Making your best trades as markets panic

Friday, 17 June 2022 — Burradoo, Australia

[8 min read]

Dear Reader,

This may be the most insane article you’ve read in turbulent times like these.

Many pundits are advising caution now that markets are sounding the alarm as the fires of inflation escalate and engulf the global economy.

The firefighters are the governments and central banks that failed miserably to get it under control. Worse, they fuelled it with stimulus packages and prolonged near-zero interest rate policies.

Cast your mind back to last August when their narrative was so strong that doubters like myself ended up with egg on my face.

And now, who’s having the last laugh?

Alarm bells ring as investors brace for a severe bear market

Last Friday’s US Consumer Price Index data saw inflation surprise on the upside as the year-on-year inflation rate came out at 8.6%, topping the previous month’s reading. This quickly put to bed the market consensus view that we have seen peak inflation and, therefore, the Federal Reserve may be able to go easier with their rate hikes. It would at least relieve the asset markets that have dived.

No luck with that.

Bond yields jumped on the shock inflation announcement. The US 10-year bond yield rose more than 0.35% from the May highs at one stage to 3.5% and now sits above 3.3%.

The markets tumbled hard last Friday and earlier this week in US trading. Since the announcement, the Dow Jones Index has lost more than 2,000 points or over 7%. It’s a whisker away from bear market territory.

Our markets closed for the Queen’s Birthday public holiday, robbing us of the chance to reduce our exposure as investors followed the lead from the rest of the world. The ASX All Ordinaries Index shed around 400 points or just under 6% during the week. It still has another 500 points to lose before it enters bear market territory.

As for cryptos, that has taken another massive dump. Bitcoin [BTC] is now just over US$20,000, while Ethereum [ETH] is flirting with the US$1,000 barrier.

Suffice to say, more pain’s coming. This is because some pundits are saying that the Federal Reserve will not act as a backstop this time around.

The Federal Reserve has raised the interest rate by 0.75% to sit at 1.5–1.75%. It’s expected to raise rates by another 1.75% into the rest of the year.

I can imagine many investors are anxious about how much lower the markets could go and how much more damage their portfolios will take.

But there is one part of the market where morale should be on the rise, unlike the rest of the market.

You’ve guessed it — it’s gold stocks.

How so?

Because the last two years saw them grind down as markets flip-flopped on whether inflation will be under control. It could go lower, but those who have held on are hardened veterans. Those without nerves of steel have abandoned the pursuit long ago.

The contrarian play

Gold stocks are a unique group of assets in that they’ve been trading in a bearish trend since the second half of 2020. They had a stellar run straight after the February to March 2020 flash crash but since August 2020 they’ve been grinding down.

The figure below shows how the ASX Gold Index [ASX:XGD] performed since 2019:

The journey for gold stock investors since 2021 has been difficult to say the least. We experienced no less than four false rallies and each time it seemed so close to the real thing.

Looking back, I see it as a blessing in disguise. Especially now that the entire market is bracing for a nasty fall.

Here are a couple of reasons why…

Firstly, gold stocks are a great contrarian play. History shows that investors seek gold stocks for refuge in a declining market. They may fall with the rest of the market at first but tend to recover earlier because gold is an anchor of value in troublesome times.

In the subprime crisis crash of 2007–09, the broader markets bottomed in the first week of March 2009. Gold stocks traded at their lows in late November 2008.

In the flash crash of 2020, the broader markets hit their bottom on 23–24 March. Gold stocks bounced back a week earlier.

What about this time?

We don’t know when the broader markets will bottom and how low they’ll go. But gold stocks began heading down way earlier, so they’re likely to recover earlier once again.

Secondly, a market crisis should trigger a race to find a safe-haven asset. The US dollar and other fiat currencies are currently holding up thanks to the central banks raising rates. But there’ll come a time when central banks will stop raising rates or they botch their strategy completely and cause the economy to crash hard, destroying the little credibility they have left.

Once that happens, gold roars back with a vengeance.

And gold stocks?

History shows they could go ballistic.

Fortune smiles on the patient

How big are the gains that I’m talking about?

A selection of gold explorers delivered an average of 838% from October 2009 to November 2010. In the 2015–16 rally, another group of gold explorers rallied an average of 380% in less than 10 months. And in the most recent rally in late 2019 to early 2021, another group of gold explorers rallied 1,253% on average.

Many inexperienced investors cut their teeth into speculative gold stocks and end up bleeding their wallets dry.

After all, there are more than 200 listed companies on the ASX trying to make their fortune in gold mining. But only a small group of them will ever pour their first gold bar.

It’s a loaded game and many do this without an experienced guide. They’re better off going to the roulette table in the casino and trying their luck there.

Luckily for you, I have ridden on the shoulders of giants like Rick Rule, Eric Sprott, Peter Schiff, and many more to refine my skills in selecting gold stocks that could deliver you some spectacular gains. I had my ups and downs.

How did I go with my foray into gold stocks? You can find out here.

A word of warning, though: It looks easier said than done to make outsized gains speculating on gold mining stocks. It’s a cyclical play, and you need to ‘do your time’. Even the most solid gold producer could operate under difficult conditions and trade like a penny-dreadful.

For some inspiration on how to play gold stocks right, watch this interview I had with Rick Rule last August.

What do I read of this market for gold stocks?

The water is great. Time to jump in.

Join me on this journey now. It could be the best trades that you make.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

PS: Have a friend who would enjoy The Daily Reckoning Australia? Share this link with them: https://go.fattail.com.au/DRAUS. They’ll receive our in-house gold expert’s top secrets for buying, selling, and storing gold in Australia.

Dear Reader,

‘When the tide goes out you find out who’s been swimming naked.’

Warren Buffett

Even in a world chock-a-block with messiahs, Michael Saylor deserves special mention. Most pied pipers only take the children once. He’s done it twice.

But it’s against the Letter’s code of honour to kick a man when he’s just lost 90% of his fortune. We’ll wait until the last 10% is gone.

And maybe we’re wrong. Yesterday, Saylor assured the world that the kids were all fine. Bloomberg:

‘MicroStrategy Inc. Chief Executive Michael Saylor told investors not to worry about a potential margin call on a Bitcoin-backed loan, saying the company has ample collateral to pledge if necessary.

‘“As long as the Silvergate loan remains collateralized with an LTV less than 50%, there is no margin call,” Saylor wrote in an email to Bloomberg, referring to loan-to-value metrics. “We manage accordingly.”’

Staggering losses

Our first encounter with the man (though never in the flesh) came more than 20 years ago. We had only just begun these daily commentaries. We were relatively new to the trade of making fun of people in print. We needed an easy target.

And there he was. Michael J Saylor.

And here he is again: one of the crypto world’s biggest victims. His company is/was the third largest holder of Bitcoin [BTC] in the world. But it had an average cost per coin of a little over US$30,000. Now, with bitcoin trading at US$19,000, he’s looking at staggering losses.

In the intervening two decades, however, our sympathies for stray dogs, alcoholics, and madmen have greatly increased. After all…‘there but for the grace of God…’. So we mention his name with neither contempt nor pity. He did his level best. He brought entertainment to millions. The hope of riches to thousands. And a warm schadenfreude to a few.

‘We’re purging ignorance from the planet’, he said back when his hair was still dark, and his future was still bright. He was on a ‘crusade for intelligence’, he said. He wanted to make information ‘free…running like water’.

That was back in the glory days of the dotcom bubble, circa 1999. We didn’t have any better intel then than we do now. ‘But in a contest between ignorance and stupidity on one hand’, we wrote, ‘and information and intelligence on the other, we know how to bet’.

In the months and years that followed, our bet turned out to be a good one. The Nasdaq, home of the ignorance eradicating dotcoms, fell. Investors lost billions. And it took many years for prices to recover.

Gold, on the other hand, that ‘barbarous relic’ from the Age of Ignorance, flourished. The price doubled. And doubled again.

The ‘Billionaire Losers Club’

And Saylor? What happened to him? We quote ourselves from 2003:

‘Purging the planet of ignorance? Only a buffoon or mountebank would say such a dopey thing. Saylor was clearly one or the other — maybe both. We were also suspicious of a man who didn’t waste his time on women. Wasting time and money on women is practically a moral obligation for a straight man. But Saylor saw women as “a time sink” and avoided them. In fact, Saylor didn’t drink, either — at least, not back then.

‘“I think my software is going to become so ubiquitous, so essential, that if it stops working there will be riots,” he told New Yorker magazine. A certain level of madness is often an advantage in the business and entertainment world. But as it turned out, Saylor had less visible corruptions, too… he had hidden massive indiscretions in the company’s financial statements.

‘On March 15, [2000] the week before Saylor had his rendezvous at the abattoir, we ridiculed Saylor’s Information Age pretensions. The following day, too, we made fun of his idea for an “Ivy League Education on the Net”. Ivy League educations were already bad enough, we pointed out, even when you attended in person.

‘Saylor’s company, MicroStrategy, had developed software that helped businesses figure out who was buying their products.

‘Shares were offered to the public on June 11, 1998. Nearly two years later, the stock hit $333. Saylor made another $1.3 billion that day after $4.5 billion in the preceding week — bringing his personal net worth to $13.6 billion. MicroStrategy, with sales of only $200 million, and a reported profit for 1999 of $12.6 million, was worth more than Dupont.

‘Saylor became the richest man in the Washington DC area…wealthier even than Oracle founder, Larry Ellison. At $333, the MicroStrategy stock price was as insane as its CEO.

‘[But] while we were mocking MicroStrategy, its share price and its dizzy CEO, the rest of the financial press was praising them. Hardly a single report failed to find something flattering to say. The English language has thousands of negative words, but before the 20th of March, 2000, the ink-stained hacks, analysts, and TV presenters couldn’t seem to find a single one that applied to Michael Saylor.

‘Then, on March 20, under pressure from the SEC, MicroStrategy admitted that it had cooked its books for the previous two years. Instead of a profit of $12.6 million in 1999, the company would now shoulder a loss of $34 million to $40 million. Revenue, too, was downsized.

‘That day, Michael Saylor made history. Never before had anyone lost so much money in such a short time. In six hours, his net worth dropped by $6.1 billion.

‘From that day on, Saylor’s life was different. Instead of being praised by investors and the financial media, he was whacked hard. Investors were out $11 billion. Some of them were angry. Others were suicidal. “I never thought I could lose like this”, said one investor on the Yahoo/MicroStrategy message board. He went on to announce that he was going to kill himself.

‘Before March 20th, Michael Saylor could do no wrong; after, he could do no right. Most prominently, Fortune magazine listed him as #1 in the “Billionaire Losers Club”, with total losses of $13 billion.

‘But a difficult failure does more good for a man than an easy success. On the evidence, Saylor is a better man today than he was a few years ago. “He began to drink”, reports the Washington Post. “At least two MicroStrategy officials received calls from people who were concerned that they had seen Saylor drunk in public…”’

Freedom and sovereignty?

That was nearly 20 years ago. Now, we have the Michael Saylor Story, Part II…in which our flawed hero makes a comeback. That is, he has a second chance to make a fool of himself…lose billions more…and babble about cyberspace….

His stock is now selling for only half of what it was worth 22 years ago. But he insists that it’s a buying opportunity — ‘like Amazon’, he believes, which crashed five times before it really took off.

As for bitcoin, he hasn’t given up. He’s HODLing (holding on for dear life). He says it’s ‘a million times more valuable than gold’.

And if things get rough for HODLers, here on planet Earth, there’s always ‘cyberspace’, he adds, where you can find true ‘freedom and sovereignty…’.

On its face, the idea is preposterous. It suggests that a man confined to Guantanamo and regularly tortured by his guards might ‘move to cyberspace’ and find ‘a decent life’.

Is that all you need — a laptop and WiFi access? More free information? More bitcoins? We suspect that for millions of people ‘cyberspace’ is a hollow lure…like a multicoloured, fake bug dragged across a mountain lake. It leads not to freedom, nor sovereignty…but to flopping around in a fisherman’s basket.

Poor Mr Saylor. Gills wheezing. Naked. Cold. God bless him.

Regards,

Bill Bonner,
For The Daily Reckoning Australia