The massive volatility in stock markets around the world over these last weeks has stocks in many great companies on sale. And yet, I’ve been warning that I think things will get worse before they get better. I’ve also been saying that while everyone knows it’s dangerous to try to time a market bottom, it’s also unnecessary. Plenty of time to make money when things are clearly heading upward again.
There’s one very specific reason I don’t think the bottom for US markets is in yet; the US dropped the ball on testing. Test kits are now flooding out, weeks after the first cases and deaths. This pretty much guarantees that a sudden surge in the number of cases in the US will be reported soon.
Whatever you think of COVID-19 itself, are you willing to bet that investors, the public, and public officials, are going to react rationally to the sudden increase in cases?
That aside, we do have experience of recent market meltdowns to draw upon. Thinking back to 2008, I can’t remember anyone who called the bottom who wasn’t calling it every time markets hit new lows, until they were eventually right.
That almost includes me.
I wasn’t foolish enough to call the bottom, of course. But I did keep saying that each new low was a buying opportunity. I remember clearly how oversold the best companies seemed—such great bargains. That didn’t stop them from dropping again in the next cascade down.
By the time the actual bottom came, few people had any appetite for averaging down—or cash left if they did.
This painful experience is etched on my mind. It’s why I’ve been so strongly against rushing in to buy the great bargains we already have before us. It’s the source of my current mantra:
“It’s better to miss the bottom than to buy a dead-cat bounce.”
To your credit, most of you seem to get this. But naturally, many of you are asking how we’ll know that the worst really is behind us.
The honest answer is that we’ll never really know for sure when the bottom is behind us, except in hindsight well after the fact.
We also know that the longer a bottom holds, the clearer it is that it’s the bottom, and it’s behind us.
I also painfully remember this from 2008. I put out a shopping list in the newsletter I wrote in December 2008, with “BEST BUY” in caps on a bunch of stocks. As I recall, all of them doubled within the next year, and their average gain by the top in 2011 was much higher. Back in December, I couldn’t be sure the bottom was in, I was just sure the stocks were stupid-cheap. Unfortunately, policy was that I couldn’t buy until giving readers a three-day start… so I contented myself with buying more gold, which had dropped below $800.
By the time I could buy the stocks I’d recommended, their prices were all up. Burned by so many dead-cat bounces, I waited. The stocks just kept going higher and higher. I missed the bottom and never bought those stocks.
Fast forward to the bottom for gold in 2015. I remember writing with increasing confidence about the opportunities as the bottom fell behind us in the rearview mirror. Unfortunately for me, I was required by new management at my former employment to sell and refrain from buying any stocks I wrote about. So I realized losses and missed the rally of 2016.
This was a large part of the reason I became The Independent Speculator in 2018; I could see the next rally shaping up, and I didn’t want to miss out.
And here we are today, with global markets in a major correction, looking for a bottom.
First, I have to point out that gold holding in the mid-$1,600 level is in stark contrast to the major retreat we saw in gold in 2008.
That’s not to say gold won’t retreat further if more funds face redemptions, people get margin calls, or general panic causes stupid decisions. But this is solid evidence of what I’ve been saying: an entire generation that ignored gold before 2008 now remembers that gold ended 2008 in the green and headed up from there.
But gold stocks are still stocks—risk assets.
They can and will be the golden baby thrown out with the bathwater if there’s more panic and forced selling. I covered this at about 9:40 into Saturday’s live session.
Okay, so when will I think it’s time to buy gold and silver stocks?
Here’s what I’ll want to see:
1. EITHER the broader markets stabilize, even if at a much lower level…
2. OR a clear trend of gold and silver stocks tracking the metals and not the broader markets. (A week or two should do.)
Note that these criteria hold whether the powers that be throw enough money at the problem to pull off another 2018-style correction or whether we go over the edge into another 2008-style wipeout.
When will it be time to buy industrial minerals and other assets?
I’ll want to see:
1. The still-accelerating global rate of COVID-19 infection turns negative.
2. Travel and tourism picking up again (evidence that the public is getting over its panic).
3. Clear evidence that the US and global economies will recover from the COVID-19 hit and return to growth.
Even with a great deal of government help, I’m not going to hold my breath on any of this. Overall, 2020 looks pretty grim to me.
One potentially very strong positive in all this mess is that with gold averaging around $1,600 so far this quarter, all but the most incompetent gold miners should report great financial results.
The majors beating guidance at the time when almost every other market sector reports worse than expected results should shine a very favorable spotlight on gold and silver. We could soon see a stampede into gold and silver stocks for the record books.
That would likely start with well-known producers, but it would trickle down to mid-tiers and juniors as desperate institutions and individual investors seek yield.
I’m not promising it, but this could spark the mania phase of this gold bull so many of us have been waiting for.
If that’s what’s ahead, there will be a lot of money to be made on the way up—even for late arrivals who miss the bottom by months.
That’s my take,
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