When to Sell Gold and Junior Stocks
December 26, 2005 - To set your mind at ease, I am in no fashion suggesting the immediate sale of gold or the junior exploration sector shares. On the contrary, I am confident that they should instead be accumulated during this nerve-wracking time for most gold investors. It is my belief that following this course of action will allow us to later distribute our investment positions when their prices are far higher, and when other investors are clamoring for them.
I feel that the last, remaining hold-outs are in the process of liquidating their gold complex holdings. They've held on with the desperate hope that their investments would reverse course and allow them to at least recoup their losses. When they entered the market, they made their purchases primarily for the wrong reasons! Most of these individuals were not believers of gold's secular Bull Market. Their sole objective was to profit from their belief that gold investments represented an easy, highly profitable trade.
They have already sustained losses. Their concern has burgeoned in lock-step fashion with gold's recent sharp price decline. This, combined with the extended junior stock weakness has now transformed their concern into a feeling of terror that they were wrong and should have earlier sold. Now, the thoughts of recovering their capital have turned bleak, and the fear that they will soon face further, devastating losses is consuming their waking moments.
When the remaining hangers-on have completed their sales, the gold related markets will be prepared for assaults upon new Bull Market highs. Until then, I believe that we are now presented with one of the most opportune periods to acquire your favorite precious metal investments, and at bargain basement prices.
To most readers, the information presented in this essay might be considered ill-timed. Why should I discuss selling gold and the nascent exploration companies at far higher prices when they seem on the cusp of trading at markedly lower levels?
What I hope to achieve is to prepare the reader for the future. This is after the current reversals in both markets has been brushed aside, and remain only a lingering remembrance. Later, the time will present itself when gold and numerous small companies, or the entire exploration sector, are rocketing higher in price. In my opinion then, and not now, is when sales should be contemplated and executed. As difficult as it may now seem to hold onto your gold position and your stocks, it will appear just as hard to sell them when their prices are surging higher, and our greed clouds our better judgement. Yet, that will be the time to act, and gather the rich rewards that the seeds of your present actions will have sown!
The emotions of the typical investor drive them to sell their investments at precisely the wrong time, and to covet major purchases when they should be sellers. This is the reason why we frequently hear a variation of the profound euphemism "most investors buy high and sell low".
The two most overwhelming forces motivating mortals are the emotions of fear and greed, and fear is the most powerful. As investors, if we allow ourselves to succumb to these, we will perform exactly as I have stated.
This is what separates the very few seasoned investors and traders from the masses. These successful individuals have learned to detach themselves, as best that they can, from their emotions. They know from their own experience that if they allow themselves to capitulate to their inner voices, they will likely make the wrong decision.
The secret to profitable investing or speculating over the long term is obvious to all. It is to "buy low and sell high". However, from my decades long experience in the markets, only a handful of people actually can consistently achieve that goal. Periods such as we are experiencing in the precious metals arena, "feels" like the time to sell for most investors. The gold price has collapsed and the junior exploration companies are down and out. The successful, hardened professional, however, may also feel stressed. Yet, he forces himself to focus on the bigger picture.
He studies the long-term chart of gold's Bull Market. The graphics surge and retreat, yet the overall trend is distinctly towards higher levels. Further, the major uptrend line remains unviolated from its $252 nadir. Additionally, gold's 50 day moving average is 485.41 and the 200 day average is 448.36. By its moving average study the eternal metal can still significantly fall and remain in a fully bullish mode. The pro's fears are further greatly allayed because while gold was posting new, Bull Market highs it was becoming heavily overbought. He realized that a correction was destined. The only question in his mind was when, so he was prepared.
He recognizes that nothing has changed to challenge the reasons underlying gold's Bull Market. The United States' balances of trade and payments, and our federal deficits are continuing to soar with no end in sight. Further, the domestic money supply is increasing faster than new goods and services are entering the economy. The Federal Reserve Board is even eliminating the broadest measure of the U.S. money supply, M3, in March. This will prevent observers from following the Fed's actions if they open the monetary spigot. This action will further reduce the purchasing power of the dollar. He looks around his world, and objectively concludes that prices are moving higher and faster than the adjusted, government generated indices indicate.
The trained investor also takes Dr. Benjamin Bernanke, the next likely Federal Reserve Board chairman, at his word. He knows that Dr. Bernanke will not hesitate to create a dollar flood. He opines that the once almighty dollar is destined to again weaken on the foreign exchange markets due to this and the other above factors. Further, he has seen gold break out above major resistance points in all of the primary world currencies. This he knows from experience, is destined to attract new gold buyers from the corners of the globe.
For these and numerous other reasons he now patiently waits. He will act when he feels that the time is opportune for him to accommodate the frightened sellers, by buying their unwanted metal and exploration shares.
I have given reasons why the accomplished investor already is in the gold markets, and is awaiting another entry point for gold related acquisitions. When will he sell?
WHEN TO SELL GOLD
"Bulls make money, bears make money, but pigs get slaughtered". This is a time tested euphemism that gives one an idea why greed is the greatest destroyer of an investor's capital. When the gold Bull Market resumes its upward trek, it is likely destined to perform in a similar fashion as it has to date. While it trends higher in price it will continue to encounter numerous secondary corrections, such as the one that we are experiencing. This, in its inexorable climb to its final, bull peak. Some corrections will be swift and steep. Others will require much time while the gold universe grinds lower across the board.
Recognizing this truth the professional, successful trader will sell into strength when the gold market becomes overextended and overbought such as we recently experienced. However, this action should be strictly reserved for the seasoned, prescient trader.
For the rest of us, we will likely best profit from the gold Bull Market by buying and holding throughout its duration, with a few caveats. As one's confidence grows by observing the market move higher in price, and from greater comprehension of the ongoing factors driving the gold bull, we may add to our positions. However, this will only be on weakness, such as presently exists.
The investing public has yet to recognize the presence of gold's Bull Market! Each time that gold moved sharply higher, the investment media downplayed its underlying bull trend. Gold advances were characterized at various times as being driven by different factors. Among these were a falling dollar, a rising oil price, speculators, China and India buyers, and sunspots.
The time to exit gold will be when "everyone" including your local waiter and cabby knows that gold is going higher, and when the future of common stocks looks bleak and interest rates are surging. This is when you should begin to satisfy the frantic public by selling them some of your cheaply acquired gold assets.
You should never attempt to pick the absolute top! I for one know from experience! However, if you gradually sell into a steeply rising market when these factors are unfolding, you will average a substantial profit above your original cost.
WHEN TO SELL EXPLORATION COMPANY SHARES
The experienced, successful investor benefits greatly from speculating in the junior company market. He recognizes that few of these stocks will achieve the ultimate success of either bringing a mine into production, or being acquired by a larger concern. However, he also knows that the life cycle of the better managed companies can allow him to reap substantial rewards.
Whenever a company announces a major acquisition or important progress on a project, its shares can experience a large price rise. It is not unusual for many of these companies to soar 50% to 100% or more in any given bull year, if not in the space of a few weeks. Thus, success for the juniors does not hinge on production or a take-over. In fact, a company that is on the way towards ultimate failure but that repeatedly excites the market, can reward its shareholders with profits that are a multiple of their initial investments. Consistent profits can be garnered.
Unfortunately, the average investor allows his greed to make him overstay his welcome. He will maintain his position when one of his favorite companies rises sharply in price for fear of missing even greater profits. He will then ride it lower and curse his poor luck.
There are thousands of small mineral or energy companies. This makes it nearly impossible for all of the newly emerging stocks to be properly evaluated by a large number of players. The best fashion in which the average investor can handsomely profit from the speculative exploration companies is to enter a company before the marketplace full recognizes the merits of their management or their projects. You will acquire your shares relatively cheaply. This will give you the best risk vs. reward potential with the least downside risk.
It may take a while for your management team to either acquire the right project or to generate some other form of market excitement. However, when one of your well-selected stocks announces news to which the marketplace greatly responds, you will be well rewarded for your patience.
This is the reason why any substantial price advance should be met with some selling on the investor's part. In Financial Insights, I attempt to feature companies that are in their infancy, but are managed by experienced, proven management teams. I have been fortunate to have discovered more than my share of companies that were either acquired at a substantial price, or moved into production.
Never forget what I said about the pigs getting slaughtered! No matter how good the news, if you convince yourself to take a portion of your money off of the table whenever an important price advance occurs, you will eventually own shares in a good company for free. Further, be extremely careful when investing in companies that already have a series of positive, market moving announcements. Their share prices will likely reflect this state and be inflated.
From my experience, the higher priced the stock, the further that it can fall! I suggest that the reader reads, or rereads my essay, How to Profit on the Road to Failure. It is at the bottom of my Financial Insights home page. You will then better understand the pitfalls that lurk around the corner of every stage of a project's development. This includes potential problems facing a company that has successfully taken a project to the stage where it is in the process of mine construction.
The greatest likelihood for success in this investment field occurs when you early and cheaply acquire shares managed by a group of individuals, who have achieved earlier mining success. In this fashion, with relatively low risk, you can wait while they develop their company and even make a mine. When one of your companies progresses towards the development of an important orebody, you have the opportunity to be there. You will have sold some of your shares after each important announcement, and will still have some left over at little or no cost to you.
I believe that I would be remiss if I did not discuss a major secondary correction that will likely unfold sometime during this great, gold Bull Market. It may be similar to the one that emerged when gold was legalized in the United States as1974 ended. This frightening, eighteen month price decline took gold from 200 to103.50. While it could arise sooner than I expect, I believe that gold's 1980 bull high of $875, could be a likely target price range for the beginning of such a major correction.
The period from the end of December,1974, to gold's mid-summer 1976 nadir, saw devastation accrue to gold and gold share holders. Those few that sold an important part of their positions on the final explosive rise towards $200, replaced their sold metal and shares for pennies on the dollar.
With both gold and the junior stocks, as well as with the primary gold producers, I feel that an astute investor should prepare for the likelihood of a repeat performance. Do not meet your investment end like the pig who got slaughtered. When your greed tells you to hold onto your positions, while gold is raging higher, take some profits and prepare to reenter these markets after a respite. Your pockets will be full of cash, and bargains will abound in these sectors. This is how the pros survive and prosper in the investment arena. You must act like one, to be one.
The above was excerpted from the January 2006 issue of Financial Insights © December 26, 2005.
I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential. Disclaimer.
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