At what point does a crash stop being a crash and become an opportunity?
That’s the conversation your editor had with Diggers and Drillers resources analyst Jason Stevenson yesterday afternoon.
But we weren’t talking about any old crash.
We were talking about one of the biggest crashes of the past three years.
That’s right, gold and gold stocks.
We wanted to know Jason’s view on whether now was the right time to buy…
Let’s look at the evidence.
First, the overall position of commodity prices. This week the Reserve Bank of Australia released the latest Index of Commodity prices. It’s not a pretty picture for mining companies.
There’s no doubt the index of commodity prices looks remarkably like the price chart of most asset bubbles.
It has the initial surge, the sell-off, followed by the recovery as investors assume the worst is over, and finally the beginning of the real crash.
If most other asset bubbles are anything to go by, commodity prices could have much further to go. But what about gold and gold stocks? Well, if you think the above chart looks bad, just wait until you see these next charts…
The Big Bubble That Never Quite Happened
We’re sure you remember when the gold price hit US$1,921 in September 2011. It seemed that a rise to US$2,000 and above was inevitable.
We’ll admit that we thought it was inevitable. We thought it could be the big one…gold would soon trade at US$2,000 then US$3,000 and perhaps even US$5,000.
But that never happened. In fact, gold went the other way. This morning it’s trading at US$1,221. As we said at the start of this year, even though we’re still happy to buy gold, the great gold bull market is on hold for now.
How long it will stay on hold is anyone’s guess. All we know is that the worst won’t be over until even the biggest gold market bulls have finally given up. At that point the next phase of the gold bull market will begin.
That could take months, and more likely, years.
But it isn’t just the gold price that has taken a pounding. Below is a chart for the Market Vectors Gold Miners ETF [NYSE: GDX] and the Market Vectors Gold Junior Miners ETF [NYSE: GDXJ]:
These indices have fallen 66.5% and 78.5% respectively since September 2011.
Over the past year, just when it seemed they couldn’t fall any further, they’ve defied belief and…fallen further. As an optimist on the future and on stock prices, it’s tempting to think that this is the bottom for gold stocks.
But do we have 100% conviction on that? And more importantly, does our resources analyst?
Pit-Bull v the Sober Analyst
We put the question to Jason yesterday.
You’ve got to understand that your editor is like a pit-bull yanking at the leash eager to make the most of the collapse in resources stock prices.
So it’s fortunate that we’ve got a resources analyst like Jason who can take a sober and analytical approach to resource stocks. Like your editor, Jason likes the fundamentals for gold, and he likes the potential for big gains from gold stocks.
What he’s not so keen on is trying – as he put it – ‘to catch a falling knife‘ as some of these gold stocks continue to fall.
Now you may think that as contrarian investors we should plunge in to recommend these stocks. And it’s possible Jason will do that. He’s running the numbers on a bunch of resource stocks right now.
But remember what we’ve said before. Contrarian investing isn’t about doing the opposite of everyone else, it’s about getting into an opportunity just ahead of everyone else. In other words, just before or just as the market changes direction.
Of course, you’ll never get the timing perfectly right as a contrarian investor. Sometimes the market stops falling, but it can take months before it turns higher. That could mean locking up your money for some time while you wait.
Waiting for the ‘No-Brainer’ Day to Buy Gold Stocks
As it stands today gold stocks are super risky. But if you’re a speculator that may be just the kind of risk you’re happy to take. If you’re a more conservative investor, because Jason still sees some risks that gold stocks could fall further, you may want to wait a little longer before taking a punt on gold stocks.
Naturally, that view could change at any point over the days, weeks and months ahead.
One thing’s for sure: the combined value of all gold stocks won’t fall to zero. At some point there will be a clear no-brainer decision to buy gold stocks.
We’ve written in Money Morning previously that we see the resources sector as one of the best places to earn speculative gains in 2014. As the dedicated resources analyst for the investment newsletter Diggers and Drillers Jason Stevenson is excited about the potential as well.
The task now is to find the best stocks on the market, value them, and then make a decision on when to buy. That will be a tall order with over 1,000 resources stocks on the ASX…
But it’s a challenge Jason is prepared to take.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: The ‘Wonder Weld’ That Could Triple Your Money
