Digging for Opportunity in Precious Metals, Part I

VANCOUVER (Bullions Bull Canada) -- This commentary is not for all investors. Sadly, many if not most investors will never know the intellectual and financial satisfaction of truly buying low and selling high.

When some company -- or even an entire sector-- is falling in price toward some long-term bottom, most investors will be fleeing in panic rather than edging closer, sensing opportunity.

The popular (but apparently mistaken) belief in the West is that the Mandarin characters that represent the Chinese word for "danger" also can be used to represent the word "opportunity". The fact that this botched translation has achieved cliche status here in the West is, in fact, because it articulates one of the most time-tested principles of Contrarian logic.

There is no better context in which to demonstrate this principle than in markets. The vast majority of investors are bandwagon-jumpers. This is in no way intended as an insult. It is a simple statement of empirical evidence and human nature.

What should any smart investor invest in: "winners" or "losers"? Most smart investors don't even have to think about that one -- naturally, you invest in the "winners" and shun the "losers." By definition, a "winner" (in market terms) is something which has already risen in value, substantially. One is jumping on the bandwagon.

Conversely, by definition a "loser" is something that has fallen in value, substantially. To truly "buy low" requires buying losers -- i.e. being a Contrarian. Thus while all the talking heads in the financial management industry parrot the words "buy low, sell high," the only people in our markets who actually walk the walk are the Contrarians.

If Contrarians are (literally) the only investors in our markets who actually practice the money-making principle of buy low/sell high then why aren't all Contrarians fabulously wealthy, and thus viewed as Market Gurus? Because sometimes when "losers" go down they never come back up again. Anyone bought any Kodak film lately?

One must be a Contrarian if one wishes to even attempt to "buy low and sell high." However, one must be an intelligent Contrarian (or at least a competent one) to do so successfully. We can summarize the challenge facing investors with a simple metaphor. Being a successful Contrarian means being able to discern between a "low tide" (which precedes a high tide), and a ship that has absolutely (and permanently) "run aground."

This brings us to the Mother of All Low Tides: the precious metal sector. Envision two sectors. One sector has been rising for 12 consecutive years, during which time it has outperformed all others and produced stellar returns for investors.

The other sector has been shunned by mainstream investors to the point where the majority of market participants have invested only roughly 1% as much capital in this sector as the historical average, throughout the entire history of our markets. It is continually described by the mainstream media as "about to collapse" and avoided by most "respectable" financial management professionals because it is "too risky."

Now try to wrap your head around the notion that these "two sectors" are the same sector: precious metals. How is it possible that the best-performing asset class over the past 12 years has been (and remains) more under-owned than at any time in the entire history of our markets?

I've already answered this question. Twelve years of mainstream Chicken Littles warning investors continuously that "the sky is about to fall" on gold and/or silver. Twelve years of financial management professionals warning their clients that the best-performing asset class was/is/will always be "too risky."

Now, after this (simultaneous) 12-year low-tide/bull market in precious metals the "low tide" has gotten even lower, the Chicken Littles suddenly even more shrill. Nowhere, anywhere in markets, has the tide receded as far as it has with the gold and silver miners, producers of these shunned-but-outperforming commodities.

With prices having fallen over the short term in both the bullion markets and fallen much further with the majority of the miners, investors have a clear and simple choice as to whom they listen in answering the question "what comes next?"

They can choose to listen to the same mainstream Chicken Littles and same financial management "professionals" who have unerringly and unequivocally been wrong about precious metals month after month, year after year.

Or, investors can choose to listen to the much smaller cadre of professionals within the precious metals sector who have been consistently right over that same time period.

Before you make your decision, let's perform a quick idiot test. One of the most frequent accusations made by the mainstream flock that routinely denounces precious metals is that gold or silver or both are "in a bubble."

Now the idiot test: How can any asset class be "in a bubble" when practically no one is holding it?

Time for a reality check. Each reader can ask themselves this simple question: Do you know any friend/relative/business acquaintance who currently has any significant holding in precious metals? From experience, I can provide the answer to that question for the typical reader.

Their answer would either be "zero" or "one," with some mental notation in brackets beside the one that reads "kook."

Now the second half of the reality check.

During the dot.com bubble, when the same media Chicken Littles and financial management professionals were shouting "buy, buy, buy" right to the bitter end (i.e. implosion), can any reader recall a friend/relative/business associate (invested in the market) who did not have significant holdings in tech stocks?

Our idiot test is completed. When "everyone" is holding an asset class, that is a bubble. When fewer people than ever are holding an asset class, we have the opposite of a bubble - i.e., low tide.

Readers are nearly halfway there in being able to answer the question "why invest in precious metals miners?" You are now aware of the absolute "low tide" that has existed in the precious metals sector throughout this 12-ear "private party" for the tiny contingent of investors who have bought into the best-performing asset class. You're now aware that the tide has receded even further, and what that represents to the Contrarian investor.

Readers know the community of mainstream media scribes and investment professionals to whom they have listened over those 12 years regarding precious metals have been consistently/absolutely wrong with their fear-mongering. Readers also know this same legion of talking heads all fail the simplest of idiot tests: being unable to tell the difference between a "bubble" and the opposite of a bubble.

However, these are only the negative reasons for investing in precious metals and the companies that mine them.

In Part II, I'll supply readers with the positive fundamentals that explain why precious metals has been the best performing asset class of the past 12 years, and why the miners in particular represent the ultimate "silver lining" in this sector.

Then I will spend some time suggesting what they can expect when the real "bull market" in precious metals begins. Or, in other words, what will happen when "the tide finally comes in."

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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