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Gold and silver - don't fear the wall of worry

Commentaries & Views

Investors today seem to love jumping on whatever asset’s price is soaring. Tesla is going vertical? Buy Tesla. Gold is going vertical? Buy gold stocks. Already overvalued? No problem—it’s hot!

This sort of momentum-chasing is no “buy low, sell high” strategy. It can work if a greater fool comes along, but if one buys just as momentum falters, the losses are major.

All obvious, I know, but needed to set the stage.

Now, gold bugs enter the scene, stage right.

We buy gold and silver whenever we can… but gold and silver stocks? Do we buy at the bottom in late 2015? After the failed rally in 2016? Or during the Crash of 2008?

A few of us did—precious few. More were spooked out of the market. Many took huge losses in the process.

I’ve seen evidence of this in the flow of reader correspondence over the years. Perhaps more telling is that subscriptions tend to soar when gold is soaring, flatline when gold trades sideways, and tumble when gold and silver go into reverse.

We like to think we’re contrarians who are too smart to buy all the media hype and follow the investment herd. But in our own sector, most of us are as likely to fall prey to groupthink and chase momentum as other investors.

I bring this up because gold has traded sideways for months. So have many gold stocks… and even subscriptions to my services have leveled off. (We’re doing fine, no worries; I mention it as a relevant datapoint.)

If I thought gold and silver had already peaked, I’d actually see this as a good thing. Fewer people would get hurt in the ensuing bear market.

But I believe the opposite. After a record run, we’re going through a normal and healthy period of consolidation in the monetary metals space. Absent a broader market crash that puts a temporary squeeze on gold and silver, I think the next big move is going to be upward.

The way to maximize gains in this context is to research and act on opportunities now—not when gold is in the headlines for making new all-time-highs.

I should point out that I am doing more research and less actual buying right now, because I’m seriously concerned about a potential stock market crash before, or not long after the US election on November 3.

This is no contradiction to my main point; it’s important to know what I want to buy if there is a crash—now—not after it’s too late.

Besides, there may not be a crash. Powell could spark a renewed market mania just by opening his mouth. That’s why I’ve not been afraid to buy first stakes in great speculations when impatient investors dump shares, driving them down to reasonable entry levels.

Key Point: We don’t actually need higher gold prices to make lots of money.

Imagine what would happen if gold did “nothing,” fluctuating sideways for years…

That would mean $1,900–$2,000 gold for quarter after quarter after quarter.

  • Unless management of the world’s gold producers turn criminally stupid all at once, that would make gold miners a stellar market sector for long enough to attract a lot of generalist investors. That’s all the more so with Berkshire Hathaway’s purchase of Barrick Gold shares appearing to give “Buffett’s Blessing” to gold stocks. Those of us who already own the best producers would be well rewarded.

  • There’s been little money spent and fewer major gold and silver discoveries made for years. Larger companies will have to take over smaller ones that have made economic discoveries. That wave of takeovers has been held back by COVID-19 this year, but I think that will just make the tsunami all the bigger when it does arrive. Those of us who already own the most likely takeover targets should make a bundle.

  • Such a stable, relatively high gold price environment would make many marginal projects more robust. Better yet, it would turn already robust projects into prospective cash geysers. Such advanced exploration and development stories should deliver in spades for those of us who already own shares—even in a flat market.

  • Success in production and development companies would provide the cash needed to fund more high-quality exploration plays. Mines are, by definition, self-depleting assets. All miners know they must explore (or buy other companies that do it). It’s either that or they mine themselves out of business. Even if gold went nowhere for years, I think we’d see an explosion of exploration such as we’ve not had for years. Those of us who own the best explorers would be well rewarded in due course.

Sadly, such a stable price environment is very unlikely.

Happily, I think gold will head much higher before all is said and done. That may average out to about $2,000 per ounce over the next few years, but it would likely be with great peaks and troughs along the way.

The point is that while it’s very predictable market psychology, it’s also bad strategy for investors to stop buying—or researching their next buys—simply because prices have stopped rising.

If a speculator is unwilling to climb the “wall of worry” phase of a major secular bull market, he or she can’t expect to reach the top when the market peaks.

Contrarians don’t wait for everyone else’s blessing before buying.

That’s my take,

P.S. To keep you abreast of opportunities and issues affecting resource speculation—without unleashing a daily flood of advertisements—I encourage everyone to sign up for our free, no-spam, weekly Speculator’s Digest.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.