Silver Linings in the Panic Selling and Madness

Dear God, these financial markets are not for the faint of heart. The powerful and fickle forces of the market, including hedge fund liquidations and small investors beginning to panic, are creating a schizophrenic atmosphere that appears to never end.

Widespread liquidation continues in the capital markets due to the ongoing dash for cash.  It is astonishing and painful to observe that investors are liquidating top-quality companies in the resources arena when these businesses remain healthy and profitable. 

Thursday, upstream oil and gas stocks dropped by roughly 10-12% and the best agriculture stocks declined by a whopping 25-30%!!!  This happened without any negative news and despite the fact that only a few days ago, one of our holdings (a major fertilizer company) announced record profits!

This madness goes to show that the herd has totally lost its mind.  If history is any guide, such panic selling is usually seen close to major bottoms in the markets.  Now, it may well be that 'things are different this time' but I doubt that the supply and demand dynamics for commodities have changed so much in the past 3 months.

These are the words of internationally renowned analst and advisor Puru Saxena.

In the world of precious metals, Silver got walloped from the New York open all the way through the Globex, in a nearly continuous down line, failing to hold even $11 and closing at $10.85/oz., down a whopping $1.74. That is a shocking 14% decline in just one session.

It was a bloodletting that stretched across every market except the currency trade, where the dollar prolonged its determined climb against the euro.

Nothing was spared, as equities were hit almost as hard as commodities. Fear of everything seems to be spreading, as investors retreat into cash en masse. The cash-to-equities ratio vs. the S&P Thursday rose to 31%, eclipsing even its high point during the last recession, when it hit 30% as the tech bubble burst.

Gold at the moment is certainly being sledgehammered by the dollar’s strength and oil’s weakness, but its safe haven status hasn’t really kicked in yet, and may not for a while if the bailout passes on its next try in the House.

Additionally, there is the problem of liquidity. As the paper markets continue to tank, cash-strapped investors will have to raise money to cover their losses, and the first option to which they turn has traditionally been selling metal. How much of that is going on now can’t be measured, but it’s bound to be considerable.

Looking short term, Senate passage of the proposal “has forced gold lower,” said Peter Grant, of USAGOLD-Centennial Precious Metals. But, “The long-term implications of the proposal, if it is passed, are extremely negative for the dollar and therefore extremely positive for gold.”

For now, though, “Speculation about the bailout is the main … driving force,” said Ed Bugos, editor of Gold & Options Trader. “Every time the market thinks it will go through, gold falls, and vice versa when the market thinks it will not be passed.”

On Friday (as I'm writing) stocks surged while credit markets remained strained Friday ahead of an expected House vote on the government's $700 billion financial rescue plan and after Wells Fargo Co. (WFC) agreed to buy Wachovia Corp. in a $15.1 billion deal. The Dow Jones industrial average rose nearly 150 points.

Whether the House passes the big-bucks rescue plan or not, the gut-wrenching volatility will be with us for awhile longer. The silver lining is that, for instance, if silver is going to fall 14% one day and today be up 5 or 6%, there is money to be made. 

Some are not sophisticated enough or risk-oriented enough to know when to buy low and sell high in a 24-hour period of time. The risk of that is high and so are the rewards. Perhaps some would find it suitable for a small portion of their investment dollars.

Frankly that is what I did yesterday with such stocks as Freeport-McMoran (FCX), Kinross Gold (KGC) and Hecla Mining (HL). I wish I had the nerves to do it with the Silver ETF (SLV).

No boys and girls, I don't recommend you try this at home because it is too much like trying to catch a falling knife. But don't let anyone tell you there is no way to make money in these kind of markets.

One friend said he was buying pharmaceutical stocks like Novartis (NVS) because he thought there would be hundreds of thousands of people who work in the financial sector who will be needing boat-loads of medication just to treat their nausea and anxiety. That's one way to capitalize on an otherwise disastrous economic nightmare.

Stock position: Long FCX, HL, KGC, SLV, AUY, NVS.

Comments

[CLH:]

The stock market always looks to the future while you are looking at the past. The market believes we are headed for a recession which means commodities will go down in price. I am shorting commodities which just came off a huge bubble.

Commodities are good buys when the PE ratio is high or better when they are losing money (2002). I can see no reason to buy commodities while debt is being eliminated--deflation.

2008 Oct 05 07:41 AM

[adan:]

nice article, interesting info - thanks!

2008 Oct 05 09:03 AM

[lundbergj@b...:]

We are in new international market territory & the long term rewards of gold & silver will be profitable as US dollar declines.

2008 Oct 05 09:24 AM

[tipalia:]

CLH talks like my broker and history proves them right. Still,not because I am a contrarian, I will buy at or near 40$ 50 shares of FCX and will buy 50 mores if or when it goes down to 35$ ,anther 50 shares at 30$ etc...It doesn t pay to be arrogant and to fill a position at once, not in this type of market. If FCX doesn t go to 0 I should come ahead in 2 or 3 years from now,do you think it s going to 0? I don t think so and do not forget the nice yield that goes with it while waiting.

2008 Oct 05 09:38 AM

[GMiki1:]

FCX is a great buy here as are many other commodities--such as coal stocks, platinum, and many of the junior resource stocks. We are in a deflationary moment, but not a deflationary period. We're going into a very bad inflation with resources ultimately on their way up. The dollar is up right now due to technical issues of euro holders selling to obtain dollars for business reasons not fundamentals.

2008 Oct 05 11:11 AM

[Marc Courtenay:]

The same approach you are suggesting on FCX could be taken with Penn West Energy Trust (NYSE:PWE) whose yield for now is near 18%.Not too long ago Morningstar put a fair market value of $37 per share on this well-managed, resource rich Canadian royalty trust. The key to my article is found in two facts: 1). Everybody seems afraid of everything right now (a.k.a.unbridled fear) and 2). Every step that the treasury dept., Congress, and the Fed takes to ease the credit tightness, increase liquidity and inflate our economy is inevitably bad for the value of the dollar. They are debasing the dollar's buying power over the medium-term, and you know what that usually means for things like precious metals. These are the realities, not the emotions or opinions of pundits.
Thanks for your comments and for sharing your perspectives.

2008 Oct 05 01:30 PM

[directcommu...:]

We could see silver touch the $10 dollar range. I would hedge in here all the way down to 10 if necessary.

2008 Oct 05 01:41 PM

[Pessimistic...:]

Affirmation is blissful. My thought which comes from a friend and money manager is DCA down and do not loose sight of a stock based on environment as opposed to bad stock itself. We are in it.. but there is a ray of sunshine in these great stocks with a yield.. as the price drops.. these stock with great cash holdings will only increase their yeild and become even better value stocks.. then one day they will return to a better growth stock again. Watch NUE.. I see a 4% yield, if it doesn't bounce out.

2008 Oct 05 06:17 PM

[loch:]

more correctly: we're in a deflationary panic. When said panic subsides, the market will react to the inflationary "medicine" being applied.

2008 Oct 06 08:00 PM

[loch:]

@clh - you missed the trade bro.

2008 Oct 06 08:05 PM

[Socialism c...:]

"CLH talks like my broker and history proves them right"

Hah! Best joke all day. My broker was a joker. Decided I didn't need the overhead. The way "they" are fighting this is highly inflationary...look for commodities to pop, especially gold, given that it is safe in both circumstances!

2008 Oct 07 05:36 PM