By Jeff Clark (Casey Research)
“True capitulation involves extremely high volume and sharp declines. It is usually indicated by panic selling. The word is a derived from a military term which means to surrender.”--Investopedia
It appears the gold market, despite the occasional good day, has entered a phase of true capitulation. Gold has fallen 40% since its $1,921 high in September 2011. GDX, the gold miners’ ETF, is down a numbing 78%. Many gold stocks are now selling at their 2008 lows, with some back at their 2001 lows (and major miner Barrick Gold is now at its 1992 price).
This will wreak havoc on the industry. If current price levels remain through the end of the year, we will see:
We are massively long, of course. But should we be? And does it make sense to hold when market fundamentals are crumbling so fast?
Assuming you own companies that can survive a period of low prices, our answer is most definitely YES!
These and other factors are all valid reasons to hold on. But there’s another reason that may be the most exciting of all…
How Do You Spell Capitulation?
The gold selloff has been so brutal that we’re now approaching a true “blood in the streets” moment. That phrase is widely attributed to Baron Rothschild, who made a fortune after the Battle of Waterloo against Napoleon. With the blood of dead soldiers literally staining the streets, he bought when almost no one in their right mind wanted to. We may not be quite there yet with gold, but we’re close.
To get an idea of the kind of profits contrarians can earn under such circumstances, let’s look at five top examples from history…
In each example above, investors made a fortune by buying when things were at their most pessimistic. Note that none of the successful investments above required the investor to know, or even guess, where the bottom of the market was. All they had to do was buy deeply undervalued assets when others would not.
The current situation for gold stocks is similar. Multiyear low prices, extreme pessimism, panicked selling, scornful media… you get the picture.
The “blood” may not be done flowing in the gold sector, but the opportunity emerging is similar to these extreme scenarios in history.
Every investor keen on extraordinary gains should be prepared to capitalize on this opportunity. That’s exactly what I and many others at Casey Research are preparing to do. As Louis James likes to say, you don’t try to catch a falling safe; you let it smash and then pick up the treasures scattered about. It’s not easy, but that’s why there’s so much profit in it for those who have the cash and courage to follow through.
As for the physical metal, in a world as chaotic and dangerous as ours, we’d argue that everyone should maintain a store of physical value under their direct control—one no government can inflate away. It’s only a matter of time before this game the central bankers and politicians are playing is up and a fuse is lit under the gold price. Owning gold is as important as ever, if not more so. And it’s on sale.
Source: Casey Research
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