This Gold Bear Market is Ending, not Starting

You could probably beat the averages your entire investing career by simply keeping in mind two famous utterances ( which say essentially the same thing):

#1 Jesse Livermore said it first when he opined

“There are two emotions in investing: greed and fear. Most people get it backwards and are greedy when they should be fearful and fearful when they should be greedy”.

#2) Sir John Templeton perhaps summed it up best with “buy at the point of maximum pessimism”.

About 5 years ago I attended the CAVIE course down at Western under George Athanassakos and aside from meeting some great folks there (some of which I think will be the next generation of Canadian value investing legends) , and learning a lot of things about finance and equity analysis, the one great takeaway which for me was worth the price of admission was learning to ask the question of any given subject of analysis: Is it secular or is it cyclical?

A lot of traders and hedge funds have to try to catch every cyclical move because they manage other people’s money and most of the investing general public are quite frankly: stupid and spoiled. If their fund manager misses the last 5% or 10% move of a cyclical up-move, it’s grounds for redemptions. Thus, the chorus of fund managers declaring the gold bull to be dead is nearly deafening.

From http://seekingalpha.com/article/298895-gold-be-patient-be-diligent

So it isn’t surprising to me that very few people are seeing the big picture, that gold is in a cyclical bear market within the context of an intact (albeit technically damaged) secular bull. Something similar happened in the mid-70’s, when gold corrected close to 50% from Dec 1974 to Aug 1976 before blasting off to it’s crescendo top in 1980.

I have seen very little (none) discernment between cyclical and secular cycles, just near saturation consensus that “gold is dead”. That brings me to my next point, which is how secular markets end. My studies of history and investing have led me to posit that bull markets end amidst denial (i.e “It’s a buying opportunity!”) and that bear markets end in a pit of derision (“It’s a dog! It’s going to zero!”)

Through this lens, I believe that the gold bull will continue, while, by contrast, the AAPL bull is over. (I have written on the latter here and here, where it looks like I called the AAPL top and RIM bottom, which occurred near simultaneously)

True, one is a sector and the other is a stock, but I contrast them to illustrate the difference in mainstream media coverage and the narratives being spun around them. My oft repeated dictum is this:

The gold top will not be in until a major sell-off is greeted as a buying opportunity.

Until then, as long as all pull backs are treated as “the end”, I for one, will buck that sentiment.

The other major misconception of the gold crash is that it started a bear market in gold, which is wrong. Gold has been in a (cyclical) bear market since August 2011, nearly two years.

About the only three major market commentators who acknowledge this are Marc Faber (“Dr. Doom”), Mike Swanson (I highly recommend his Wall Street Window service) and Canadian ex-pat David Skarica (read his Debt Supercycle book). It was Mike Swanson who was quick to point out after the April crash that this looked a lot like a panic washout that ends bear runs.

Again, we go back to simple logic: I posited that AAPL’s bull was over because everybody was already IN Apple and there were pretty well no more buyers left from which a sustainable, bull up-leg could be launched.

I ask again, where do powerful bull markets come from? Literally out of nowhere, meaning – nobody is in it, everybody is out, everybody hates it and nobody will touch it with a ten foot poll.

Specifically: sentiment now around gold is more negative than it ever has been, more negative than the 2008 meltdown lows (more on this shortly) and I think the negativity has more scorn and derision behind it than even the 1999 – 2000 lows.

All of this leads me to believe that gold is poised to blast off. Maybe not next week, maybe not next month, but personally I have been buying physical metals for the first time since 2006 and mining shares for the first time since 2009.

Shortly after the April crash I analyzed the major gold producers (Barrick, Newmont, Goldfields, Eldorado, Yamana and Kinross) and found that nearly across the board they were more compelling buys now than at their Oct 2008 lows (gold and silver bottomed in October 2008, several months before the major indices bottomed the following March 2009). All of the majors were trading at lower P/E’s, putting up higher EPS and paying out higher dividends on a per share basis now than in 2008, and this despite that all of them had even issued more shares. (If you want a copy of a workup I did on this, fill out the form to join the Wealth.net / Rebooting Capitalism list in the sidebar this article and I’ll send you a PDF of it)

Nobody knows what the timing will be, while the Canadian markets were closed today, gold and silver may have posted a key turnaround day having blasted off after an early morning smash down.

Short interest is at all time highs, the price of physical metals has decoupled from the paper price with premiums on the order of 20% and delivery times 6 to 8 weeks out.

Sentiment is horrible.

The number 1 google suggestion for “gold bull market” right now is “over”, with “end” and “is dead” placing not far behind [ screen grab ] and every major media account on gold is unanimous in it’s pronouncement that gold is dead. (bloomberg article)

Fundamental drivers are more in play now than when this all started.

The big picture macro drivers behind gold remain if not unchanged, more intense. Fed Governor Chuck Evans today confessed (or revealed) that at the current rate of FOMC operations (a.k.a “QE4”), the Fed balance sheet will hit 4 Trillion by the end of the year. The Fed has no exit plan. It’ll be 5 Trillion by the end of 2014.

Austerity is dead.

Nobody will take it as a serious option and there is absolutely no political will to put the finances in order of any major economy. The Paul Krugman’s of the world will invent elegant economic theories to explain why governments do not need to pay their bills and why societies as a whole can live beyond their means, produce more than they consume and borrow their way to prosperity.

Real interest rates will be negative until they come unglued and all major (and most minor) currencies are racing to the bottom in competitive devaluations.

All of this will prop up the gold bull, and the wider pundits and commentators will continue to laugh in the face of this until the horse is so far out of the barn that it’s a rapidly fading speck on the horizon.