Gold stocks, as measured by the GDX and GDXJ, have fallen respectively 33% and 37% from the recent highs, and almost 50% from their all-time highs, while the price of the physical metal is flat on a 52-week basis. Does that mean now it’s time to buy gold stocks?
Time to buy or time to sell gold stocks?
Rick Rule always encourages us to be contrarians; to do the opposite of the crowd.
“…you do what’s easiest; If there’s no buyers – so it’s easy to buy the stock – you buy some. If there’s no sellers – so it’s easy to sell the stock – you sell some. Whatever the market makes easy for you to do – you do”.
Is this true every time, though? Of course not. If you bought Enron when everybody was running away from it, you would’ve lost your money. So, one should not just buy something because nobody else wants it. This might mean that you’re assuming that you’re smarter than the crowd. The hard truth is that you likely are the crowd.
It is true, however, that we should be contrarians during a secular bull market in commodities for which there is an undeniable demand and a challenged supply chain. This is what we have going on right now.
Basically, Rick Rule’s strategy comes down to being a contrarian in a market with promising fundamentals, not in every market. Being a contrarian means understanding the market sentiment and doing the opposite. If everybody is selling; you should be buying, Rick tells me.
All the other rules of investing still apply. One should be able to pick the good companies and the good industries to invest it.
Are investors bullish on gold stocks?
To answer that question, I like looking at the Gold Miners Bullish Percent Index (BPGDM) which currently shows reading that we haven’t seen since the crash in March 2020.
With the RSI on the chart above close to 30, and the index below its 50 & 200 MA, ticking on 17, the answer is a clear “no”. Almost nobody is buying gold stocks. If you were buying gold stocks right now you would have almost no competitors. That’s what this chart is telling me.
This does not mean that the sentiment cannot fall below 10 or below 0, for what is worth. During a broad market crash; everything will crash and I would be a fool to believe gold stocks wouldn’t.
Will gold stocks go up in 2022?
The probability of gold stocks dropping further from current levels is not high. I say this because in all the previous times (that we can see on the chart above), when the BPGDM fell below 20, the gold stocks had a sharp move to the upside, besides the obvious example of the March 2020 crash.
Look at the candle that happened in March 2020, though. If we have an even bigger deleveraging event than what we have seen in the last few months, that red candle can be repeated both in the sentiment on gold stocks as well in the prices of gold stocks and gold.
Whether gold stocks go up in 2022 or not depends on the broad market. Even if we have the best fundamentals ever seen (which we do have right now), when the market is selling off, everything falls. So, even though the probability of gold stocks going up from here is now rather high, that will mean absolutely nothing if the FED decides to raise interest rates by a full point or more, instead of the promised 0.75%.
With the US GDP now in decline, debt levels at extremely high levels, and consumer confidence at extremely low levels, there are a million things that can collapse the system and take gold stocks down with it.
What are gold experts saying?
I recently spoke to Lobo Tiggre about gold and silver stocks and he told me that he expects a further fall in the prices and that he hasn’t started buying. Lobo would’ve started buying if he had no positions, though, as he is a believer of scaling in.
His advice to me was to start a position in gold stocks if I didn’t have one, but not to go all-in yet so that I have cash to add to my position if the broad market crashes and takes gold stocks down with it.
Antonio Atanasov is not an investment advisor. Antonio Atanasov owns shares of companies mentioned in this publication. The information provided in this publication – and all other publications by Resource Talks – is impersonal in nature and meant for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple licensed, experienced, and qualified investment advisors. Get numerous opinions before taking your own decision in the end. The minimum risk on any investment mentioned in this publication is 100% loss of capital.
Shortly: you will lose all of your money and possibly most of your brain cells if you listen to talking heads on the internet. Especially if they have orange hair and no experience (me).
Readers are cautioned that this presentation likely contains forward-looking statements about expected future events and the financial and operating performance of any companies potentially discussed herein. Reality often varies from people’s expectations. Managements like over-promising and under-delivering. If a manager was speaking in here, beware. Readers are encouraged to read the Cautionary Note on Forward-Looking Information and to consult the Company’s Annual Information Form, which is available on www.sedar.com. Reading the full disclaimer on the disclaimer page on this website is mandatory.
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