Capitulation or nasty sell-off in gold?

Have we just experienced ‘capitulation’ in gold stocks, or just a particularly nasty sell-off?

Rick often mentions that ‘capitulation’ is a looming threat in a bear market. When it looks like stocks are already ‘down and out’, investors get driven over the edge and decide to sell at any price they can get. Investors want out. People who work in mineral exploration and development also give up and look at other career options.

Back in March, Rick said gold could fall back to around $1,150 this year. In mid-October, Rick made a stronger prediction – October could be the month that we see capitulation in the junior market. “October is a month full of emotion” he said, and it’s easy for a weak emotional market to be driven over the edge by short-term volatility and a natural decline in prices due to tax-loss selling. “The market is cheap but it will get dirt cheap in a capitulation. I think there is a 50 percent chance for a terrifying capitulation sell-off within the next two weeks.”

In a complete capitulation, stocks melt down dramatically and some stocks just go ‘no bid.’ That hasn’t happened yet, which means that we may be witnessing a very nasty sell-off, but not complete capitulation.

“For those of you fond of surf,” Rick explained at our San Diego office, “capitulation is sort of like getting caught under a particularly big wave. You get pummeled and tumbled around under water. Capitulation in 2000 only lasted for about two weeks. Just like when you’re stuck underwater and struggling to come back up, a short amount of time can seem like an eternity.”

The most important thing to do now? Prepare yourself psychologically.

“Abandon your ‘hope stocks’ – the ones where there is no catalyst, asset, or enough cash to do anything important. Get rid of the stocks you own that have no reason to go up, and get into ones that do,” Rick advises. In a complete sell-off, you may find that just a few investors will make the difference as to whether a particular stock survives, which means you must be willing to be one of those investors if the market gets much worse.

This ‘psychological preparation’ made all the difference in the summer of 2000, the last time that we saw capitulation in junior mining stocks. “The capitulation in 2000 was the single most beneficial event of my career, as a consequence of my psychological preparation to face the sell-off,” said Rick.

Capitulation or not, why the sudden leg down?

“It’s an emotional market. An example of irrational behavior is that investors are more willing than ever to put money into bonds at levels that guarantee a loss in purchasing power. The Treasury rate is now lower than prior lows, at around 3.1 percent for 30-year bonds.1

“In addition, benchmarks in platinum and other metals suggest a weakening economic outlook,” Rick explained. This, he says, is also the real reason that oil prices are much lower. The economy is simply a lot weaker in the US and globally than commonly believed. This has weakened all equities, not just precious metals. Just as the 2000 low came around the time that the tech boom imploded, a capitulation today could coincide with a sell-off in stocks across the board.

Rick’s market call, which was recorded for our clients on October 16th, looks prescient in hindsight. We’ve indeed seen a nasty sell-off, but I don’t think it’s quite a capitulation.

For one thing, Rick explained, when a capitulation occurs, the issuers also ‘give up.’ Right now, we’re still in a game of chicken that we’ve been playing with junior miners for the last two years or so. They believe they can wait out the bear market to raise money. If they’re right, they might not have to submit to terms that Rick would call ‘fair.’ If they’re wrong, they’ll end up having to raise cash at terms that are much more favorable to financiers like Rick.

The idea now is to prepare for this possibility, and decide which stocks we own are worth saving if the market truly goes ‘no bid,’ as we might have to put up more capital to keep them solvent. The rest we probably shouldn’t own at any price.

By Henry Bonner 

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1 U.S. Department of the Treasury website



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