As any market veteran will tell you, markets are a mind game. I’m not always sure that everyone appreciates the role of psychology in the investment world–but to ignore the irrational nature of the herds of people involved in speculating on the value of this or that asset is to ignore the reality of the human beast, in my mind.
The issue of the mind games played by and on market participants is particularly relevant as we watch the upward thrust of precious metals and their related equities as we enter the third month of 2014.
The precious metals sector– particularly the stocks- were left for dead, loathed, reviled– and worse– at the end of 2013. And yet, just three short months later, here we are with the metals and the miners having outperformed nearly every asset class as the new year unfolds. This would seem to be exhibit A supporting the case of those who would advocate doing exactly the opposite of what is popular or of what the majority of people in a market thought was going to happen just a couple of months ago.
I am sure, however, that many are watching these rallies in the precious metals sector and simply viewing it as a dead-cat bounce. They may even be wondering when to go short this sector once it begins its inevitable head lower into a bear market. But to me, this is just an unfortunate case of people looking in the rear-view mirror. They are sympathetic to the views of those who were correctly cautious and bearish from 2011 to 2013, as the precious metals bulls appeared to have been discredited. But that was then and this is now. So often markets make turns when no expects them, as just as everyone is certain of price moving in the opposite direction. No matter how many times one observes investors selling at bottoms and buying at tops, human psychology is too powerful a force to avoid, and people make the same mistakes chasing an old story. As we speak, many are still succumbing to the temptation to get off what is likely only the beginning of another powerful move higher for the precious metals sector.
I say this because I believe that zero percent interest rates, a controlled (for now) global deflationary depression, attacks on the supremacy of the Pax Americana (think Russia and the Ukraine at the moment), plus global central banks convinced that inflation is too low are just a few of the reasons why we are in a secular bull market in the precious metals. As many learned from 2011 to 2013, a secular bull market is no guarantee of prices going up without interruption, but this does not change the longer term, larger picture.
And, when we look back at the price performance of the precious metals as they came out of their corrections during a bull market, the price moves are stunning. Looking back across the 1970s, as well as the last 12 years, the average move for gold and silver combined was somewhere around 200% and, the miners made even larger moves. Just looking back at late 2008, when gold, silver and the miners last bottomed, the resulting moves upward were roughly 150%, 400% and 350% respectively (many of the junior miners had even better results.) If we overlay these returns with the present, we would come up with gold at nearly 3000 dollars, silver at over 75 and the HUI at somewhere over 600 by late 2015 or early 2016.
I hope you understand that markets are a mind game, and I hope you have the courage to realize the most important thing about an investment is not where it has been, but where it is going. This is another old market saying that I think will come in handy for precious metals investors over the next couple of years.