Contrarian Investing and the Case for Gold

Disclaimer: The following article contains opinions regarding investments or sectors in which Treece Investment Advisory Corp. and Ben Treece currently hold long positions. Readers should consult with an investment advisor or broker-dealer representative before making any investment decisions. This article does not serve as a recommendation or solicitation.

As an investor, it is much more difficult than one would imagine to buy low and sell high. While this seems like a logical course of action, that mindset will likely result in you being labeled a “Contrarian.” This week we wanted to take a look in to the concept behind Contrarian investing, and a sector that we believe is vastly undervalued.

Lately, we have found that many investors are hoping to ride the wave of the Dow Jones Industrial Average and other blue chip stocks. This year the Dow is up approximately 25% and is up 145% from the lows in 2009. However, the time to buy is not when the prices are high; that’s a sucker’s bet. The time to buy was back in late 2009 and early 2010, when we heard disgruntled investors who took a significant hit in the 2008 recession claim that they would never buy stocks again. For the sake of comparison, buying into the Dow blue chip stocks today would be like buying a house in 2007, right at the peak. That is not to say that the market will not go higher, but it certainly is not a value buy today.

We have been keeping a close eye on precious metals mining stocks and companies, as we see a great opportunity for growth in that sector. In the last 3 years, gold and mining stocks have been hit hard; however we contend that the hit has not been due to investment fundamentals. For example, Kitco publishes a ratio that tracks daily the price of physical gold divided by XAU, an index of gold mining stocks that trades on the Philadelphia exchange. This ratio historically ranges from about 3-5. At the time of writing this article, that ratio is just shy of 15. In order for that ratio to come back into alignment, gold stocks would have to triple in value, gold would have to go from $1200/oz to $400/oz, or some combination of the two. Another possibility would be if mining stocks were to rally significantly while the price of physical gold remained stagnant.

Unfortunately, the gold market has fallen victim to rather obvious market manipulation. For homework, track the price of gold on the world market and watch what happens at approximately 8:30am every morning; as soon as NYMEX trading opens, the price takes a sharp turn one way or another, which has lately been down.

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The fact remains that gold stocks (judging by XAU) are at 10 year lows. XAU’s all time low was in October of 2000, and gold stocks went on to rally over 300% from 2000 until the recession in 2008. From 1997-2000, physical gold fell in price by approximately 37% while the Dow rallied almost 77%, and from 2011 to date, physical gold is down 35% while the Dow is up 60%. Given recent news regarding tapering and that interest rates are at historic lows and should rise, we see growth opportunities in the sector, however we understand if some readers call us bias due to our holdings. Some will call us absurd for even giving the sector any consideration whatsoever.

dow

That is the story of a Contrarian; buy when others call you crazy and sell when others call you stupid.  

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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