Time to Buck the Gold and Iron Bears
- And down we go on the ASX. I spent a fruitful day yesterday watching the action. I expect I’ll be doing the same today.
Times of market pressure are much more instructive than rising ones.
Mr Buffett is damn right when he says you see who is swimming naked when the tide goes out.
But then again, you also see who is wearing clothes, or at least underpants.
For example, there were stocks I watch that did not go down yesterday, or barely budged. Will they hold up today too?
That can prove fruitful insight. Instinct and intuition have a role in trading and investing.
Many people want to make it about numbers and forecasts. But sometimes your gut can tell you when something is not right.
Three weeks ago, I told my subscribers something was off about this market. I didn’t know the reason — and could give only guesses.
The next week I told them we were going to high alert.
We’re mostly sitting on the sidelines right now. That’s a nice place to be when stocks go down.
Intuition and instinct are even better when you can pair them with the cold eyes of an algorithm.
My friend Peter runs one for us called First-Mover Algo Alert. It’s a unique algo that shifts between 100% stocks, to a mix of shares and bonds, and — the most conservative — 100% bonds.
The algo has said to be out of stocks for quite some time now.
The fruits of that are now apparent. I strongly urge you to put this weapon in your arsenal. You can check it out here.
But that doesn’t mean you can’t back some ideas of your own…
- One place to look is the iron ore sector. It’s just been absolutely creamed.
(Yes, I know — steel cuts, Evergrande, and the bears of UBS are currently getting prime airtime from mainstream papers.)
I am quite familiar with the arguments against it.
And yet pick up any investment tome or memoir of the great investors and what do they tell you?
Buy when there is panic and negativity. That’s where you get the best values.
That doesn’t mean buy today, or even tomorrow. It would be good to see the iron ore price stabilise.
But our line of thinking should be running along these tracks if you’re prepared to look beyond six months.
What? China is never going to build another house or railway?
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What about all the windfarms and electric cars everybody is so keen on in the lithium and renewable space?
What about the massive infrastructure plans the world over? What about the billion people in India?
All these need steel and iron ore. Even at US$90 a tonne, BHP and Rio make a decent margin with their costs under US$20.
Naturally, there are those that say iron ore could go even lower. Maybe it does. But that would severely cut back any investment in the sector.
Eventually that will show up as inadequate supply. You’re supposed to buy commodities in a bear market if you are investing.
Rick Rule puts it like this: you’re either a contrarian or a victim.
Iron ore stocks have had a lot of wind punched out of them right now. Plenty of them have high cash reserves and low debts too from the recent bonanza.
That gives them some muscle to work through this difficult period.
You could say the same about the gold miners. It’s astonishing to me the low values that the market is putting on cash rich, profitable Aussie gold miners currently.
My friend and colleague Brian Chu — who runs Gold Stock Pro — can’t quite believe it. As the prices go down, so does the risk of backing these firms.
There are some miners trading on P/Es of 1–5. You’re almost buying cash flow.
The market gives us nothing for free. Clearly the market thinks gold is, in this case, more likely to fall than rise. It’s pricing in falling earnings.
But if the market is wrong? My goodness me…the upside could be huge.
Editor, The Daily Reckoning Australia
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.