“This isn’t the end of the world,” says Rick Rule. “This is a normal – and ultimately healthy – cyclical decline in a longer term bull market. This is a sale.” Rule made these comments in a market commentary on April 17th in which he suggested that none of the macroeconomic, geopolitical, or global demographic conditions pointing to a long term increase in gold and commodity prices are any different today than before the metal’s price began a multi-day slide last week.
“I would ask every investor to ask themselves a set of questions today: Has the global financial crisis abated? Do any of the G20 nations have balanced budgets? Are global banks solvent? Are real interest rates negative? Is physical bullion demand strong? Is global population and resource consumption rising? Is competitive devaluation looming? I would suggest that none of the answers have changed, and that the only thing that has is the price.”
Is this the Capitulation that Marks the Beginning of the End of the Current Bear Market?
Rule suspects the recent sell-off may signal the broader capitulation he’s been waiting for as a signal that the current bear market in gold and gold stocks may be ready to turn. “Although valuations have been low, I was concerned that the bear market wouldn’t be likely to turn until we saw a capitulation sell off. It’s my suspicion that we are now in that capitulation sell-off, and it’s a spectacular one.
Benjamin Graham taught that bear markets end with capitulation: first traders, then investors, then the industry, and finally, the professionals. I believe we are seeing professional capitulation now.” He adds that his experiences in the professional capitulation of the 1990’s showed that it is typically followed by a very impressive bull market, though he cautions that the current capitulation is likely to be followed by the “summer doldrums,” and that “we aren’t likely to start to see the market turn until later this fall.”
“Could prices go lower? Yes,” Rule admits. “Graham also taught us that if we are willing to buy a stock today, we should be happy to see it on sale for 20% less in two weeks so that we can buy more.” He adds that while he doesn’t know exactly where the bottom is, “the current values are extraordinary, and we need to place ourselves in a position to take advantage of the extraordinary upswing” he believes will happen. “I suspect the next bull market could be even more dramatic than those in the mid 90’s, and those were very dramatic bull markets in our sector.”
Use the Market as a Facility for Trading, Not as a Source of Information
“Too many people regard the market as a source of information, rather than as a facility in which to buy fractional shares of businesses,” Rule said. “When we do this, we disarm ourselves of valuable information that we have acquired. Graham reminds us that the market, in the short-term, is a “voting machine,” not an information source. Those of us that believe that recent political elections indicate wise decisions by the voters may want to take information from the market – I choose not to.”
As he’s reminded audiences before, Rule believes the single biggest impediment to making prudent investment decisions is the investor’s own actions and responses to market conditions. “The biggest obstacle sits to the left of our right ear and to the right of our left ear,” he said. “Three years from now, people may be looking back at this period and saying ‘those were the good old days – I can’t believe I didn’t go all-in’.”
Cash and Courage
How does Rule suggest investors take advantage of the current market conditions? “Cash and courage,” he says. He believes private placement opportunities will return this year, despite a dearth of them so far in 2013. “Despite low share prices, the industry is going to need financing very soon, and investors like us are going to be about the only place they will find it.”
He also sees opportunity in the secondary markets. “We see world class assets on sale, supported by very strong management teams. We’ve seen 50 per cent declines in share prices over the past month with no associated drop in the quality of the companies’ assets. We see junior energy companies trading at large discounts to their NAV, both on the income and growth sides. These discounts will evaporate over time,” Rule said.
For those investors who may already be “all-in,” Rule suggests the sometimes painful process of reviewing their portfolio and identifying positions that might be sold. “It may be difficult to do when prices are down, but this will allow the investor to create a cash position and allocate their capital in the most efficient way. The market may not turn soon, but it will turn.”
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