I think we may have reached a very important turning point in the gold market. Needless to say when I use the term gold I am also referring to silver since they move in tandem more or less.
I stopped trading gold stocks in April of 2015. I didn't trade again until August. I've really only just begun trading again in earnest in September and raised my position from 4% of net worth to 12%. This week I raised that to 15%.
I think the odds have increased that we are about to see a major move in the precious metal sector. The long bear market in commodities that began in 2011 may be over and a new bull market may be beginning. Stocks have been beaten down to absurd levels. Gold stocks that were selling at their lows are selling now at the same as when gold was $350 dollars an ounce. Gold is around 1180 today while the cost of gold production has been lowered from 1200 dollars an ounce to $600 to $800 hundred dollars an ounce in many mines.
Add to that, many mines have curtailed or eliminated production. Supply is dwindling. This is bullish for those mining companies that can survive. They can go much higher if gold were to rise to say $1500 dollars an ounce – only half way between its old high and low over the next year or two.
I am both an investor and a trader. Sometimes I trade aggressively, but I watch the markets minute to minute. I don't recommend this for most other people. My advice to the average investor that wants a position in gold but doesn't want to trade aggressively is the following:
Everyone should have some assorted gold and silver coins, plus some physical cash on hand. These are for protection against hack attacks that can close banks and ATM's. It's insurance against a major financial crisis that can lead to a banking crisis. And it’s insurance against a major inflation if monetary policy turns aggressively expansive. Gold is insurance and should represent 5-10% of one's net worth. Physical gold, silver, and cash should be kept both at home and in a safety deposit box for diversified access. Next, you should have a position in gold stocks.
When I sold out of gold and gold stocks completely in 2011 right at the top of the market, I was pretty sure that we would see years of declines in gold. So I remained out of the market for quite a while. When I began to re-enter I bought only mines in the exploration and development stages that had huge potential to move higher as they went into production. Many penny stocks can increase 10 to 50 times over the course of their development. I felt although gold would fall in value, it would take years for these mines to be developed and profitable. And as time went by, I reasoned that gold costs would be lower as mining technology would be newer. So time was what I needed, not price.
Of course these stocks are speculative and if they fail to produce profitably they can go to zero. I've been playing stocks of this kind most of my life and have done well with them. I've had my share of 10 and 20 "baggers", and my share of losers. For specific recommendations see my Market Update at http://www.paulnathan.biz/.
I have lately re-entered the market at sub $1100 gold, and been making my money in Ultra ETF's. JNUG and NUGT are ETF's that track GDXJ and GDX, but at 3 times the price movement. It is like being on margin but without the interest costs. In April before I exited the market, I had a quick 30% profit on JNUG, and in the last few weeks got two more of those. Yesterday I got a 20% hit on JNUG. These are good vehicles for traders, but they are only good short term. They tend to depreciate like options over time.
For the average investor that wants a diversified portfolio in the precious metals sector, the best vehicle is GDX and GDXJ. These are cash ETF’s and wont deprecate with time. (You can also buy these on margin, which will give you the leverage of the Ultra ETF’s.) GDX is a portfolio of major gold stocks, and GDXJ is a portfolio of junior gold stocks. Owning both gives one a good diversified exposure to the sector without having to be a stock picker and without being exposed to only a few stocks where things could go wrong that are company specific.
My intention is after catching this launch in the gold sector (if that is what we are having), is to switch from the Ultra ETF's to the cash ETF's. Ultra's are good for a burst in price. Cash ETF's are better for the long haul. GDX and GDXJ, together with my spec penny stocks, will give me ample exposure and diversification to the sector as a whole.
However, this could be just another false launch and because of that possibility, I will protect myself on the downside through the use of defensive stops. I don't use stops on my penny stocks since they are like owning calls without an expiration date. They will either go substantially higher or disappear. But on my trades I always have either a mental stop or a physical stop just under my buy price so as not to lose any serious money. This prevents me from getting trapped in a position and losing a LOT of money.
One more point. I am not averse to selling out completely. I did this in 2011 and again for the most part in April. There are times to be in gold stocks and a time to sell. While holding gold is a long term commitment, gold stocks must be sold at times. This is something most gold bugs don't understand. I've seen gold go from $35 dollars an ounce to over $1900 dollars an ounce in my lifetime. I've had a position in gold and silver most of my life. The appreciation of this investment over time speaks for itself. That's why I say everyone should own some gold as a part of their portfolio.
But gold and silver stocks on the other hand are selling today at $1180 gold for what they were selling for at $350 dollar gold. Companies are less dependable than the underlining commodities. Commodities generally go up over time. I can’t say that for precious metal stocks.
Cut losses and let profits run is my investment strategy.
As the week progresses, and if gold looks good, I will be looking to buy either NUGT or GDX on margin to up my position and round off my portfolio. And if gold falls back, I will likely be stopped out of JNUG with a small loss and reduce my exposure by 38%. This will take me back down to only a token position in gold if this rally should fail.
Personally, I think we’ve seen the lows in precious metals and could see a very good rally in the months to come. As of now, I’m positioned for that rally.
Paul Nathan
Paulnathan.biz