Summary
A) Investors generally return to the market after Labor Day from Summer Vacation.
Trading volume picks up.
B) Investors are returning to an extremely volatile market where three digit
moves have become the norm.
C) Precious metals and commodities come back into favor when searching for
a safe haven for capital preservation.
D) Uncertainty on U.S. rate increase decision September 17th could lead to
more major moves lower.
E) After a 7 year decline, precious metals, commodities and the junior miners
may be the best place to be for the following 10 reasons.
As the summer comes to an end, investors return to their offices and trading
volumes tend to pick up after Labor Day. I expect that many are realizing the
markets have considerably changed since May. Global equity markets are all
off led by the price decline in the S&P 500 which has broken its four year
uptrend forming a technically bearish death cross. The name of the game right
now is capital preservation and plunge protection. Look for rallies in equities
such as the Dow to be short lived.
The Fed is expected to raise interest rates for the first time in many years
on September 17th. However, there is growing uncertainty that will not occur
especially due to the recent equity market volatility. Many other major economies
such as China are announcing stimulus plans to prevent a recession. As the
global stock markets rolls over on fear of a U.S. Rate increase, it could boost
the value in the beaten down precious metals and commodities as they may be
seen as a safe haven to protect against a plunge and preserve capital.
Here are ten reasons why I believe gold, silver, commodities and especially
junior miners may be the best place to be over the next 3-5 years. The bottoming
process for the juniors after a seven year decline may be ending in the next
few months as they once again come back into favor for the following ten reasons.
-
Junior Miners are now even more cheap than they were in the late nineties
when gold was below $275 an ounce. This might be a once in a lifetime buying
opportunity that may not last for much longer. The safest havens during
periods of deleveraging are the assets already trading near liquidation
levels.
-
The stock market and U.S. treasury market is extremely overvalued and
has been going straight up for more than four years boosted artificially
by quantitative easing and government stimulus. The odds for a bear market
have been extreme for many months. Do not be surprised of a 30-50% possible
decline as the momentum traders are automatically stopped out.
-
Many of the momentum and high frequency traders left precious metals and
chased stocks higher over the past few years since 2011. That trend as
evidenced by the Dow-Gold
Ratio may be changing. As soon as that upward trend in equities was
broken we saw a massive shakeout.
-
The bear market in commodities really began during the U.S. credit crisis
and has lasted close to seven years. This is one of the longer declines
in terms of length duration. Over the years there has been a drastic reduction
in mineral exploration and development due to investors chasing the latest
fads in social media and biotech. This could create a major shortage of
mineral supplies going forward over the next decade.
-
Precious metals and commodities provide diversification to stocks and
bonds. One must have a portfolio of hard asset investments but they must
be chosen wisely. One must be a good stock picker and investigate the management
team that it has the best interest of shareholders in mind.
-
Investors may be nervous of credit risk and want tangible assets in the
form of precious metals and commodities. The prices of hard assets unlike
so many equities can't disappear. Rising interest rates and a slowing economy
could actually boost commodities as it did in the 1970's.
-
The majority of investors are usually wrong and for the first time that
I can ever remember there is a net short position on gold. Just like a
few months ago I said don't be surprised to see huge moves to the downside
on U.S. bonds and equities, I also expect huge moves on the upside for
gold. It may be extreme but I feel the headlines could change from "Record
Down Day for The Dow" to "Largest Percentage Daily Increase in Gold Price" as
investors once again seek out safe havens.
-
Mining stocks are trading at historically discounted valuation and generational
lows. This could be one of the best contrarian opportunities of a lifetime
especially for younger investors who have not yet positioned their portfolios
to the sector. Look at the recent moves by Soros, Icahn and Drunkenmiller
to increase exposure to commodities.
-
Quantitative easing should continue across the Globe to prevent deflation.
It may not be successful. The Banks can print but they can't make more
commodities out of thin air.
-
The commodities relationship to stocks and financial assets is negatively
correlated meaning they can go up when other assets deflate.
