Conviction and Patience Needed to Ride a Bull

Vision is required to identify a primary bull market, but conviction and patience are required to ride it.

The time has come for the lemmings to now pile onto the precious metals buy side, especially silver related assets. They finally have their long awaited breakout confirmation, as per many indicators, such as the gold-to-silver ratio shown below, silver, and precious metals mining stock indices.

Do the lemmings understand how predictable they behave? We don't suppose that's a great approach in any walk of life. In contrast, we've been buying quality undervalued precious metals-related assets during this entire downturn, as we described in our last article. As others were screaming "crash," we were buying more of our favorites on sale.

Don't get us wrong, we understand the indecision of the lemming traders prior to this breakout. In a world driven by fiat money and extreme levels of accumulated debt for developed nations, nothing is certain. The reason the lemming traders are unsure is because in a fiat monetary system, those in charge of the monetary levers can swing the entire system in various directions. In an extreme scenario, one could imagine crediting everyone with enough fiat money to pay off all debts. Yes, creditors will get swindled via monetary depreciation, but that is the nature of fiat monetary systems. In another scenario, one could imagine contracting the money supply and causing prices to decline across the board. We do not know for certain what governments and central bankers will choose, but we have some strong thoughts on the subject.

First, most governments are interested in stimulating the economy and creating jobs, if for nothing else, to keep dissent by the governed to a minimum. Also, since government is notorious for its inefficiency, it is of little doubt that the means will not justify the results. In practical terms this implies that the monetary and fiscal policies will be geared toward stimulating liquidity and job creation, respectively.

However, monetary and fiscal looseness has a price. It is no secret that government debt has been growing. Some governments recognize the problem as ever pressing and have taken what has been dubbed as “austerity measures,” at least for a while. However, the U.S. government is far from entering a “spending reduction” phase. For one, the almighty U.S. dollar is by far the predominant reserve currency, which grants the issuer some measure of protection from excessive debt. So, the U.S. government can continue borrowing money and driving up or at least sustaining price levels.

Even in the absence of legitimate buyers for government debt, the central bank can create fiat money to purchase government debt. As sick as this may sound, this dynamic can continue until a critical point is reached and the remaining holders of fiat currency and bonds sell those assets and buy precious metals. We believe such action would thereby trigger a mania phase in the precious metals primary bull market.

In the meanwhile, the price of precious metals will continue to steadily rise as a consequence of money creation in excess of the production of goods and services, so investors must resist being whipsawed out of their long-term positions.

In general, our approach to growing wealth in a primary bull market involves:

1. identifying the primary bull market using vision,
2. finding undervalued quality assets within that primary bull market,
3. buying those assets on price corrections,
4. employing patience and conviction so as to ride that primary bull market,
5. identifying the end of that primary bull market using vision, and
6. then promptly selling all assets associated with that primary bull market.

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