TAKING THE EMOTION OUT OF PRECIOUS METALS. . .

And Replacing it With Common Sense—and a Greater Purpose

By Chris Temple, Editor

The National Investor

April 30, 2004

            Following the last major bull market peak for precious metals as well as gold (primarily) related shares in mid-2002, I wrote a commentary similar to what follows.  The observations contained in that item, I hoped, would be taken by the precious metals community as they were intended; to help one and all, guru and investor alike, better themselves financially.  To do so, I said, one needs to approach this sector, as any, with a clear head, common sense and a sound strategy.  Unfortunately, those are attributes lacking in most investors; even more (and tragically) so, it seems, when it comes to investors in the precious metals arena.

            If I could pick out just one reason why adherents to precious metals in recent years have usually been so wrong in their prognostications, it’s due to their using their hearts rather than their heads.  I don’t think there’s a single investment vehicle where more decisions (and usually bad ones at that) have been made by folks using their emotions and beliefs as opposed to common sense than gold (and, most recently, silver.)

            Many a time during gold’s relentless bear market of the last half of the 1990’s, gold bugs threw money at their favorite investment, even as the metal’s fundamental and technical behavior both deteriorated.  Often, this was prompted by “forecasts” by those with a vested interest in selling precious metals-related products.  Just as much, though, these usually doomed forays into metals were encouraged by those who were making forecasts based on how they believed things should be, rather than on the way they really were. 

            Tragically, the bull market in precious metals that began in 2001 has, for too many investors, not changed their fate as much as it should have.  Once more, people have piled willy-nilly—and usually with a grossly disproportionate share of their overall portfolio—into gold and silver shares in particular.  On top of this, countless investors did so with increasing enthusiasm (and even larger amounts of money) as expensive stocks became more so, and even as CLEAR danger signs were obvious to one and all.

Just as in mid-2002, most gold investors—and even gold pundits—have for the last few months now either ignored or denied signs every bit as clear as back then that gold (and, this time, silver even more so) were accidents waiting to happen.  In particular, excited precious metals aficionados of all stripes fed the recent bubble in mining stocks gleefully, as always seeming to put in the most money when share prices became (at least for the time being) absurd in many cases.  It didn’t matter that valuations were way too high.   It didn’t matter that the rebound of the last 10 weeks in the U.S. dollar GUARANTEED that everything (including not only gold and silver, but most other commodities) that had been used to bet against it by hedge funds and others was therefore in BIG TROUBLE. 

No Siree—for most people (unfortunately) investing heavily in precious metals is a cause.  A quest.  It’s “proof” that they are one of a precious few who know that, ultimately, our fiat money system is in trouble big time.  It’s their vote, often with a majority of their entire portfolio and life’s savings, that the Founding Fathers were right when they voiced their own distrust of paper money, its many evils, and its eventual doom.

And when the markets, as they have done yet again, don’t “see the light,” what happens?   Precious metals bugs, who have just seen another substantial chunk of their portfolio’s value evaporate, often go into tirades—as do some of their gurus.  They holler of manipulation, conspiracies and more (much of which I indeed believe in, lest you think otherwise.)  Seldom, though, do many of them cool off, take a deep breath, and ponder the possibility that it might have been them that did something wrong, by investing based on their emotions rather than on sound and clear fundamental and technical signs in these markets they love so much (and, in the cases of a few gold and silver gurus, markets they claim to know so well.)

This is not to say that our own market calls will ever be perfect.  Yours Truly does not pretend to claim that.  However, it saddens me on a couple scores that, time and again, so many investors in precious metals take two steps forward (admittedly nice after the long commodities bear market) only to then take two or even three steps backward!

“All right, Temple,” you’re saying.  “You’ve made your point.  Don’t rub it in any more.  What do you suggest we do?”

I’m glad you asked.  And, I want to answer that question in two ways, starting with precious metals’ investment attributes and character as a crisis hedge:

First, I suggest you come up with a modest, realistic amount of PHYSICAL gold or silver bullion you want to own, which you will hold in your possession.  Buy or accumulate it, squirrel it away and forget about it.  This is your “mad money” you’ll be able to use as money in the event that “Bubbles” Greenspan’s skyscraper of cards suddenly does fall.  How much you need to have is your decision; but don’t go overboard.  Better yet, depending on where you live, your neighbors and your circumstances, other things can and should be accumulated for such a possible event as well.  

Next, with your investment portfolio, determine how much (as a percentage of the whole) you should have in precious metals.  Since the bull market in this sector began, I have advocated for subscribers that they have a “core position” of 10%.  When the sector has been cheap, in my view, on BOTH a valuation and technical basis, we’ve increased that significantly; most recently, we had a third of recommended portfolios in precious metals stocks, cutting back on that position to 15% around December 1 of last year, and further down to our 10% core several weeks ago.

Does this mean those who followed my advice avoided losses entirely?  No.  In a long term bull market—which I believe we are still in—we always want to have at least this modest core position in carefully-selected individual precious metals shares (or, if you have no choice due to being in a group of mutual funds, in one of them geared toward precious metals stocks.)  Indeed, our 10% has become 7 or 8% over just these last few weeks.  However, by taking the lion’s share off the table before the carnage developed, we’re in much better shape to load up again once it’s time for the next spurt higher.   On the other hand, those “riding” outsized positions in precious metals stocks up and now back down will need to see their positions rise 50% or more from here just to get back to where they were a few months ago.  

The foregoing is as much as most people need to be successful investors in the precious metals area.  Have your “mad money” in the form of gold and silver bullion.  Set up and hold a core position in metals-related stocks.  Finally, realize that beyond this you must be a TRADER due to the nature of the precious metals markets.

Now, I want to talk about what really motivates me—and should motivate YOU—when it comes to precious metals as a “cause.”

What breaks my heart as much as anything at times like this where “gold bugs” (and especially “silver bugs” this time around) have been bloodied anew is not so much the realization that—once again—this could be seen a mile away, and was therefore preventable.    Instead, it’s that I see in the kind of people who are most inclined to gravitate toward precious metals a constituency with the potential to change their society for the better.  It’s a constituency, though, that usually spends its time tossed to and fro by often shoddy advice, lots of hype and—usually—zigs when it should zag.  As a result, it’s a constituency which spends too much of its time licking its wounds, hunkering down, etc.

It has always struck me that most investors in precious metals have something, as I alluded to above, that the larger universe of investors—nay, even of our fellow citizens—does not.  That is, a level of knowledge about the predicament that our nation—and world—are in; one which inevitably comes back to the nature of our “funny money” system.  Further, many of these people—and I’ve met them at various precious metals, preparedness and similar shows down through the years—actually look at the subject of precious metals in a context beyond that merely of their individual financial health.  This is good.

I believe the time has come to—in addition to getting the emotion out of our investment decisions in the precious metals area—actually turn our knowledge and even passion into something positive.  Something useful.   Even a movement toward monetary and, eventually, social reform, if you will.

I was sharing these thoughts this past week with my friend Steve Carr, co-founder of the Honest Money Group and an accomplished author, political activist and media expert (who can be reached for those who would like to do so at lifejourney60010@yahoo.com.)  He, too, was decrying the fact that—among other things—gold and silver bugs have for too long been caught up in too much hype and hoopla, whipsawed regularly by market swings and all the rest, and have generally been lacking in any “game plan” that would both bolster their portfolios as well as the “cause” of precious metals.

He detailed for me the example of what has recently occurred in the silver market; one which he and I are both bullish on longer-term.  Recently, boosted even more by hedge funds chasing this metal’s momentum and, for a time, making “dollar contrary” bets, silver soared.  Finally catching up with its big brother gold, silver spiked to a July contract high of $8.49 per ounce; its highest level in many years.  On the COMEX, some 120,000 “open interest” contracts were accumulated at one point recently by speculators.  Each of these represent 5,000 ounces of silver; doing the math, you come up with leveraged “bets” on some 600 million ounces of the junior precious metal.  

After reaching its high, silver plunged on the July contract to well below $6.00 per ounce (it closed today at $6.09 per ounce.) 

Rather than playing in the “manipulators’ ball park,” Steve suggested, what if some of the people out there who got caught up in the SPECULATION over silver—and, in effect, ended up trading paper bets on the underlying metal—had done something different?

On paper, the losses incurred on these contracts from the contract high (which came in early April) to the low of $5.55 per ounce come in at more than $1.7 billion.  This would purchase the better part of 300 million ounces of the metal itself, were the price to stay static (it wouldn’t, naturally, as such demand would overwhelm the physical market.)  The point is, if more people who really believe in precious metals as a cause would to at least some extent be wise and accumulate the physical metal at times like this rather than chasing the futures markets and, as just happened, getting whipsawed, a couple things would happen. 

First, this activity alone would drive the price of silver dramatically higher; not because speculators are making paper and other derivative bets on the metal, but because it is really in demand.  Second, many thousands—and, maybe one day, millions—more people would be in a position to join some of the fledgling efforts already underway to do business in a true free market by using their silver as money. 

A rapidly growing segment of the population which understands history, our current monetary predicament and the need to do something pro-active to develop an alternative monetary regimen would be a potent force!  Further, as this growing number of people acquired a form of money NOT dependent on debt, NOT dependent on markets, and NOT dependent on whatever manifestation of Greenspan we are treated to this week, a true free market might actually break out!  As many are already attempting and even implementing with other forms of trading regimens based on silver, gold and even community currencies not based on precious metals, people of good will can further what I have in the past called a “peaceful monetary revolution” that is way overdue.

This and more will become more likely as the day arrives when the precious metals community approaches the asset classes it is most passionate about with more strategy and sense, and less emotion (meaning, of course, the kind of counterproductive emotion and hysteria that time and again leads to major financial losses during debacles such as we’ve just seen.)  If you want to be emotional, then be passionate—nay, driven—about the kind of portfolio you could have by changing your approach.  More so, be driven about the kind of future your children and grandchildren can have if we break out of the mold so many have been in for so long, and look at precious metals as a greater means to an end we all hope for.  No conspiracy or manipulations, real or imagined, could stop millions of awakened people who realize that—at the least—they need an alternative to Greenspan’s fiat money.  Those millions, grounded in truth, sound investment strategies and with a noble purpose even beyond their own investment success, can change society for the better. 

Will you be on board?

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