If you've been watching the news lately, you've seen the extreme market volatility and you’ve heard financial experts predicting another financial collapse. Some call it a "double-dip" recession… or worse.
At a recent industry conference, we sat down with one of our favourite straight-talking contrarians, Mickey Fulp, the Mercenary Geologist. In his typically engaging style, he talked about what is happening in the markets, what we might be seeing in the markets to come, and gave advice to junior resource investors who are looking for guidance to invest wisely.
First, we spoke about the summer and Mr. Fulp gave us his no-holds-barred analysis: "We've had a brutal summer," he said. "We not only had the usual summer doldrums [an annual summertime slump in the market] but we also had financial uncertainty in the markets." While doldrums drive the price down, uncertain causes volatility. As a result, "there have been many three-five day mini-panics since the 2008-2009 crisis," Mr. Fulp reported.
Driving the volatility is a combination of global economic realities and Mr. Fulp listed three for our readers’ benefit: "The volatility has been driven by European debt crises, US debt ceiling issues, and the downgrading of US bonds by the S&P Rating Agency."
That's the reality for all markets, but what about the junior resources market specifically? Mr. Fulp explained: "The junior resource sector has been down – as is expected in the summer because there is never that much interest or liquidity in the summertime. Gold periodically flirted with record prices, and there was also great volatility: $50 up and down days are not uncommon."
"After Labor Day," Mr. Fulp continued, "we always expect better markets and gold producers are now starting to catch up with the price of gold. As quarterly financials come in, we see record profits for gold producers. Investors are realizing that [gold and gold stocks are] a way to play the market for good returns. That realization has not trickled down to the advanced explorers or the general junior resource gold sector yet, but it's starting to." Mr. Fulp pointed out that "gold is looked at as a safe haven and an insurance policy and that has driven the surging price".
But is it all good news? Gold prices are going up, the general market continues to be volatile, and bad news continues daily. Are the experts correct? Are we on the brink of financial disaster? Mr. Fulp didn't come right out and tell us his thoughts about impending financial doom but he gave us a number of hints (and some great ideas for what to do no matter happens).
"If we're on the verge of financial collapse then your readers should own gold," Mr. Fulp said. "I've heard the idea that we're on the verge of financial collapse every time the market gets unsettled. We did have a financial collapse in mid-2008. It might happen again …" Then he adds: "but how long have some experts been saying that we're on the verge of financial collapse?"
Regardless of whether or not a financial collapse is imminent, Mr. Fulp advised: "Owning 10% of your net wealth in physical gold is always a good idea as an insurance policy… Gold is money. US dollars, during an economic collapse, could become hyper-inflationary or we could go into severe deflation. I would encourage someone to take possession of their gold – not in a gold ETF because that's paper gold." Then he elaborated about the problem with gold ETFs: "There is no idea how much gold is actually held and how much is leveraged in a fractional banking system. I like to own gold bullion and have it in my possession. If there is a significant correction in the gold price, I have a target at which time I will buy more gold. I already did that once this summer and bought bullion at $1487 an ounce on a one-day correction. My target price is higher now."
So, if someone takes possession of physical gold, what should they do with it? Mr. Fulp provided some guidance here, as well: "You don't want to put it in a bank or a safety deposit box. The bank is open 35 hours of a 168 hour week, which means you can only get to your physical gold about 1 of every 5 hours. You don't own the safety deposit box. You own the contents of the box and the bank owns the box. The government has a right – with a court order – to get into that box and do what they want. So that doesn't make it safe."
"The idea of burying it in the back yard is not a bad idea but if the government ever came for your gold, they could find it with a metal detector. I could find your gold with a metal detector."
He continued: "Some people put it in a safe in the house. That's not a bad idea because you can anchor a safe down. A gun safe, for example, is really heavy and weighs many hundreds of pounds. They are not easily broken into."
Ultimately, he said, "you want your gold close to you, especially if you think we're on the verge of an economic collapse. And if you don't need it in your lifetime, it passes to your children and your grandchildren and it ensures their financial security because gold always retains its purchasing power. I‘ll say it again: Gold is money."
Good advice whether or not we see financial Armageddon.
But what about stocks? What happens if there isn't a financial explosion? Just because there might be one doesn't mean we should stop investing. Mr. Fulp gave some great ideas here, too, sharing his own experience with stocks he invests in.
"A couple of the stocks I'm involved with are very robust right now. These are stocks that I've held shares in for a long time. Goldgroup Mining (TSX: GGA) is at record highs on continuing news and the idea that there will be lots of positive news to come through the end of the year. Another company that I've been a shareholder of for a long time – Amarillo Gold (TSX-V: AGC) in Brazil – has published a very robust resource estimate. It's trading at about 80% of its all-time high and showing good strength even on low liquidity."
These aren't the only companies with good news. Mr. Fulp explained: "We're hoping that moves such as these will filter down to the general junior resource market. We're seeing companies with positive news and that are furthering their projects starting to get notice [from investors]. So I'm hopefully optimistic for the fall."
So what should investors do with the money they aren't investing just-in-case-of-Armageddon? Mr. Fulp provided a great step-by-step method to help investors: "I think investors should find fundamentally strong stocks that they like and buy them on weakness, before they start running up."
He explained further: "I'm a proponent of the stink-bid concept where you find a fundamentally strong stock that is a little weak or has been beaten up. Look at what your risk/reward profile demands. Then, decide on a price that you're comfortable paying for that stock. Put in a bid at that 'stink' price below the current market. If it gets filled, that’s good. If the price goes lower, you put in a lower bid. But always buy it on weakness. And, if that stock does not get to your target price then move on and find another that meets your investing fundamentals."
As usual, Mr. Fulp delivered great insight into the current market situation and provided both bullish and bearish investors with compelling ideas to handle whatever they think is going to happen in the markets.
REFERENCES
Mickey Fulp, Mercenary Geologist: www.mercenarygeologist.com
Gold Group Mining: http://www.goldgroupmining.com/s/Home.asp
Amarillo Gold: http://www.amarillogold.com/
DISCLAIMER: Mickey Fulp owns shares of Gold Group Mining Inc and Amarillo Gold Corp.