Early, Late, or Wrong

by JDH on July 6, 2013

As gold bounces back down to close to the $1,200 level, and as the DOW recovers to close once again above it’s 50 day moving average, we must confront the inevitable question:

Is JDH early, late, or just plain wrong?

I have long held to the view that unfettered money printing will eventually render paper money worthless, and at that point we will all want something of value.  That’s why I advocate buying hard assets, like a shovel or a bicycle or a good pair of shoes, because they will hold their value even as the currency is depreciated.  Gold and silver are also in that category.  They hold their value because governments can’t print them.  They are a finite resource.

So, for the last many years, in addition to holding cash and some other stocks, I have invested heavily in precious metals stocks.  Needless to say, I’ve gotten hammered over the last two and a half years, as those stocks have dropped from historic highs to abysmal lows.  In fact, today, the price to book value for large gold stocks is .91, the lowest level ever.   In other words, the 31 largest gold stocks, the blue chips, are trading at less than book value.  In theory, you could shut all of the companies down, liquidate their assets, and end up with more than what their shares are trading for today.

That’s amazing, but it’s true.

So with precious metal stocks at historic lows, it would certainly appear that I was obviously wrong to own these stocks.  In hindsight, I should have moved to cash, or to a DOW ETF, two and a half years ago.

I am wrong as of today, but the game is not over yet.

The score doesn’t matter in the third inning.  The only score that matters is at the end of the game.  The game is not over yet.  Not even close.

If gold continues to drop, and returns to $300 per ounce, and stays there forever, than obviously I will have not choice but to admit that I was wrong.

But if money printing continues, and gold resumes it’s upward trajectory, I will be proven to be early, but not wrong.

I am not a day trader.  I am not a market timer.  I have no idea where the top, or the bottom, of the market will occur.  I therefore prefer to take a long term perspective, and hold, and wait for the inevitable.

After the crash of 2008 many gold stocks bounced back 400% from their lows.  Do I want to be on the sidelines if that happens again?

No.

Do I want to park my money in an over-hyped DOW stock, or some other vehicle with no enduring intrinsic value?  In the short term the obvious answer was yes, but longer term I think I will take my chances with a “sure thing.”

I will continue to build cash, do covered writes as appropriate, and wait for the inevitable, and then we can determine if I was early, late, or just simply wrong.

Thanks for reading, see you next week.