Capitulate, or Double Down

by JDH on November 23, 2013

The picture in the precious metals markets, as we all know, is bleak.  From a near term bottom at the end of June, gold had a healthy advance into the end of August.  Of course now the question is: “will we return to retest those end of June lows?”

Gold6monthsNov22-2013

Darned if I know.  Perhaps.  Probably.  Does it matter since we are very close to those levels already?

The question is relevant, because as I watch gold continue to suffer, one obvious solution comes to mind:

Capitulate.

Sell everything.

Use the money to buy quality companies with a long history of earnings, the stock market darlings, like Twitter.  And Facebook.

Of course the time to sell everything was two years ago, which leads to the next obvious question: “Is now the time to invest heavily?  Double down? Buy everything in sight?”

A true contrarian investor buys when all others are selling, and in the gold and silver market, at least on paper, that would appear to be the case.

Gold6YearsNov22-2013

A six year chart of gold paints a bleak picture.  There are numerous resistance levels that most hold for a rebound to start, including around $1,150, and $1,050, and $875.  Scary.

There are lots who are now capitulating.

Famous bears like David Rosenberg, then Jeremy Grantham, and now Hugh Hendry are throwing in the towel, and turning bullish.  They don’t want to turn bullish on the market, but they realize that as long as the Fed keeps printing money, and no-one cares, the markets will continue to advance.

Nothing fundamental has changed, of course. Gold is still “unprintable” and remains the ultimate store of value, but if gold is in a two year downtrend and the paper stock market is in a multi-year uptrend, why not back a winner?  Gold is a relatively small market, so if the boys want to squeeze it down, they can, in the short and medium term.

And so back to the question: is it time to capitulate, sell all gold, and wait for it to test the 2008 lows before re-entering the market?

AEM-Nov22-2013

Obviously the answer is that the selling should have occurred two years ago.  The horse has long since left the barn, and most gold stocks have been hammered a lot harder than the gold price.  Case in point: compare this chart of AEM.TO – Agnico-Eagle Mines Ltd. to the six year chart of gold presented above.

Agnico-Eagle has already tested the 2008 lows, and quite conceivably will test them again.  Is there any point in selling now?  Perhaps the stock will drop a dollar or two more to those lows, or perhaps we are close to the bottom.

This is a stock with a 3% dividend yield, so if you have a long term investment perspective, would it not make more sense to simply hold on, cash the dividend (which is more than you can get in the bank), and wait for the inevitable recovery?

Even better, why not double down?  Two years ago this was an $85 stock; today it’s under $28.  Is it really worth two thirds less than it was worth two years ago?  Granted, it probably wasn’t worth $85, but it traded in the $60 to $70 range for an extended period, and it could see those levels again.

I see no point in throwing in the towel at would could very easily be close to the bottom.  Holding all the way down and then selling makes no sense.  So, my strategy has two elements:

First, on strong days, employ a covered writing strategy to mitigate the losses.

Second, on weak days, double down, and buy more to lower my average cost, so that when the upturn happens the gains are magnified.

December is traditionally a strong month for the Dow, including the Santa Claus rally period, so I see no point in shorting the market now.  Gold doesn’t traditionally do much in December, often turning positive in January, so a covered writing strategy and buying on lows in December seems prudent.

We shall see.

Thanks for reading; see you next week.