March 15, 2012

Investing, and in particular speculating, can be said to be the art of attempting to guess how stupid most people will be and position yourself to profit from it.

This has been the case more so than usual lately as the precious metals and gold and silver stocks have pulled back yet again despite there being no valid fundamental reason for them to do so. However, we here at TDV had predicted this possibility and so we are not surprised to see the gold stocks have been sent back out to the woodshed again this week.

GOLD STOCKS

If you own gold stocks and are wondering what happened, last year the fools went into gold and bonds for all the wrong reasons, and now they are liquidating those trades and again going into a different set of the wrong investments. We expected this to happen to an extent. That is why Senior Analyst, Ed Bugos, downgraded our outlook for both gold and gold stocks from bullish to neutral to subscribers on February 14th in a move that now looks quite prescient.

When asked where the Gold Bugs Index (HUI) could go from here, Ed replied:

"The textbook objective is around 380 if you view it as a head and shoulders top. If it is a rounding top it could be over at 430-450. I don't know which is more likely but if it is the deeper one it will come back faster imo. I downgraded my short term (<3 mo) outlook in mid February - expecting that investors would be fooled into thinking everything is okay, and into buying the Dow back. At any rate, I expected it more or less, and my call is for the most gold price sensitive producers and explorers (those with lower grade stuff) to see the most pain in the next month or two."

Vin Maru, of But it looks like they go down when gold goes up, and down when it goes down, and then they go down for the hell of it. It is frustrating. Since September 2010 we felt that there was a possibility for a pullback and we left a 20% cash reserve in the TDV portfolio for the correction. I waited until December (2011) and then we reduced that cash position in favor of adding to two trades: 1) Shorting Treasury Bonds and 2) for the gold juniors which up until then only had a 15% weighting in our allocation (the majors had 15% too, and gold ETF/physical had a 30% allocation). So I did my left over buying at the end of last year, which I hope is the low (in the $CDNX)."

So far that call to short Treasury bonds at the end of last year (through the Proshares UltraShort Treasuries) has paid off:

And so has the re-investment in the junior shares which still haven't fallen to their December lows as shown by the TSX Venture exchange index:

Will the juniors pull back to their December lows? Ed doesn't think so and he'll have much more on that to subscribers in the next TDV Interim Update out early next week.

But, where it goes between here and the December bottom is anyone's guess. It's just a matter of how stupid the fools can be in believing that gold and gold stocks are not the place to be at a time of near universal money printing and massive government debt.