Submitted by Adam Hamilton:
Before investors can sell high and multiply their wealth, they first have to buy low. The lower any trade’s entry price, the greater its ultimate profits. The best time to buy low is when stocks are deeply out of favor, when few others are willing to buy. And that certainly describes gold and silver stocks today. This sector is universally loathed despite fantastic fundamentals, offering vast opportunities for brave contrarians.
Gold stocks are trading today as if gold was far lower, as if they had little hope of ever earning big future profits. There is a vast fundamental disconnect between these miners and the price of the metal that drives their profitability. This critical point is easily illustrated through a simple construct known as the HUI/Gold Ratio. It divides the premier gold-stock index, known as its symbol HUI, by the price of gold.
Contrarian investing is simple in concept, yet very difficult in execution. The fortunes of stocks flow and ebb, their prices rising and falling. After they’ve risen, they quickly become popular. Everyone wants them and bids up their prices. That’s when it feels the best to buy, so that’s when the great majority of investors rush in to chase the rally. But following the herd leads to buying high, the recipe for failure.