For the individual investor, a market correction can be scary. Investments that were "supposed" to go up, drop suddenly and panic sets in. Inexperienced investors tend to buy in a frenzy of rising prices and sell in the subsequent frenzy of a normal market correction, "cutting their losses" and losing money.
The always level-headed, often contrarian investor Mickey Fulp has some good insight for investors who experienced the recent commodity correction. We spoke to Mickey Fulp – known as "The Mercenary Geologist" – about the market correction and what it means for investors.
First, he provided a brief overview of the commodity correction as of May 10: "We had a significant correction in commodities across the board last week," Mr. Fulp said. "Oil is down 15%. Copper is off 15% from its all-time high. Silver took the predicted parabolic tumble, down 30% last week. Since then, it's made a comeback a little bit – up $3 or so from its low. Gold has started regaining the 5% it lost last week."
Then he added his own take, which might surprise some investors: "I think [the correction] was very long overdue, and much welcomed (from my point of view). Markets tend to swing too much from one side to the other, like a pendulum. So when they get out of whack, they must come back toward the middle."
If Mr. Fulp's opinion on the correction surprises some investors, his conclusions will certainly surprise them: "I look at the commodities market as still overbought. I don't know if this [recent market-wide price drop] actually was the correction. It was much shorter than most corrections tend to be. Maybe as the bottom fell out for a few days last week, speculators came in and started buying again and prices started to rise. The commodities game is very risky right now. At this point, I choose to sit on the sidelines and observe to get a better feel for how the overall commodities markets are going to trend in the short term."
Then Mr. Fulp dove deeper into a couple of very hot markets – gold and copper – and what the recent correction means for these two commodities. "I'm still looking for a correction of the gold price. It came off about 5% last week and it needs to come off even more. It's been overbought because of its safe haven and insurance policy status caused by fear in the marketplace and geo-political turmoil in the world. These factors have skewed the supply and demand fundamentals of the gold market. I could see another 5% to 10% correction in the price of gold. Personally, I would welcome that. I don't like to see markets go on sustained bull runs with no corrections. Corrections are necessary to establish a new base."
And then for copper, he added: "The copper market has come off 15%. Supply and demand fundamentals have looked bad for copper for the last 6 months and inventories continue to rise. Chinese demand is slackening while it is raising interest rates to cool off an overheated economy. That doesn't bode well for copper demand. I would expect to see at least a static copper price, if not some weakness in the copper market over the next few months."
But it's not all gloomy for Mr. Fulp. After describing these two seemingly bearish opinions, he asserted: "I remain a long-term secular bull in precious metals, energy, industrial metal, and agricultural commodities across the board."
So, if he's bullish, what is he bullish in? As is always the case when we interview Mr. Fulp, his long positions are based on fundamentals rather than frothy emotions. "I remain a uranium bull," Mr. Fulp said. "Supply and demand fundamentals have not changed much. We still use and will continue to use approximately 30% more uranium every year than is mined in the world. That’s a supply/demand imbalance and it's not going to change. Even if the 60 or so nuclear reactors under construction now were suspended and never produced a kilowatt of electricity, we would still be in a significant supply deficit. Based on that basic idea, I remain a uranium bull."
And here is where we see Mr. Fulp the contrarian investor, in action: "Uranium stocks have been beaten up unmercifully, and they are off 50% or more from their yearly highs… so I'm buying uranium stocks. As a contrarian, I go in and buy when markets are out of favor and pick fundamentally strong companies that I think will survive whatever the marketplace or the world will throw at them. I buy them on the downtick and will continue to do so."
Then he gave us two of his favorite uranium stocks: "I've been buying Uranium Energy Corp (AMEX: UEC) on the way down. They have operating costs of $20/pound, and low CAPEX to put their projects into production. Satellite in-situ recovery mines in South Texas feed a central processing facility. I keep buying on the downtick and have a stink-bid in that is lower than the 52 week low. I will continue buying this stock because I like its fundamentals. I think it's a no-brainer [investment]."
The second uranium stock Mr. Fulp highlighted for us is one we've heard him talk about before: "I very much like Strathmore Minerals (TSX: STM) and it has been my favorite uranium stock since June 2007, right before the first uranium bust. It has good fundamental value with a relatively tightly held share structure, production scheduled for the mid-term from New Mexico and Wyoming; a very strong joint-venture partner with Sumitomo in New Mexico, and is cashed up. It's run by uranium pros from the geology to the finance to the engineering to the processing ends – these guys have done it all in the past and I think they will do it in the future."
After hearing his strong bull view on uranium, we asked Mr. Fulp for his thoughts on rare earths, which is a popular sector right now. "The rare earth element market is extremely speculative and volatile with ebbs and flows. Oftentimes, it's in sync with overall markets but at other times is very much led by Molycorp (NYSE: MCP), the 800 pound gorilla on the block. Rare earths have reached astronomical levels for the cream of the crop in the sector. I would not buy those stocks in rising markets, but if you want to get into rare earths, consider buying very fundamentally strong exploration companies with the best deposits on weakness."
Then he listed some rare earth stocks that he bought in the past: "Quest Rare Minerals (TSXV: QRM) is my top pick in the sector right now. It has an AMEX listing that is imminent (Started trading on May 23). As soon as they get the listing, liquidity likely will increase 10 times. Increased liquidity generally leads to higher valuations. [The second rare earths stock is] Tasman Metals Limited (TSXV: TSM) with current drilling in Sweden. [The third rare earths stock is] Rare Element Resources (TSXV: RES), which has been beaten down from all time high of $18 and is trading in the $13 range (May 10) right now. If you want to invest in the high-flying rare earths sector, these stocks are ones I might buy on weakness." My newest penny stock idea in REE space is Medallion Resources, Ltd.
Mr. Fulp's contrarian point of view is compelling, but it can be a challenge for individual investors to approach the market this way. So Mr. Fulp shared some wisdom about investing in general: "It's a time of turmoil and correction in the commodities market. Corrections oftentimes become buying opportunities. Keep a level head. Think things through. Do not act on spur-of-the-moment feelings or emotions. Do thorough research and due diligence to make better decisions. Nothing is ever so good that you have to get in immediately or that you should regret you didn't get in yesterday. Patience is a virtue in this market."
Corrections, then, are just as important as rising markets, and they give the wise investor an opportunity to buy. Thanks to some guidance from Mr. Fulp, investors have some speculative ideas and a little helpful guidance to navigate whatever the market might throw at us.
DISCLAIMER: Mickey Fulp owns Uranium Energy Corp, Strathmore Minerals Corp, Quest Rare Minerals Ltd, Tasman Metals Ltd, Rare Element Resources Ltd, and Medallion Resources Ltd.
