Source: Wikipedia

Dear Diary,

There is nothing quite so satisfying as coming upon an overturned beer truck on a hot day.

In the same spirit, today we gawk at the wreck of the gold miners. They are 70% cheaper than they were three years ago. And they are 25% cheaper than they were just two months ago. What a delight!

Wednesday, the Dow fell 153 points. Gold lost $9 and came to rest at $1,242 an ounce.

The yellow metal seems to have bottomed at about $1,200 an ounce. This is an important number. As Gold Stock Analyst’s John Doody told subscribers of Bonner & Partners Investor Network recently:

Below $1,200 there’s going to be mines that close because they can’t pay the ongoing cost to produce the gold.

Now, gold rises on hopes of more QE and sinks when it looks like QE might end on schedule – just like the stock market.

Limiting Your Losses

Before we forget… we get a good deal of correspondence from dear readers – especially about our new project, The Bill Bonner Letter, the latest issue of which went out this week.

We read all your feedback. But we can’t answer it all. Sometimes we don’t have enough time. Most often, we don’t know the answers.

Still, we learn from it. And we try to pick up general themes, questions and matters of interest in these Diary entries.

Subscriber Dennis B., for example, asks about trailing stop losses, which Braden Copeland recommends his subscribers use on all their recommendations at his new advisory, Building Wealth.

Why do we have a 25% trailing stop; why not 20% or 15%?

Can you explain the reason why in more detail? I’m a new investor, and when I was growing up I was always told the stupidest question is the question you don’t ask!

I’m asking, and looking forward to your reply.

Good question, Dennis. We’re not the best person to answer it. And we won’t even try.

Instead, we remind readers that although stop losses can be a very useful, they are not appropriate for deep-value investors.

Stop losses work by automatically closing out your position when it goes down by a preset amount. So your total loss is limited – if the mechanism works as advertised – to the amount you are willing to lose at the get-go.

Nice, no? Like walking into a casino with only $100 in your pocket. And very useful for certain investment styles: If your investment doesn’t go up as hoped, you get taken out with a small loss.

But the kind of investments we like best are the ones that go down, not up. We buy value. We want the most we can get for our money. If the price of a stock we like falls further below its intrinsic value, it means we can get even more for our money.

So, we don’t want to get stopped out. Instead, we tell our friends what happened. They laugh at us… and we buy more.

Smashed and Dented

What kind of investment are gold mining stocks?

That is a good question. And a pertinent one. We have recommended a small allocation to gold miners at our family wealth advisory service, Bonner & Partners Family Office.

On the surface, the gold miners look like good value. Compared to other stocks, they’re cheap. The US stock market has more than doubled since the March 2009 low. Meanwhile, the NYSE Arca Gold Miners Index (GDM) has lost roughly one-third of its value.

That is not to say the miners won’t be even more wrecked next year. But right now there are probably a few cans of beer intact, lying among the wreckage, ready to be picked up.

What caught our interest was a couple of articles written by colleagues Steve Sjuggerud and Chris Mayer. Simultaneously and independently, they have concluded that the time to get back into gold miners is now.

This is especially significant because Steve and Chris have some of the best track records in the business.

Steve had annualized gains of 15.8% over the past 10 years at True Wealth. And at Capital & Crisis, Chris had annualized returns of 16% over same period (excluding dividends). That’s versus annualized gains of 4.8% for the S&P 500 – something the Efficient Market Hypothesis tells us is practically impossible.

It would take a brave stockbroker to recommend mining companies now. Not only are prices low, but also there is no reason to believe they will rise over the near term.

The world economy is slowing down, not speeding up. Commodity prices are falling, not rising. Inflation is ebbing, not flowing. And the exchange value of the US dollar, against which gold and other commodities is measured, is surging.

Knowing these things, stockbrokers do not want to mention gold mining shares. And investors do not want to hear about them.

Which makes us wonder if the time has come to buy. Says Steve:

After a horrendous couple of months, gold stocks appear to be trying to bottom out. We have a glimmer of an uptrend setting up. The sun might be starting to rise.

Is the sun already peeping over the horizon?

We don’t get up early enough to know. But as long as Earth still turns, the sun must rise sooner or later. And we are tempted to add to our recommended position in these deep-discount gold mining stocks and wait.

Steve prefers to use a stop loss. That way, the upside is huge. And the most he can lose is 7%.

The last time gold-mining stocks were this hated was in late 2008. The Sprott Zacks Gold Miners Index soared 242% from its bottom in late 2008 until the end of 2010 – just a little more than two years.

Steve is hoping for a rerun.

Buy now? Use a stop loss? Wait for a clear uptrend?

We don’t know which approach is best… but we’re planning to study the issue and report back.

Regards,

Bill