Gold stocks are at, or near, the ‘puke point’ which is where the downtrend reverses and the long-term secular bull market resumes. It takes a strong understanding of the fundamentals and considerable courage to buy at a time like this, but those that do will be richly rewarded.
What is the puke point?
The puke point is the moment at which an asset makes a significant bottom and then reverses direction. It happens when investors who are long the asset finally capitulate and throw in the towel. The shares they sell are picked up either by short sellers who need to cover their positions, or by investors who understand the fundamentals and have nerves of steel, the so called ‘strong hands’.
The puke point is often identified by a sharp decline in early trading, followed by a strong rally/ reversal at the end of the day.
The puke point occurs when sentiment towards an asset is extremely negative, and that’s just what we are seeing today.
The latest COT (Commitment Of Traders) report, which shows the holdings of various participants in the futures market, reveals that the net long exposure to gold among professional money managers is at the lowest level since December 2008. Essentially that means that the hedge fund community is the most bearish on gold it’s been since the collapse of Lehman Brothers.
Sentiment is even negative among gold newsletter writers.
The time to buy, not sell
The HUI gold stock index is down more than 37% since 9 September 2011 and is now at the same level it was in March 2010. This has led many investors to throw in the towel, but as I’ve said before, it may feel like selling these distressed assets is the right thing to do, but it’s likely a very bad idea.
“The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all; for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.” Benjamin Graham
It takes a strong understanding of the fundamentals and considerable courage to buy at a time like this, but I believe that those that do will be richly rewarded.
The three things a successful investor must do
In order to make money long-term investors must do three things:
- Have the right thesis
- Execute that thesis in the correct fashion
- Sit tight until it’s truly time to sell
“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. Jesse Livermore