Excerpted from the October 25, 2008 edition of Biiwii.com’s Notes From the Rabbit Hole
Throughout Greenspan’s inflation bull market (RIP 2003-2007), I was very bearish, fully aware of the impending credit and derivatives disaster that the Maestro claims not to have seen coming. Long time readers know my writing included a comparison of the entire USA to the former poster child for corporate criminal excess, Enron (Amron).
But the theme was one of playing the cards dealt and despite my bearish bias, the cards being dealt by Greenspan showed ‘bull’ (I mean that in the literal as well as figurative sense). Inflating the money supply at the first sign of systemic problems was his modus operandi and he was celebrated as the great and wise overseer of the long but ultimately doomed party in paper goods. The operating theme from the outset (defined here as the beginning of my public life) has been one of inflation policy that begets the appearance of a sound economy and sound markets but in reality, is anything but. Enter Armageddon ’08.
It is ironic that while I was bearish from 2003 to 2007, I made healthy profits each year as a trader, roughly doubling the broad bull market’s gains each year. This is because I was not fundamentally attached, even to the gold stocks much of the time (due to their rising costs and status as an underperforming sector in the latter half of the ‘inflation bull’). More ironic, however, is that now, in the midst of a crisis I knew was coming I have endured severe paper losses as an investor (in accounts I allow to be exposed to risk).
The most recent target for HUI is 150 and it came within .27 of that on Friday before turning up and leading gold higher. But this could simply be a pause to build a bit of hope before the next dunk. The broad market is in danger of new lows (into capitulation) which could suck the precious metals stocks down yet again. But with each hard down I become more bullish. As an investor. I realize that ‘investor’ can be another way of saying ‘bag holder’, but that is not the feeling I have right now. I hold this precious bag tightly because nobody else wants it and the nuggets in there are literally being given away, so I continue to pick up these discarded nuggets with each decline.
The title of this piece is ‘Epic’, and that is what I expect the gains to be in the gold sector over the next 1-3 years. With producing miners finally achieving the coveted ‘value’ label and junior and exploration gold stocks selling in some cases below cash on hand with properties being looked at by the market as liabilities (in that they need to be funded), folks, you know what we have here don’t you? Mania. Downside bearish mania (along with margin and redemption related forced selling).
There is a good chance that this is the play that people wait a lifetime for, but after the fact will bemoan their inaction due to fear. But the public and its policy leaders who all kept their heads buried deep in the sand during the cyclical bull market have now done the predictable 180, worshiping fear much as they worshiped greed just a short while ago in what now seems like a different life. Mania is mania and it works both ways. Smart people will fade mania.
I suppose it is up to the people who rightly saw this mess as over valued and/or a disaster in waiting to move in and pick up the pieces. John Hussman and Warren Buffett are doing so, as is Jeremy Grantham. I believe the gold sector holds the best and nearest term potential gains, but real contrarian and value investors are now becoming interested in many markets. For those with patience, this stance could indeed be epic.