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The HUI gold miners index, a benchmark for the gold and silver mining industry, has closed today at 152.52, a full 100 points lower than 2 months ago (40%) and 30 points lower than a week ago (16%).

The following charts do not need any comment. The first chart is the weekly HUI mining index price chart, while the second one is the weekly junior mining index GDXJ.

HUI_Weekly_Chart_6_november_2014

GDXJ_Weekly_Chart_6_november_2014

The chart pattern is already a big mess and points to even lower prices. The technical indicators like moving averages and RSI are suggesting (much) more downward potential. There is no technical support on the charts so it feels like these assets could literally fall to zero every moment.

How much worse can it get for Gold Stocks?

The truth is that it can indeed get much, much worse. The most likely scenario that is playing out right now is one of capitulation. And here is the bad news: the ongoing market activity is not one of capitulation yet, but suggest a phase of capitulation is upcoming. So what is the difference between the ongoing collapse and “real capitulation”? We prefer to let a real investment veteran, who lived through several phases of capitulation in his career, answer that question for us. Resource investment guru Rick Rule comments on the subject:

When it looks like stocks are already ‘down and out’, investors get driven over the edge and decide to sell at any price they can get. In a complete capitulation, stocks melt down dramatically and some stocks just go ‘no bid.’ That hasn’t happened yet, which means that we may be witnessing a very nasty sell-off, but not complete capitulation.

Rick Rule warned in March already that gold could fall to around $1,150 this year, while he was on record three weeks ago saying that capitulation in the junior market would be there in October. He believed there would be a 50% chance for a terrifying capitulation sell-off at the end of October.”

Remember, the damage done so far is no capitulation yet. The worst is probably still ahead of us.

How to Prepare for the coming Tsunami?

The short answer: prepare psychologically. The last true capitulation in the resource market took place in the summer of 2000. Rick Rule lived through it, and this is what he has to say about it: “This “psychological preparation” made all the difference in the summer of 2000. The capitulation in 2000 was the single most beneficial event of my career, as a consequence of my psychological preparation to face the sell-off.”

This implies that one has to abandon the stocks which have no quality assets, top management team, enough cash, promising discoveries. In a complete sell-off, you may find that just a few investors will make the difference as to whether a particular stock survives, which means you must be willing to be one of those investors if the market gets much worse.

Are you prepared with your future model portfolio to grab this once-in-a-decade opportunity?

 

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