By Rick Rule, Chairman - Sprott US Holdings
The investment bank Goldman Sachs continues to predict that gold would take another big leg down. (3)
First off, it’s important that you understand right now that negative sentiment towards precious metals and natural resources creates opportunities for contrarian investors. When your sentiment is negative, your competitors and fellow investors are likely feeling pessimistic too.
I’d suggest that many of you are probably looking to be talked out of selling, rather than into buying more, as an example of this negative sentiment. That kind of sentiment is the basis for the first part of a bull market.
In 2000, we had gold at $260 per ounce (4), and at the time, I wrote a letter to my clients titled ‘a case for gold.’ Investors were wondering whether there was any reason to hold gold. The economy was strong, the S&P was doing well, and tech stocks were all the rage.
Does anyone see a correlation between now and 2000? To me, the correlation with regards to general economic indicators and sentiment towards gold seems pretty clear. In 2000, gold went up precisely when there was no constituency for gold. The challenge became to get under the bar – because expectations were set so low.
In the bear market cloud, there is a silver lining. We are now in a situation where many big mining companies have been forced to abandon a large part of their self-destructive M&A activity and loss-making operations. In fact, we are beginning to see accretive M&A activity, which adds cash to the system.
We’re now in a situation where a reasonable amount of self-inflicted pain and over-priced acquisitions have been wrung out of the market. Once those write-offs occur, the pain is then in the rear-view mirror. The market will move up, I expect, because these companies begin to exceed expectations.
Finally, we’re seeing a classic bear market bottom for precious metals where they are switching from weak hands to strong hands. The weak hands were traders and investors who held them in the futures market. The strong hands are buying physical metals. There will be a point in time where the futures market may need to settle in physical metal to satisfy the buyers who want to hold physical bullion. This could be a truly religious experience for people on the wrong side of that trade.
There are three signs of a bottom in natural resource stocks and precious metals now. First, there’s the absolutely negative sentiment towards the sector on behalf of most investors. Second, there’s the fact that major mining companies are improving their cash flows and their balance sheets, and finally, there’s the transfer of physical bullion from ‘weak hands’ – investors in paper products – to ‘strong hands,’ people who want to own the physical metal.
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(3) Bloomberg Online: Goldman Sees Risk of Gold Below $1,000 on U.S. Economy. September 13, 2013
(4) Click here - Kitco.com
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