At times such as these, the economy reminds us of the inscription that Dante read at the gates to hell, “Abandon Hope, All Ye Who Enter Here.” My firm takes a different view of this grim admonition. At the risk of sounding pollyanish, we look for the silver lining instead of succumbing to panic.
Can the economy get any worse from here? Perhaps, yet the situation brings to mind an old aphorism, “The worse things were ... the better they got.” The Gershwin Brothers put the same thought another way, “With gloom to lead the way, I’ve seen more skies of gray, then any Russian play can guarantee.” The time to buy stocks is when the lumpen are terrified, not euphoric.
This year investors have been engulfed by the perfect storm of the Japanese earthquake and tsunami, Middle East and North African turmoil, credit downgrade warnings in the U.S., the exacerbation of euro-zone debt fears, and more. What does this all mean? The global market has had all the slings and arrows of outrageous fortune thrown at it. This chaos has had a positive effect on precious metal stocks that has not been reflected in its current price.
Newcomers to the arena are being given a golden opportunity to participate in an underpriced and oversold mining sector. Gold is close to all time highs yet miners have recently been basing at 52 week lows.
This represents an unusual opportunity. Central banks are increasingly buying gold. Witness the recent acquisitions by Mexico, Russia, China, and India who adding to their repositories of precious metals as they choose to diversify away from the U.S. dollar.
This dollar bounce and mining stock selloff is providing one of the best opportunities for long term mining investors to enter the market during this short term liquidity crisis.
There is currently a short term consolidation and pause in the U.S. dollar decline. This is a phenomenon resulting from the extreme weakness of the euro and the need for liquidity rising from the potential exit from QE2.
Looking forward to the rest of the summer and the 2012 election it may become evident that a QE3 -- in whatever semantic guise -- may have to be instituted to buoy the economy, improve employment, and postpone a financial crisis. Already President Obama has told the nation that he will propose a massive infrastructure stimulus after today’s horrendous jobs data.
This unemployment crisis may benefit the long term holders of precious metals and mining stocks as interest rate hikes will have to be kicked down the road to some future date. Quantitative easing and stimulus projects will also be instituted, putting us into further debts.
There are too many well publicized negative considerations when the see-saw of speculation tilts to one side. It is entirely possible that the equilibrium is somehow going to be restored. In time, there has got to be a morning after. Precious metals will inevitably occupy their rightful place in the investment universe. Miners have bounced off 2011 lows and are now positioned for a major reversal, while gold and silver are consolidating near key resistance levels.
Disclosure: I am long GLD, GDX, SLV.