A Harsh Lesson About the Metals Markets

 @ibtimes
on May 12 2011 2:52 PM

In an interview with Kitco news this morning, Senior Analyst John Nader was asked What's the number one lesson to be learned from the commodities sell off last week? His answer: The number one lesson is actually a repeat of a lesson...and that is that whenever you see the cows piling in you have to be mindful that when the skies appear at their bluest and least clouded, that's when surprises happen.

And happen they did. Since making highs at the end of last month, gold and silver have both suffered severe corrections, erasing much of the gains made through the beginning of the second quarter. Silver today is trading above $34.40 per ounce, with gold holding just below the $1500 mark. As analysts are struggling to determine a likely market direction for the upcoming months, investors have taken a much more cautious stance.

This correction is a harsh reality check for those of us (myself included) who purchased substantial amounts of metal at much higher levels. That said, it's time to put our game faces back on and think about this logically, now that a lot of the emotion has been sucked out of the market. The good news is that times like these create the best opportunities.

Did you ever hear of anyone making a fortune by buying tech stocks in the first quarter of 2001? Probably not. That's because by the time tech stocks were the hot item, the market had been flooded with eager investors looking to pick off easy profits. It's the guys who bought Amazon in 1994 or Google in 1998 that made off like bandits. Why was that the case? Because they had the foresight and discipline to put their money in the ring when it was not the popular thing to do.

Though some of the same paradigms hold true for gold and silver, there is one big difference. The cycle of gold and silver growth and retraction is one that repeats all the time as a part of this cyclical bull market. It's not like the tech bubble where there is only one chance to get in low and one chance to sell out high. With gold and silver, we get buying opportunities several times per year. So far in 2011, this is the best one we have seen.

So what about those of us who bought higher? Don't panic! We've been through this again and again, and this market has shown it has the strength to correct the damage it has done. At the same time, pushing a few more chips into the center of the table could create a dollar-cost-averaging strategy that has the potential to greatly increase average profits down the road.

A couple months after I started in this business, I remember speaking to my best friend from grade school. I asked him if he had ever bought gold. He told me his dad had taken him down to a coin shop to buy gold way back in the 1990's. When he asked his dad why they were doing it, he said Because no one else is. Since then, his father has gone on to run one of the more successful alternative investment hedge funds in the country. I aspire to be the guy who has the guts and foresight to make decisions like that.

On a day like today, when everyone else is running for the hills, a few people will probably make the decision to go against the grain. At the end of the year, I'd be willing to bet they will be money ahead.

-by Mike GetlinExecutive Vice PresidentMerit Financial

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