as a gift and also not be shaken as it pertains to my viewpoint that the top has not been reached in this secular (long term) bull market in precious metals (I’ll get into reasons why I believe this later in the issue). Now, no two bull markets are identical but previous markets can give us an idea of what’s possible. On the next page we see a chart of the gold price from 1970 to 1979 and it is a very good example of what may be occurring right now in the gold market. The price had risen from $35 to $200 an ounce in about 5 years (approximately a 600% increase), then over the course of one year from 1975 to 1976 the price was cut in HALF to $100 an ounce.

The price of gold in this cycle has moved from a 1999-2000 low of under $300 an ounce to a high of $1900 in 2011 (approximately a 650% increase-VERY similar to the initial percentage move in the first half of the 1970’s bull market). The chart above doesn’t show the last year of the bull market into 1980 when gold soared to $850 an ounce but that high was an 850% increase from the mid cycle low and an approximately 2,500% gain from bull market genesis ($35 an ounce) to peak. Let’s do a simple exercise, what is 50% of $1900 an ounce? $950. So, IF this market were to mimic the activity of the 1970’s, we would be looking at a very jarring correction where virtually every talking head out there would be saying the bull is dead and gold is going back to $300. This, my dear readers, if it were to occur, would be the BEST time to be buying. Not only that, but this would be a very ‘normal’ and ‘reasonable’ correction for gold in the larger picture.

Think about it, gold has risen 12 years in a row without a down year. That is unprecedented! I have not experienced any market that has risen 12 years consecutively. Not only that, but after 12 years of gains and a 650% increase in price, very few people own it! At the end of the day, this is a big reason why I am very confident that the bull isn’t over. Gold/silver are under owned assets (See here on page 16) Unfortunately, I could not post the chart of reference but this is a great presentation from last fall by Pierre Lasonde, who is one of the most successful gold industry executives alive today. Here is a video version of a similar speech. The data in the PDF amazingly shows that global Gold asset allocations peaked at 14% in 1980 at the height of the last bull, to a low of 1% in 2000, with only a modest increase to approximately 2.5% in 2011(the recent peak/top thus far in the cycle).

We’ve said it many times but ANY phase 3, secular bull market top environment, whether it be real estate-internet stocks-oil, top out with a mood of euphoria, not serious under-ownership and many top pundits screaming bubble! Yes, gold, silver, and mining stocks will have their days in the sun at MUCH higher prices and be the talk of cocktail parties and garnering hot tips from cab drivers, but not before they ‘shake the trees’. We’ve seen this before in other huge bull markets! Let’s look at 2:

Oil hit a high of nearly $150 per barrel in 2008 but not before there was a violent shake out in 2006-beginning of 2007 where prices dropped nearly 40% before tripling in the next 18 months. A circumstance I like even better is the NASDAQ composite index during the 1990’s. If we take it back 13 years before the high in the year 2000 to make it analogous to the current gold bull duration, we see the COMP traded from around 300 to approximately 2000 in 1998 (another 650% ish move), then corrected violently in 1998 to 1400 (over 30%), before more than tripling in price to more than 5,000 in the year 2,000, the height of the internet mania.

I was a young broker at this time and it was one wild ride! I remember vividly all of the talk of the Y2K computer change over that was going to wipe out our economy and cause all kinds of problems. Luckily, I remember during the 1998-1999 period, I bought into a contrarian stance that we would see a market melt up after January 1st 2000 when people realized life would continue fairly uninterrupted. Why is this important? Well, if I would have been bucked off the technology bull in 1998 I would have missed what was the most money I have ever made in my lifetime up until that point in a very short period of time. I remember writing my top 12-15 client account values on a post it note on the wall next to my desk because I felt they would increase dramatically from that point. Indeed they did! The last explosion into the mania phase of the tech/internet bubble saw many of my client accounts go up over 10 fold in value.

I remember one of my favorite clients at the time had his account value dip below $80,000 in that 1998 low and in early 2000 in was worth over $1,000,000. I had bought a company called Alpnet virtually every single day for over 18 months for clients between $1.50-$2 per share, then the stock exploded to a high of $10.50 over probably a 3-4 month period, peaking with a money manager recommending it on CNBC and it trading over 10 million shares that day (I was often 30-40-50% of the daily volume in 1998-1999 when it traded 30-50,000 shares per day). One other stock I’ll never forget was LanOptics (it still exists today under as EZChip Semiconductor (EZCH)). The owner of my firm and I started building a position and buying shares at $4 in the fall of 1999 after noticing George Soros had taken a stake in the company and they had a sexy internet backbone/speed story with a tightly traded float.

Well, one day I was adding to my position and the stock doubled in an hour to $8. But, instead of selling, I waited for it to cool down a bit back into the $6’s, loaded the boat even more, and within 60 days the stock hit $45 per share! Why am I mentioning all of this?? They are good stories but also to make it clear that I think the same type of thing is going to happen in gold/silver stocks! Clearly, we are very far away from that sentiment currently but there are real parallels between these secular bull markets of the past and the current one we’re in with precious metals. Isn’t it fascinating how virtually all of these sectors, just prior to going into their parabolic/mania phases, had significant shake outs where most regular investors sold at the worst possible times?

Again, I believe this is occurring as we speak in the gold/mining stock markets. Now the key is taking an objective view at how long it can last and how low things can go. This is why I’m glad I waited to write this issue because one thing that has hit me is the whole disconnect in the physical/paper market prices and what that could mean. Most of you have heard that premiums on, say, silver eagle coins, are very high compared to spot prices, indicating very high demand in the physical market. Bullish right? Not so fast. I thought it was initially but after further digestion, I think it’s a sign that the correction in precious metals has further to go certainly in terms of time and likely in terms of price.

This quick rush to buy coins is contrary to what I’ve experienced near the end of a corrective phase. I have had plenty of situations where a stock I owned and loved pulled back hard and I pounded my chest immediately and bought more, only to realize that the correction needed more time before turning around. Also, a true bottom typically garners much doubt and certainly some hesitation. The rush to buy physical, with huge premiums/mark ups on the coins, leads me to believe we’ll see this correction at least extend through the summer months. The summer is typically the worst time of year seasonally for gold, silver, and mining stock prices and it is right around the corner.

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