Buy the Bear

Dear Readers,

Your metals team has just returned from the Casey Research Recovery Reality Check conference in Weston, Florida. I think the quality of the speakers was perhaps the best ever. There were clever tales and insights aplenty, but I'll cut to the chase for investors in the metals and mining sector: The correction we've been experiencing was discussed at length, and while no one is sure when it will bottom, legendary investors in our sector are buying now.

Some say my calls to buy the best of the best mining stocks in the midst of a continuing share-price decline evoke a fear akin to what one feels trying to catch a falling safe. It may help to know that investors today are buying alongside Rick Rule of Sprott Global, John Hathaway of the Tocqueville Fund, and Doug Casey, of course – among other legendary resource investors.

I interviewed Rick in Florida, as you may have seen in last week's Conversations with Casey. We both have a sense that the meltdown in our sector may well get worse before things get better. The "sell in May" conventional wisdom could collide with an already bearish sentiment and truly rustle the whole resource-sector herd to the share-price slaughterhouse.

We Should Be So Lucky

I've said that before: we should be so lucky as to get another 2008-style buying opportunity – and that's what we'd have if the market melts down from this low point.

I've also said "buy low and sell high" so often, it's starting to sound like I'm stuttering. It sounds easy, but it's not – if it were, everyone would do it, and there'd be no profit in it. Contrarianism 101: You have to buy when others are panicking and there's blood in the streets. That means you have to master the fear and do the opposite of what everyone else is doing.

Email from some unhappy readers whose recent share purchases are down have made me wonder if they thought we were joking or merely being rhetorical about this. The whole idea behind the tranche buying system we advocate is to take advantage of downward volatility, and the objective of placing stink bids is to capture "stupid" prices. I meant exactly what I said: we offered guidance on lower prices because we believed a major correction was a distinct probability. Well, here it is.

I see the buying opportunities shaping up with fear and excitement. My fear is not that our speculations won't work out: rather, it's that – as happened in 2008 – too few investors will have the courage to follow through on their contrarian ideals. The excitement, of course, is that we face truly spectacular contrarian opportunities.

"When Will the Pain Stop?"

A friend, reader, and fellow speculator who attended our conference asked me half-jokingly when the market would bottom. He knows I don't have a crystal ball, but the way he phrased it was interesting: "When will the pain stop?" It was delivered with a smile that showed he understood the long-term trend we're betting on remains solid; when you believe in a better future but suffer pain in the present, you don't want your life to end – you want the pain to stop.

I said I saw the slaughterhouse potential mentioned above, and that I was hoping for a chance at phenomenally stupid prices on great companies. However, any number of factors could reverse the market's current fear-dominant sentiment back to being greed-dominant again. Scary news on the geopolitical front – just one potential black swan among many – could send gold shooting north in short order. With many gold companies severely undervalued, that could bring greed back to the forefront with a vengeance.

I also interviewed John Hathaway (coming soon to an inbox near you), who said he thinks we're close to the bottom now. Gold stocks are already undervalued and he's buying.

He may be right. I had dinner with a friend the other night who is a much more mainstream investor than I am. He told me he'd just bought Newmont for the reasons Jeff Clark outlined in BIG GOLD last month – but he's not a subscriber. He reasoned that while gold is up over the last year, the retreat from last fall's peak has producers so beaten down, many are deeply undervalued relative to the strength of the underlying commodity. He saw an opportunity, liked Newmont's dividend structure, and took it.

If mainstream investors are waking up to the opportunities in oversold gold stocks, Hathaway could be right: We have bottomed, and the time to buy is now.

Rick, by the way, says my anecdote matches his observations; he thinks more mainstream investors are becoming aware of today's specific opportunity in gold stocks, as the high-visibility gold indices such as the HUI have diverged substantially from the gold price. He says that's bullish, but suspects that present market negativity will take a while yet to reverse – and that that's a great thing. He likes to buy what others are afraid to touch; usually, that means grassroots plays, but now he's very pleased to be able to buy advanced developers and even producers that are on sale. Rick shares my excitement at the prospect of 2008-style prices – he seemed almost gleeful when I spoke with him.

I talked about this with Doug, of course, and he agrees – he said he looks forward to seeing my shopping list.

What to Do

If John is right and we are at a cyclical bottom, now is the time to buy.

I would not go "all in" even if I were positive John is right, because no one knows the future for certain. Still, I would move aggressively, deploying more cash into gold stocks. In fact, the divergence between gold and gold stocks has become so great, some of our conference speakers mentioned selling some of their gold to buy more gold stocks.

[Some of the biggest institutional and mutual fund managers believe that gold miners are severely undervalued, and they're urging their clients to load up.]

If I were sure Rick is right about lower prices in the months just ahead, that would not make buying some undervalued stocks now a bad idea. Again, no one can be sure – a point Rick himself made. If the companies are solid, well financed, and have projects of genuine merit and the right people to push them forward, today's buyers should come out well, regardless of the fluctuations along the way – as long as they don’t panic and sell at the real bottom, when they should be buying with gusto.

Key point: no one can call the exact market bottom, except in hindsight.

That means you have to buy when prices are low and not worry too much about how much lower they could go. That takes discipline and nerves of steel – the DNA of the contrarian mind. This is precisely the rare and difficult ability that makes fortunes for speculators – and the reason they deserve to make those fortunes.

Profiting from 2008 was only "easy" in hindsight – many people chickened out at the moment of truth, when share prices went into freefall and I was putting "BEST BUY" on many stocks. Others were willing but lacked the liquidity to follow those recommendations. I know – I got the agonized emails.

So, here we are in 2012, potentially on the verge of a similar sell-off within an underlying trend that remains as bullish as ever. What to do:

• Those who've taken our advice to take profits along the way and maintain a cash reserve should remember 2008, hold on to their courage, buy first and second tranches where appropriate, and prepare to buy low in a big way with stink bids.
• Those who have already averaged down and find themselves, if not "all in," then perhaps with less cash than they'd like, must hold and not lose their nerve. We're in front of what may be the most spectacular buying opportunity in years. Sure, if a company suffers a major political setback, runs out of money, or shows in some other way that it's unlikely to deliver, then sell – but do not sell just because the market is down.
• Those who are new to the sector should buy first tranches on great companies and prepare to average down with second tranches and stink bids, should they be so fortunate as to get opportunities to do so.

What if I'm Wrong?

At the close of our conference in Weston, David Galland polled our attendees, asking how many thought the US and global economies were actually recovering (implying that we should not be investing with further crisis in mind, but improving economic conditions). In the entire, packed room, only a handful of hands went up. Okay, we had just presented a lot of evidence for why the Casey consensus is for more crisis ahead, but there were different views among speakers, and the overwhelming majority of independent-minded thinkers present agreed that the fundamental trend we're betting on remains solid.

If they – and we here at Casey Research – are all wrong, and the bull market for metals is over, you may lose some money. This is why we always urge readers in the strongest terms not to speculate with money they cannot afford to lose. There is, however, no practical limit to how much money you can win, if we're right – and that's why we do urge readers in the strongest terms to embrace intelligent speculation.

As Rick says, in these markets, you're either a contrarian or a victim. Bear markets are for buying and bull markets are for selling. We believe we have entered an acute, but temporary, buyer's market. Our path is therefore clear: we must buy the bear.

Sincerely,

Louis James

Senior Metals Investment Strategist
Casey Research