If every month were like October, our problems would be over
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
There's one thing that I've noticed over the years: whenever bull markets (or bull legs up after correction lows) begin, prices go down dramatically, but the upward trend crawls so slowly as not to be noticeable. That is, until you compare those prices over a longer term.
We're now just one month from the miner lows of September 29. The last day of October saw a big dramatic downdraft in prices, of the sort I've just written of.
However, if you compare prices at the end of October to those at the end of September, a dramatic change is seen to the upside.
Before we list the specifics, remember last issue when I put down my thoughts of which aspects of the precious metals' universe could be expected to do the best? I thought that in the coming leg up, silver would do better than gold, and that the junior miner GDXJ would do better than the senior miner GDX.
So far, anyway, this has been borne out by the markets. While gold only rose 1.5% over October, silver jumped by 10.7%. The silver/gold ratio fell from 80:1 a month ago to a current 74.7:1.
As for the miner ETFs, GDX rose a nice 7.6% over October, but GDXJ jumped by 12.9%, or approaching twice as much.
Some of the assets gave back a bit from two weeks ago, but several did not:
FNV is up from both one month ago and two weeks ago, or 10% overall.
SIL followed silver pretty much straight up last month, to a rise of 10.7%, equal to silver itself. PAAS is up as well, from last issue as well as a month ago, for a 10.2% October rise overall.
As for our most recent choice, EQX, it was the champion, up 13.33% in October.
As I said, it is too easy to get discouraged if you only watch day to day movements: the drops are dramatic, but the rises are slow and steady overall. I'll bet anyone who hasn't compared prices at the end of October to those at its beginning will be surprised at such overall good action. Annualized, many of these assets would be doubling.
I know this sector is being forgotten: it certainly isn't getting the media play that things like Tesla and bitcoin are getting. But if look at things from a percentage standpoint, both of these (as well as the major indices themselves) are at or very near their all-time highs. Bitcoin has risen thousands of percent in the past few years. At current prices, with the regulatory eyes of the world now upon it, and its name on every investor's lips, can you really expect it go up hundreds of more percent? I'm sure many people do, but many people thought that real estate and stock prices would keep soaring as 2008 approached, and many expected the dot.coms to continue soaring as 2000 arrived.
I know I can be accused of only focusing on the precious metals area these days. But I'm always on the lookout for sectors that are dramatically lagging the rest, and are being ignored by the masses, but still have wonderful fundamentals. I can't think of a better class that fits this description nowadays than the PM group.
October was a very good month for us, and for this beaten down sector. At a time when the Dow, S&P, and NASDAQ are all closing at record highs, it is normal for the PM sector to be forgotten. But unlike all the others, this one is still far closer to its lows than its highs: at least this is the case for things like silver and GDXJ. They have a very long way to go up in percentage terms, which, after all, are the only terms that matter in the end.
This is the time when new money should go into this forgotten sector, and not --as will sadly happen-- when new highs are obvious to all.
October was a good month for us. But let's see what happens in the next couple of months. It wouldn't surprise me to see a bit of giveback, just because so much was up so sharply. The main thing we have to worry about is that the September 29 lows will not again be approached. With all the bullish fundamentals, I am hopeful that we won't see this happen.
Nearly all investors, which now must number in the hundreds of millions (if not billions) are "all in" in markets that are now at record highs. Remember, you never make a lot of money running with the herd. Only those who seek out the undiscovered areas, which the multitudes only laugh at, if they deign to notice them at all... only these happy few can fairly consistently make money.
Updates on Kraken, and a Great Article on Value
We've gotten some questions about the Kraken opportunity. I want to make it clear that we will pass along any updates on this whenever we get them. To me, it is a good way to hedge your precious metals holdings in case crypto currencies continue to shine. Kraken has many advantages over coinbase, as has been outlined in prior issues.
In the meantime, I thought you might enjoy Brit Hill's article on "What Is Value?"
What is Value?
In the wake of the metals' weakness, I've received many questions from anxious investors along the lines of:
"If this is such a great deal, why doesn't it go up?"
A fair question, and one that I can answer and provide an explanation to.
What is the nature of value? It's simple really. Think about when you go to the grocery store and see something on sale. Why is it on sale? Because it's either a perishable item that hasn't been sold yet and will be expiring soon, or it's an item that nobody really wants, and the store has an excess supply of. We see both these phenomenon in the publicly trading stock markets just like we do in the local markets down the street.
Option prices accelerate in their decay as they get closer to expiration, resulting in cheaper options prices just like the cost of steak gets cheaper as the expiration nears. Sellers of options, just like sellers of meat, will incentivize people by offering lower prices, hopefully clearing their inventory for something rather than making nothing. The risk for the options holders, just like that with the steak, is that they expire for good and are now "worthless". Nobody likes to see their things expire worthless.
With other items bought at the store, like non-perishables such as Clorox wipes, clothes, toilet paper, etc., for those items to go on sale, the store needs to have an excess supply due to lack of interest from buyers. So, to fix the oversupply issues, things go on sale, representing "value" compared to traditional measures for those interested. The discounted prices and coupons incentivize "bargain shoppers" to scoop up the inventory at a bargain.
These bargain shoppers exist on the stock exchanges as well, wandering the markets with their coupon books or eyes peeled for things that are selling for a bargain, or value compared to where it once was. (Think EQX, trading at a discount).
Let's imagine a shelf stocked full of Clorox wipes and toilet paper in January of 2020. This is mere weeks before the Covid-19 pandemic rocked the world and sent panic buyers of goods to the grocery store, clearing out inventory. Before Covid, you could probably find "Buy One, Get One Free" deals for things like Clorox Wipes, Toilet Paper, Rubbing alcohol, etc. But once the Covid panic set in, suddenly, the value of their mere existence was manifested, and everyone wanted them. The indifference towards basic items turned into infatuation, obsession, and a primal instinctual desire to own things that are in short supply, and prices soared.
Can you imagine how hard it would have been to convince someone to stock up on hand sanitizer and Clorox wipes before Covid was an issue? They'd look at you like you had completely lost your mind.
"Okay, weirdo." They'd say.
"You go buy your sanitizer and Clorox wipes and prepare for Armageddon. Meanwhile, I'm being realistic and instead buying more AMC Gift Cards for all the movies I'm going to in 2020."
In normal times, the AMC Gift Cards would have been the better option. I mean, in a normal world, who would rather have Clorox over free movie passes? But what happens if the fundamental drivers of human consumption and behavior change? Once the need for Clorox wipes reached a systemic level, what happened?
In a matter of days, the cost of goods skyrocketed. I remember seeing single packages of Clorox Wipes going for $100+ on eBay, and good luck finding any Toilet Paper. Where the store was once offering a "bargain" of "Buy One, Get One" on items, or maybe a discount on things that were overstocked, now we have the opposite and things are being sold at a huge premium compared to traditional measures.
Did the quality of the product change? Nope. But the desirability and needs did, and it was a snowball effect that led to mass shortages and dramatic price increases.
I remember the first people who got concerned about Covid and the effects it would have on the supply chain. They started stocking up on items at the store and the discounted items were always the first to go since they were the cheapest. Most people thought these early buyers were completely out of their minds and I'm sure some called them mean names like "Clorox-bugs" or "doomsdayers", but in the end, they were right.
The same day the Clorox-Bugs were stocking up, there were others shopping who observed the Clorox-bugs buying out the inventory at low prices. Realizing they were short on some of those same items, the onlookers decided they should bolster their Clorox stash, as well.
By the time they got back to the Clorox Isle, all the "Buy One, Get One" and discounted options were gone, so they were forced to purchase items that were selling for normal prices. (Think Barrick, NEM, WPM, FNV, RGLD, etc.)
Looking through other corners of the store, these regular buyers noticed that a few other shelves were empty.
"Better buy some for me and let my mom, dad, friend, siblings know, as well."
Later that day, mom, dad, siblings etc. show up to the store and realize that the seller (the store) has very little inventory left, so they scramble to purchase what little remains and stock their shelves at home. Now, the inventory is empty. There are no more sellers, and new inventory is almost impossible to come by.
This, is where the panic buying comes in.
Soon, the news comes out that Covid-19 is much worse than we first thought, and the world needs to go into lockdown. People who shook their heads at Clorox buyers last week are now scrambling to get some of their own before none exists to buy, but they are too late. The lack of inventory hits the news, and the small percentage of people who bought out the stores control the vast majority of the items, and guess what, very few of them are selling. At least, they aren't going to sell unless someone is willing to pay them substantially more than what they paid at the store. Prices begin to skyrocket as everyone wants/needs toilet paper, Clorox, pasta, sanitizer, etc.
In fact, due to the circumstances, the need for items like Clorox is even greater. So, not only are the shortages driving fear which drives prices, but the amount of Clorox being used—the demand—is up tremendously further compounding the problem.
Where there once were items selling at a "value" discount, there now only remains items priced at a premium.
The week prior, people buying Clorox were crazy. But now that the whole global environment has changed, most of us had wished we stocked up, as well.
Eventually, the supply chain catches up and prices that got ahead of themselves normalize. We've all seen reports of people whose garages were full of toilet paper are begging the stores to accept their returns, but the reality is, the time to sell was during the frenzy. People got greedy, oversupplied themselves, and didn't sell when they could've locked in tremendous gains. Instead, they hold excess inventory that they will now have to sell at a discount.
This is the natural cycle of investor behavior. Things are bargains because nobody wants them or needs them, so they are priced at a discount to clear the inventory. Trying to convince someone they needed excess Clorox Pre-Covid is probably like trying to convince someone today that Gold is a good deal. But what if we're seeing the early stages of a major economical shift that would put Gold at the forefront of all things desired by investors? The same forces that caused prices of Clorox—a limited commodity—to skyrocket are causing gold to prepare for a massive rally. The only difference is Gold investors aren't responding to a sickness of the body, but a sickness of the economy, and that illness is inflation.
I think we can call the Covid related price action of goods a "Micro" cycle. Prices went crazy, there were shortages for a few months, then things, for the most part, normalized. I can easily run to Walmart and buy Clorox wipes for roughly the same price as I did Pre-Covid. But what is interesting is looking at the timeline of it all:
First Covid cases in November or December of 2019, Covid issue announced in January and named in January, the virus spread in February and Lockdowns/Shortages in March and April.
People who first heard of Covid in November and bought their supplies might have been angry at first.
They would say things like:
"The virus is getting bad, why aren't the costs of my items rising? Where are the shortages?"
For these people sitting in their bunkers inventorying their wipes, this would have been very upsetting. But it took time for the rest of the world to realize the extent of the issue, and once they did, the prices skyrocketed in mere days.
The Covid/Clorox cycle lasted only a few months, but it contained all the same ingredients as a major long-term bullish cycle. I think we will see the same cycle happen with Gold and Silver, but over a much longer period of time. Instead of taking months for the cycle to complete, it will take years, but that generates a lot more opportunity for those that get in early.
I get calls almost daily from frustrated investors saying things like:
"Inflation is finally here, why isn't gold moving upwards?"
To them, I say that it will take time. Just because you have digested the meaning of inflation and how bad things could get doesn't mean other people have. The truth is, most people don't want to change until something breaks, forcing them to. People didn't want Clorox wipes until we went into complete lockdown, causing widespread fear and a desire to have them. Everyone knew about Covid in January and February of 2020. I'm sure most of us had at least heard about it. Did you go buy Clorox wipes to prepare? If you are like most people, you waited until it was too late, and it wasn't until the realization of how hard they were to get that you recognized their TRUE value.
Undervalued assets are undervalued because people do not recognize their true value. A value investor recognizes external forces contributing to an increased value for certain items, and then buys those items before others come to the same conclusion.
Gold and Silver are the Clorox and Toilet Paper of the Inflation Pandemic, and we are in the equivalent of January 2020 for Clorox. Yes, we are finally seeing inflation just like we saw Coronavirus numbers rising in January and February of last year. Yes, that is bullish for gold and silver, just like it was bullish for Clorox. NO, gold will not immediately react to inflation because most people simply don't react to things as quickly as they should.
Investors sometimes forget that gold isn't moving on its own. Gold—like all markets—moves as people buy and sell it. Gold isn't what is reacting to inflation, it's people that react to inflation and purchase gold, driving up prices. It takes time for people to react to change because at a core level, we all hate major changes. Most people would rather live in denial of the changing external forces than admit that we have to reshape our worldview and the way we see things, but things are changing whether we'd like to admit it or not. Once people feel the effects of the change—the effects of inflation—and start to react to prices increasing across the board, hold onto your horses, because things are going to move fast.
I'd like to point out that the inflation rate is nearly 3x the 30-year treasury rate in the US. That is a new and uncomfortable change that bondholders have yet to react to, but when they decide to react, the effects on the bond market—and subsequently all markets—could be violent. The Fed uses terms like "transitory" to make people feel as though it will be temporary, just like many people used similar terms at the beginning of the Covid Pandemic.
The sudden realization that Covid was worse than we originally thought and here to stay changed the dynamic of the world in a matter of days, could the same realization over inflation change the course of our markets as we know them? I think so, the question is when, but I think sooner than most realize.