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We learn from experience that men
never learn anything from experience.
....................................................................................................................................................G.B.Shaw
Mining stocks are in the midst of a severe decline these days and it seems
like there is no hope. The light at the end of the tunnel appears to be as
dim as it’s as ever been and many think there is no light and there
never was one. At least their actions assert that very outlook.
In most situations people know what they should do. They
just don’t do it. We know that we need to sleep more, eat less, exercise regularly yet how many of us do it? On occasion
we dab into “the right thing to do” area, but overall, we largely
ignore this ageless wisdom and continue on doing what we do day in and day
out. In retrospect we kick ourselves for being so hopelessly undisciplined. It
happens time and again, over and over. And if that is how we behave in
everyday life regarding things that are important to us, how can one expect
people to be rational and do what they “should” in the stock
market? After all is it not just a hobby, a kicker, something we do above and
beyond our immediate needs, something that does not directly effect our
present situation?
Ask anyone - what to do in the market - and chances
are you will get a sound piece of advice: seek value, invest for the long
term, don’t try to time the market, buy dips, don’t yield to hype
on the way up or down, don’t follow the herd, buy low and sell high. Yet
if you look in his/her brokerage account nine times out of ten you will see
the opposite. How many of us actually do “the right thing”? How
many of us follow those simple guidelines that we so easily and willingly
impart to others? How many successful investors do you know? Are you one of
them? This reminds me of a poker game when if in half an hour you don’t
know who the dope is, you are it. Who is the dope in this resource market?
A friend phoned this morning to get my take on the
markets. I actually went on to say that the only investor we commonly know is
Warren Buffett (not personally, of course). Most
everyone else is a trader, speculator or an outright gambler. Buffett purchased his silver in 1994 and has been sitting
tight since. Do the math folks, that is 11 years!
Storage fees only on 130 million ounces of silver over 11 years should amount
to quite a sum. His formula is simple: find value, take a position and stay
with it, not for a few weeks, months or years, but as long as necessary for
the market to realize that value. That’s investing.
Incidentally, Buffett is
known to say that “gold is a stupid investment because it earns no
interest”, but we like gold and won’t hold it against him. After
all, he is Warren Buffett, the king of value
investing and we’re just die-hard silver bugs. Be as it may, actions
speak loader than words. I was going to say that Buffett
owns a ton of silver, but he actually owns many tons of it.
We spent two days at the NY Gold Show and report to
you that our impression was that the whole show (exhibitors and attendees)
was sliced in half as compared to last year or the year before. However when
we talked to silver companies as we always do at these conferences, to our
surprise several of them were quite happy with the public turnout and pointed
out that while the quantity was on the lighter side, the quality was there. As
it happens in all markets when times are good and stocks are flying high
everyone wants be in the game and interest is abundant from all sorts of
investors. When times are not so good – like now – interest from
unsophisticated investors virtually disappears as they stage an exodus from
these stocks. In contrast, sophisticated investors and others in the know,
those who believe in the fundamentals of the silver story take out their
check books and go shopping.
Even Bob Prechter was not
able to scare off investors with his keynote presentation discussing the end
of “bear market rally” in gold and silver and the resumption of a
long term downtrend. As much as I respect Prechter’s
work I just don’t see how he could be right this go around and neither
did a long list of other presenters with impressive track records and
personal fortunes attesting to their investing prowess over the years. Doug
Casey summed it up best by saying that as risky as the resource sector is, he
doesn’t see a better place to be in the next decade or so.
Not every speaker was optimistic about the near term
outlook for gold and silver equities and some advised caution through the end
of this year, yet that very prognosis made them very excited. They were
looking forward to final capitulation sell-off in this correction to load up
on beaten down stocks once again.
We also attended the gathering for World Silver
Survey 2005, a
joint effort of The Silver Institute and GFMS Limited of London. Many of the same faces that we saw
at the NY Show were present. Philip Klapwijk,
Chairman of GFMS delivered the presentation in which the silver market was
thoroughly dissected. You will be happy to know that they concluded the
prospects for silver price to be optimistic. GFMS is very conservative in
their analysis but even they don’t see any considerable downside to
silver price.
To play the devil’s advocate we ask ourselves
- what is the down side? The only logical conclusion based on the
presentation is that even if silver price were to slip down from here, there
isn’t much of anything to keep it down for any sustainable period of
time.
With that in mind do as you please with your portfolio - the pundit will be
buying between now and Christmas.
The whole concept of investing in the resource
sector is based on the idea that these are real assets. We overheard that the
main reason why some people in the know are waiting on the sidelines is
because apparently some hedge funds overextended themselves and are now
forced to liquidate their positions and that is fueling
this latest decline in mining stocks. The more they sell, the lower stock
prices go and even more investors are then forced to sell, especially those
using leverage. That to some extent explains the disparity between fairly
firm metal prices and fire-sale prices for stocks in the same sector. So for
the umpteenth time - whatever you do, please stay away from leverage. Good
news is that it works exactly in reverse on the way up: the higher stocks go,
the more interest they get.
They tell me resource sector mutual funds are
selling too. Well, if you know anything about mutual funds, there’s little
else they can do when there is net outflow of capital from the fund. They are
not selling because they want to, but because they have to pay out the money
to distressed investors opting out. The bottom won’t materialize until
we run out of sellers.
Investing can be rather boring if you as you should
keep asking yourself – did the fundamentals change? And so long as the
answer is “NO” stick with your
positions. But we can’t expect the markets to be rational, can we? Trouble
is, in the long run they are and that is exactly what we’re betting on.
By : Sean
Rakhimov
Editor, www.silverstrategies.com/
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