I’m not a professional trader and this isn’t advice. I have fielded a LOT of questions from some of you over time and I try pointing you to pros that I learned from. What I wanted to do here was write something for the ABSOLUTE NOOB that just walked into the idea of gold last week and wants to make some money off of it – somehow – and wants to understand miners.
Note: TALK TO YOUR FINANCIAL ADVISOR. HE WILL LAUGH AT YOU ABOUT GOLD. STILL – TALK TO HIM/HER.
This is NOT exhaustive. This is MY take, research, and back test on how the 1970s/2000s bull gold markets could be played. Rather than using “gut” and “who are the best miners” I wanted you to understand a PORTION of the tools that can be used to navigate this.
I have made a bunch of mistakes and learned a lot – and hoping to show you how you might be able to not make some of them.
I’m writing this as a breakout from another piece I’m writing on how to survive a currency crisis and wanted to demonstrate some lessons I learned over the last 2.5 years of investing in precious metals – and miners in particular, as many people have easy access to them. Right now, you need a crash course, and I’m here with your cheat code. While this is not financial advice, these are lessons I’ve learned from the pros and have been applying to my investment and trading day by day to get really better and better results by the week. Not perfect, but I think every person tries to get better every single day.
There’s a saying that in a bull market everyone is a genius. You throw darts at a board and you get rich. But it gets pretty complicated when the bull turns into a bear but you were a bag holder through it all. I have chased with FOMO. I have bought options at the peak of a break out. I have really learned a lot in 2.5 years and wanted to pass on some things to you – since you don’t have 2 years, but perhaps a month until shit gets real.
Here – I’d like to talk about buying gold and silver miners through a tool like Schwab.
Metals are cyclical
The FIRST lesson I’ll talk about here is that precious metals investments are CYCLICAL. Meaning – there’s a time and place to buy gold, and a time and place to sell some or all of your gold to YOLO into Apple. No one can tell you tomorrow that gold is going into a bear market for weeks, months, or years. What you need to understand is gold is MONEY, and a SAFE HAVEN ASSET. Meaning – there are times when people have fear and uncertainty. Perhaps they sell some stock and get to cash. Perhaps your portfolio has 60% stocks and 40% bonds designed by your financial advisor. Perhaps you are worried that inflation is running really hot and someone told you gold was a good inflation hedge. These times of worry build, and with this, gold holdings increase. Until sunny days again – and then slowly people get out of their gold. This means if you buy GLD to get “gold exposure” then you might not want to hold that ETF for 40 years.
Most of you reading this aren’t running out to your local coin shop to buy gold. In that case, buy some silver. From there – you can look at buying gold MINERS.
When we use charts – we can see how gold has moved in dollars over the last 50 years. Our money was once backed by gold – and once the backing was removed in 1971, there has been great volatility in the dollar. Items are priced in gold, inherently – even though you may SEE a dollar price. While they do not tell you this, it’s easy to see in a gold to oil chart going back to 1971.
If you look at everything, priced in gold, you will see oscillations. However, when you look at the gold in USD, you see erratic behaviors.
This is because many years ago, this was the case…
Meaning, you knew the value of the dollar because you knew the value of the gold to buy things. Tell me today, what is a dollar worth? You start to look around and see things that you can buy for a dollar. Ask yourself that same question in 10 years and most of those things you could not buy with that that dollar. Did everything appreciate against the dollar or did the dollar become worth…less?
This means you cannot tell me the value of the dollar because it HAS NO VALUE. Let that sink in.
What you see is gold has gone up about 60x in 50 years on the chart above. But, most goods priced in gold are relatively static – with historic variations going back sometimes hundreds or thousands of years. At that same time, the value of the currency has gone down 60x. Meaning, if you had $10,000 in USD at that time in 1971, and bought gold with that (285 oz) and put it in a safe, those 285 oz today would be worth $571,000. However, if you just took that $10,000 and put it in a safe, you’d have $10,000 today. While $10,000 seems like a lot of money today to you, consider the PURCHASING power lost. My parents bought the home I lived in growing up in 1976 for $19,000. Zillow lists that house now for $195,000.
Gold is a hedge against doom. However, let’s take a look at how the Dow has performed since 1971. I see the peak of 1971 was 940 on the Dow. Low is 820 or so. Let’s say the average is 860. Today the Dow closed at 33123. That is a 38x.
Let that sink in. In 1971, had you put $10,000 in the Dow it would be worth $385,151 today. Had you put that same $10,000 in gold, it would be worth $571,000. The next time some bitcoin guy wants to talk about the last 10 years of gold to cherry pick THIS time frame – always expand the time frame. Always. Then ask them to do 5,000 years.
The truth is, you need to understand PURCHASING POWER. Gold has held purchasing power relative to other things for 5,000 years.
But, to be fair – markets are all about finding things relatively undervalued to other things, and then trading things you have in abundance for things you do not have in abundance. So there are times when gold measured in USD is priced relatively too high to other things. At those time – you sell gold and buy into the equities or real estate. Think about it. If you had $10,000 in 1971, would it have made sense to buy that gold then and then today trade that in for $571,000 in currency to then buy a big ass house where I live in cash? In 1971, $10,000 could have bought you a small home. That also shows gold’s relative value to real estate. The house we could have bought in 1971 for that is worth about $195,000 today. So almost a 3x of gold to real estate. When you think of that house – think of the cost of taxes, maintenance, and remodeling over that 51 years.
What you need to understand right now where we are, in history, looks a lot like 1965 to 1980 with inflation. If we are measuring this timetable in gold, our time line appears to now be 1976 if we go way back. The saying is, history doesn’t repeat, but it often rhymes.
1970s with gold and inflation..
What about 2000 to 2011? Gas was $4.50 per gallon in 2008 – I remember because I was driving 45 min each way and felt it.
And then you can compare that today
I am expecting probably some sort of correction into the low 1900s in the next month, perhaps bouncing off of the 1920 previous high which could be the new floor. That might be the back test and then away we go.
My MAIN issue with investing here was getting in just before the March 2020 crash. I had seen it coming – but what I didn’t realize was once it crossed the 1923 ATH, it would then consolidate. I didn’t know any better. Me and others just saw a clear shot to $3,000. The pros knew better. You need to understand here some concepts of anticipation and digestion.
These run ups you see are anticipating great financial issues. I hear people say “gold is forward looking”. The run up in the 70s, 2000s, and now 2016 to 2020 were all anticipating problems to come. What happens then is there is a pause after you extend wayyyyyyy too far. “Did we go to far? I don’t see the danger we anticipated. Could we have overshot this?”
Each and every time, you see things called “moving averages” then reject or confirm a move higher or lower. These moving averages are key for people to cement this into their hard wiring or change their thesis.
I used the 400/200 for my establishment of a bull or bear for gold. Others may use shorter time frames – but I would suggest those shorter time frames may be for tactical trading, and not strategic long term positioning. I often cite my chess experience in my writing, and it is appropriate here.
When waging war, you have overall strategies and goals to meet. When actually fighting the war boots on ground, there are tactics then used to carry out that strategy. I would then use a 400/200 to show the strategy for a long term thesis, but perhaps a 100/50 or 200/100 or the like for shorter term trades. I like to use the standard MACD with Trading view which has a shorter time frame.
Here you can see how this played out.
In the 1970s…
You can see in the red circles when the markets told you “this level might be too high”. If you look later at the green circle, it confirmed the higher price shelf and the strategy was accepted as legit and gold moved higher.
You can see the red circle here rejected the higher price and thus a long bear market happened.
Let’s go to 2000-2011
You can see in 2000, the green circle happens in 2002 stating essentially price is going up. The entire time through 2008, price was above the 200dma. It then goes down below the 200dma and you get a red circle stating there might be a problem with that price shelf. Shortly after, you get a green circle saying the price was indeed legit here, please continue. The bull kept going until price dove below the 200dma and there’s another red circle here questioning the 1923 move. In THIS case, the red circle was NOT confirmed with a green circle 400/200dma crossover.
So above, had you gotten out of everything gold related at the red circle in 2012, you would have avoided a lot of pain for 3-4 years.
Only in 2016 again do we see this buy then a sell then a buy, then a sell, then a buy – lots of chop, but part of the cup and handle structure.
But then it also told you to get back into the gold trade in July 2019. As long as the price is above the 200dma, we are in a bull.
What you can see then is we got the 400/200dma “death cross” Sept 2021, about a year after the high. Now it was do or die. Do we accept this 2000 price as legit? That is what is brewing now, and the recent move to 2074 more or less cements this convergence to happen, and soon. Could it chop sideways for years before a move up or down? Sure. But if we are using 1976 and 2009 as recent examples after a monster move up in a cup type of formation, the probability favors this convergence of the 400/200 will rhyme those 2 times in history. Given our macro situation right now with everything going on in the world and $30T in debt, I’m apt to believe this chart is showing us what is going on in the world.
My contention here is that when these DO cross, it cements the potential for the massive leg up to come – in 1980 and 2011, both cases saw about 2 years of a run up where the price of gold was over the 200dma.
So – from now until I see the price of gold go below the 200dma, I will assume we are in the gold era. I see the 200dma now around $1810, so to me – that is the price floor we have to keep the bull. IF the 200dma is crossed, to me, as an amateur, I have to look hard and long in the mirror about exiting the market. Kind of. Not really YET – but you have to start looking hard.
Gold miners are not gold
This lesson I learned the hard way. A few times. I am getting skilled at reading the conditions of the markets now. No one can predict price and direction with certainty, but you can have a “cone of certainty” if you will, that is probabilistic that might look like a hurricane cone your forecasters use. In that sense, I can forecast “cloudy with a 90% chance of a shit storm coming, buy a gold umbrella just in case”. Meaning – you may now see you are in a gold bull market, and you can see the approximate target of the storm, but the precise trajectory or time to get there is muddled with too many variables that a super computer could not project. You have to think of price movements of these things like a tropical storm. You know it is coming. It is 3000 miles away. You can see it on the radar. But the wind speeds, severity, pressure, jet stream, and even volcanic action can push a storm just a few degrees off that can completely alter how it goes. But you know the storm is there.
So many times I was now starting to hit gold and silver in a relatively accurate cone, but missing on miners – badly. The issue was that sometimes these guys get hot and run up relative to the price of gold, and other times gold or silver may moon and miners not move. I was looking at the gold or silver chart to buy/sell my favorite miners, and that’s a bad idea I learned the hard way. To me, the miners are more in tune with the economics of the backend whereas gold plays more towards the fear and uncertainty. We can see fundamentally some of the drivers of gold, like interest rates and DXY at times – but with the miners, there are periods of electricity coupled with periods of being in the desert alone. Then, you add in that fuel costs are 1/3 of the cost of production and realize that while gold may go up, oil may zoom up relative to gold and thus hurt miners’ margins.
Right now, today, the main issue with miners is the problem in 2011. Many who invested then were burned and vowed to never come back – which is why institutional investment has been sluggish with miners. They didn’t have that on my PM investing brochure when I started this. You had a lot of the big companies do expensive M&A buying up everything they could find with expensive projects that would not be economical unless you had $1600 gold, then the price receded and these giant companies had taken on all kinds of debt and dilution to get these projects that they could not develop. There was a long period of write downs and stocks getting slaughtered.
The good news is there were a lot of lessons learned from that and you have Newmont today able to pay dividends at $1200 gold. Many of these companies are printing money now with Free Cash Flow. Many in 2019 and 2020 expected the same type of thing to occur, and many rushed into the junior mining sector, driving prices up – only to see price consolidate and no M&A to occur. Then, with COVID, no one could travel to do site visits, so no acquisitions were made.
Meanwhile, these gold and silver companies were printing money. However, it went unnoticed in the backdrop of the move of the NASDAQ since 2009. The reflation trade of March 2020 with all of the stimmies had a RISK ON move – and delayed the gold move you’ve seen since August 2021. This inflated everything into a massive bubble and with this, put gold and miners in a holding pattern as money chased things with more torque.
That being said, miners are still printing money, and with gold at all time highs, investors may be rolling out of bubble stocks into a safe haven like gold – and by proxy, the gold miners. While many of you may not be able to afford gold coins at $1800, you might be able to buy shares of Fortuna Silver Mines at $4.38 today.
What you have to realize with this is that there’s a way the money flows with gold and miners. It may see gold first, then gold miners, then perhaps silver or gold mid tiers, then silver miners, then juniors. The big funds cannot move into small cap stocks – too small. In 2020, you saw a lot of people, including myself, skipping the line of the majors and going right to the mid tiers and juniors. Many who did not get out by end of 2020 got baptized in 2021. You see – when gold or silver moves, these miners are a leveraged move with the metals – mostly.
IF you see gold go up 1%, perhaps you see Barrick or Newmont go up 2%. Perhaps a mid tier goes up 3%. Perhaps a junior goes up 4-8%. The same leverage is true on the way down. So – in theory, you do not want to be buying at a time of FOMO nor selling at a time where no one loves the sector.
What you will see during these markets are an oscillation of gold (and silver) to the relative value of their miners. What I care for with gold is to check to see if the price of gold is over the 200dma. That’s about it. All of those charts above may be good if you trade gold futures or buy digital gold on OneGold. But premiums on physical metals should not have you trading in and out of your metals.
So…Gold above the 200dma for me is a green light to then look at miners. This simply confirms the storm is indeed at sea.
From here, let’s then look at relative values.
I like to use the GDX to be the gauge for miners as a whole, as this may represent institutional participation in the market. What you will see below then is I look at different miners through a different lens, but now I want to find if the storm is coming sooner or later.
I use a LOT of ratio charts to help me with this. What I do with a ratio chart is fire it up on the screen and try and draw an approximate channel where a vast majority of the trades can fit into. I liken this to one of the disciplines I learned in operations management called “Statistical Process Control”.
With SPC, this is a process design. You measure how things are going, and measure the variance to the mean over time. If things deviate too much from your average, your process may be failing – but there is a certain gravity towards the mean. In a sense, the zero line is “normal” and when you see drift from the normal, there may be reasons for this. You draw your upper and lower control limits which essentially are quality tolerances.
My point with using this with ratios is to see “normal” and find where we may have an oscillation. Where are things under and overvalued? Where might an opportunity exist to play the undervalued item?
So in investing in PMs, for me, with miners – I try and find things that are undervalued relative to peers, relative to the market. This is my THESIS. But guess what. With SPC, something may pop out of the channel and be a broken process that needs to be fixed. The same can be said for a miner that looks stupid under valued. This, to me, opens an investigation. It does not have me hit the bid. With Fortuna Silver Mines, I am now stupidly overweight them. Something made them extremely undervalued to their peers. For good reason. They had jurisdiction issues first in Peru with a PM, then later in Mexico with a mining permit. These items caused a sell off. The process is broken. However, if the process is repaired, you then expect not only a return to deviation, but perhaps an overshoot if you over-engineered a solution. With FSM jurisdiction issues fixed first with the PM of Peru in Nov 2021 then mine permit extension Dec 17th, 2021 – the items that broke the process were repaired. Naturally, you’d expect a return to the mean, and perhaps overshoot as momentum built and people piled back in. Likewise the investors never digested the Roxgold acquisition earlier in 2021. FSM is a gold miner now….in fact, they only mine 27% silver. So there’s also a branding issue going on that will take time to absorb.
The correction back to the mean and overshoot never happened. This has gotten me even more time to acquire MOAR.
Let’s look at RELATIVE VALUES. What you see above with the gold to GDX ratio is that gold had a massive run up in 2016 and 2020 and gold miners lagged, which is normal. Then gold plateaus or pulls back, and miners not only catch up – but then overshoot. Those peaks are gold shooting up – then the “crash” is miners catching a bid AS gold is dropping.
I’m going to zoom out the chart here – because you need to see something how this goes back further. The idea is the new “process” starting about 2013 had a price channel locked to the fact that miners suck against gold. If you look back further before investors got sick of gold miners – you see a much lower ratio.
In the initial chart, I only counted the time in the last 10 years. It was the new normal. Remember how people loathed miners? That created a new price ceiling relative to gold, which we see around 44:1.
However, gold miners have completely repaired their business model. While we are at 52.2:1 today, about average for this channel, gold miners are significantly lagging. I believe this can be an overshoot then to 32:1 by next summer. If gold is $2500, that puts GDX at about $78 from its current price around $37. That’s a double from here, even if gold only has a 20% move. That’s 5:1 leverage. So you could put $10,000 in gold, and get $12,000 or put $10,000 in GDX and get $20,000. If gold hit’s $3000 that is potentially a $90+ GDX price. That’s about a 3x from here. On a 50% gold price – giving GDX a 6:1 ratio move.
But it gets better the more you look.
The GDX is the least risky of all of the miners. Miners have risk. Jurisdiction, mining problems, labor strife, earthquakes, environmental permitting, dilution, costs of capital, fuel cost increase, etc.
The mid tier and junior miner index, GDXJ, tends to move AFTER GDX makes its move. And these miners have a higher move relative to the price of gold. Consider Newmont was making a profit with dividends at $1200. At $2000 they are making $800 per ounce. A miner with $1600 costs may make $400 at $2000 gold. If gold moves to $2400, the profit for Newmont goes to $1200, or 50% higher. For the junior, the profit goes to $800 or 100%. So those miners with higher costs to produce tremendous profit percent increases with the moves in gold.
The gold to GDXJ ratio is shown below, and as you can see – is higher up in the channel than GDX as it is lagging the GDX.
This too, will most likely overshoot well below this channel low to perhaps 15x. At $2500 gold, that is $166 from the current $47. Or, about a 3.5x move. Slightly more than gold. At $3,000 gold you are seeing a $200 GDXJ price.
But then you look at miners within the GDXJ – like my FSM. Check how FSM is performing compared to GDXJ.
Once GDXJ gets moving, lots of money will then come into FSM as FSM is part of GDX and GDXJ. I want to assume here this can overshoot the lower rail here, as well. The lower rail has hit several times at 5. I want to assume this can hit 4.
If GDXJ hits $166, that puts FSM at $40. Being conservative to hit a 5 on the rail you see FSM at $33.
FSM today sits at $4.25, so we are looking at a 7-10x from here. It also has a new gold mine opening up next year which may re-rate it as a 450k-500k AuEq producer, from a 300k AuEq now.
I’m using the GDXJ here because FSM is now only 27% silver. If silver goes bananas, FSM has “silver” in its name, and it can go stupid high just because of that.
So if you had that $10,000 and put it into these items and gold hits $2500 by next summer, you have:
- Gold $12,000
- GDX $20,000
- GDXJ $30,000
- FSM $70,000-$100,000
Likewise – you can even use a GDX to GDXJ chart to show when you think GDXJ might be getting the move.
Above, you are seeing the last year or so GDX outperformed the GDXJ. That is, with the mining stock price collapse of 2021, GDX lowered at a lesser rate than GDXJ. Recently, you can see with price increases in gold, GDX price is rising at a faster rate than GDXJ. And – you can see the previous 2 peaks where GDXJ then significantly outperformed GDX. So – when we start to get massive inflows into the sector at large, I’d expect to start to see GDXJ outperform GDX in a rising gold price.
I hate them and love them at the same time. Junior miners are usually smaller market cap miners who may produce, or they might be building a mine (developers) or prospecting for metals (explorers). These also have varying risks. Are you exploring a green field or brown field? Brown fields had metals found there before, green fields never have had metals and thus are higher risk. Do you have a competent management team or new? What jurisdictions are you mining in? How much CAPEX is needed to build a mine? Is it economically feasible to build a mine?
People fall in love with numbers of what these CEOs tell them. What I have learned to look at on corporate presentations are “what are they hiding from me“. You see, I was a metrics guy 20 years ago and my direction from my executive was “don’t ever make charts with a down slope”. To me, this is asinine. But, he was the boss. You can say “customer complaints are down” and show the graph. However, he wanted to show the inverse – “please show positive customer satisfaction”. The idea was, in a sense, to gaslight and brainwash a crowd into always seeing positive movements up. I didn’t like that, and in my own shops I run I don’t do that. It’s called “framing” in a sense.
But with these presentations, I look for what is missing. This is often where the questions I have start. For example, Hecla has chart after chart talking about “high grade”. But they don’t point you to the fact that their finances aren’t great. You can have all the high grade you want, but if you are paying US unionized miners and have higher production costs than your Chinese counterpart with lower grade – the grade doesn’t mean shit. I recently took out a position in Hecla due to their nice dividends and US jurisdiction – and because I think with a high silver price, that high grade could be rewarded which then makes the books look a lot better.
With the explorers and these guys, if you get the right company, you can have returns of 10x. But this is ridiculously high risk. One out of 3,000 projects gets an actual mine built. Many of these have years of drilling, then the project is never funded to build. Consider First Mining in Canada – I once owned it. Keith Neumeyer gold child. I once read it would take $800m in CAPEX to build it. I ditched then. To me, there was too great of a risk of it never being built. Can it? How do you get that $800m? Share dilution? Streams? Loans? None of those is pretty to the stock price. What about being bought out? M&A has been dead – but when it DOES pick up, can a Barrick afford $800m to build a mine there? Yes. That would mean some form of acquisition, but right now they are wanting more de-risking. Which means a lot more drilling, PEAs, PFS, Environmental permitting – a lot of the majors are buying in 10% or so to some of these companies to fund some of this – perhaps for acquisition later.
But I ask you…do you want to buy this for $.30 a share, then wait 2 years and run 50% dilution, to then have Barrick buy it for 50% premium? That means you bought in at $.30 and get $.225 for it.
With juniors, you have to understand the Lassonde Curve.
So these juniors may take 7-14 years or so from beginning to end. From the time they find a place to drill until metal comes out can be a very, very, very long time – most investors have no idea about this. Where I like to buy juniors is at the 2ish area as well as the “construction decision” phase at the bottom of the curve in the middle. I pay mining stock newsletter writers tell me where these projects are, who the best teams are, who the best projects are. You try and buy things at the beginning of the parabola and sell somewhere into the high of the parabola. Once the discovery is made – I’m out. Many of you don’t like to “trade”. But I can tell you, from the time a discovery is made until construction decision could be 2-3 years, then another 1-2 years to finance and build it. You MIGHT get a few X from the peak of discovery to the peak of development, but there’s a LOT of risk between those times. Why do it? If you bought Silvercrest in 2016 at $.16, it has gone up 75x. If you bought Great Bear in 2018, it had a 54x. Some of these can be vicious to the upside. I once had Filo Mining for months at $1.45. Didn’t move. Then a discovery and it’s now about $12. I sold out because I hated watching grass grow. That cost me about $10k in opportunity cost lost not holding. IF you are going to go after the early stage juniors, you have to be great with tucking money away and forgetting about it. And – they are uber high risk so you could lose 50-100% of the money on a bad drill result. So I really only ever follow or chase a few of these at a time.
Right NOW, we are in a phase where the SENIOR PRODUCERS will start to melt up. They mostly have made a good run now – but there’s potentially another really strong move coming soon.
Then – I believe we will see the MID TIERS running. This is when you wake up one day to FSM up $.50 a day for a few weeks as MASSIVE MONEY is chasing stocks in a $1-$2b market cap company to turn them into a $5-$10b company.
Because juniors are so risky, most people would recommend a smaller portion of your portfolio to them. How much? Up to you based on your risk appetite. Meaning, the older you are, the less ability you have to earn back a massive loss.
Portfolio set up?
The LOWEST risk miner isn’t a miner at all. They are the banks for the miners – the streamers/royalty companies. With gold, the biggest is Franco Nevada and silver is Wheaton Precious Metals. They are paid in metals, so they do not have to worry about the problem of higher fuel costs – which today is a REAL risk to miners’ profits. The next lowest risk is SENIOR producers. They still have operating risks. Then we have MID-TIER producers. Then JUNIOR producers. Then we have ADVANCED stage DEVELOPERS who are building a mine. Before that is EARLY STAGE developers who have no financing yet and are working on a PEA/PFS and permitting. Then, we have ADVANCED STAGE explorers with a near-defined resource then finally EARLY STAGE explorers who have no define resource and are sticking holes in the ground. That is your risk level.
Hint – if you have MILLIONS in cash in the bank and want to take a portion of that and YOLO on juniors for a stupid high pay day? Go ahead. But most of us have a trading account we are trying to fund college for junior and while we recognize the opportunity with gold here, we also don’t want to lose our asses on people hunting for rocks that don’t find anything.
At the beginning, you may see the big run to majors. Over time, you may see majors going sideways or not making massive gains daily – and with that you may see a rotation next into the mid tiers, etc. Keep in mind this money flows down as these miners get stupid overbought.
How you set this up is up to you – but I wanted to give you extreme examples of how someone might set it up.
60 year old
- 35% streamers
- 25% producing majors
- 15% producing mid tiers
- 10% producing juniors
- 7% advanced stage developers
- 5% early stage developers
- 3% explorers
25 year old
- 10% streamers
- 10% producing majors
- 25% producing mid tiers
- 25% producing juniors
- 10% advanced stage developers
- 10% early stage developers
- 10% explorers
This is an example – not something you should do. What you do not see here is 80-90% juniors/explorers due to risk. Like I said, if you are Greg Valentine and have millions in the bank and pick the best of the best juniors, and can make 10x on your speculation, great – you may very well 10-20x everything 🙂 But this is not you, me, or Bob from accounting. Many of us need to dial back the risk appetite. Maybe we pick some of Greg’s picks to fit in our portfolio above. I know I did!
Now, I don’t know much the streamers will move, but I do know that with a much higher fuel price to be seen, their profits are not dinged at all by it. They may move nicely over the indexes and majors.
When to buy and when to sell?
Now you have an idea of WHY gold. When to look at gold. And – perhaps when to get into gold miners. I used the gold charts above for price. I also told you gold is cyclical. I also talked about strategic times to be involved with gold and not with the 400/200dma.
But now we need some tactics. Let’s look at the gold chart below.
The gold chart here is 2009-2011. You see the entire time gold is in a bull market over its 200dma. So I know I want to be in the gold trade. The pink circles in the top chart is showing new highs. If you look at the chart below, it’s for RSI, or relative strength index. You cannot go by RSI alone to buy/sell, but if you look at the chart below that you have the MACD. Remember I talked about the 400/200 for STRATEGY to be in or out LONG TERM? The MACD is a shorter version of that you can use for TACTICAL trading for weeks or months at a time.
Now – the STRATEGY chart of the 400/200dma I may use to buy piles of gold to hold in my hands. I may buy gold in a vault. Perhaps I use the TACTICAL chart to get in and out of GLD or OneGold. Perhaps I have a MASSIVE holding of GLD for a LONG hold, but have call options I do to lever up my profits on TACTICAL trades. Perhaps I’m sitting on 45% profit in GLD and I see the MACD crossing and RSI at 80. It might make sense here to sell out of your TACTICAL trades and take SOME profit from your GLD – while not touching your physical.
If you look at that chart above and bought call options on GLD in the green areas, then sold them in the red areas, you’d make a fortune. Your LOWEST RISK gold holdings would go from $680 to $1900 in this time, UNTOUCHED – but you could trade the GLD and call options on miners to make trade income. Where this starts to get a little dicey is capital gains taxes on short versus long term holdings. I feel very comfortable in my skin selling out of options at a 40% gain in a week if I’m seeing MACD turn and RSI at peak. Could it run more up to 50, 60, 80%? Sure – but I like the idea of locking in profits at times.
Where I have failed the most is selling for a loss. Meaning, when I started out, I was buying on these FOMO runs. Price went up on things, and I then figured it was safe to get in and bought. Then the next day the miners go belly up. Instead of cutting options at a 25% loss, often I felt a turnaround was right around the corner and I was going to strike it rich. Hint – IF I had bought at a better time, I would thus not have had to sell right away. Here’s an example of GDX.
If you looked at the GDX with the 400/200 you would have gotten in at $37.75 and gotten out at $57. That is a $19.25 profit in 29 months. Or, a 51% profit in that time, which comes out to be about 21.1% yearly profit. Now, you missed the bottom here and missed the top. But if you are a hedge fund manager running billions of dollars – you just struck it rich.
I am using GOLD to get in on the trade, and thus for TACTICS for trading I want shorter time frames. Let’s now look at the DATE to get in using gold as Aug 6 2009.
As an AMATEUR not managing other peoples’ money, I then look on the GDX chart. Now – I don’t have GDX numbers before 2007, so I’ll go from 2009. Remember – you were in gold for a LONG time from 2000 to 2009 when you see this red circle. When you see this green circle, you are getting back in. So, you did not miss the run up in Oct 2008 to Mar 2009. You are simply re-entering here when the cross back over the 400dma confirms the high price.
If you look SUPER closely on this, you will see that month to month are MAJOR swings in price. You can see if you just held at the start of the green until the end in red, you would have made your 50%. But LOOK at the saw tooth patterns. This is during a BULL market!
What you then do is you might be able to use the MACD for getting in and out of trades. Perhaps each month you allocate 5% or 10% towards “trading”. Let’s look at a $10,000 account set up for trading only, using GDX here for a 10 month time frame. I’m only going to use the shares, but you could use call options to make these pop much higher.
Using the MACD somewhat de-risks a trade. You can get caught sometimes with market news, but this is why you may have stops set with your trades. With this, like the 400/200 – you lose some of the bottom and some of the top, but you capture the meat and potatoes.
Use a MACD buy/sell strategy here, you have 80% more profit in the above over a buy and hold strategy. Now, if you held it more than the 10 months here to 1 year, you STILL get a 40% higher profit using the MACD trading strategy.
Here are the numbers below which correspond with the MACD signals above. The best part of this is over a buy and hold strategy is when you are OUT of the trade, you wait.
Here is what it looks like if you trade this saw tooth pattern just using GDX shares, and no options.
I then show you what a long term hold looks like if they sold the same time at the end.
So why do I prefer the MACD over the “buy and hold”?
Let’s assume you are late to the party. All of your friends in 2012 tell you gold is going to rebound. I had received the 400/200 signal to go home. You FOMO in. No one knew in 2012 that 2011 was going to be the end of the party. “It’s a pull back”.
In the GREEN area, you do the buy and hold and I do the MACD and overall strategy with the 400/200.
In the chart above, I have a buy signal at $42 and a sell signal at $54. In a few more weeks, I get a 400/200 GOLD signal telling me gold is dead for now – which is the pink circle. You might accidentally get out then at $47 – but if you are a holder, you are holding…and holding…and holding all the way down to the low in Jan 2014 at $20. The problem with the buy and hold is the SELL part is completely either gut-driven or trailing stops or the like.
Now, imaging doing this with GDXJ. FSM. Call options on FSM. I’ll give you my FSM chart I’m looking at now. We are not in the 400/200 CONFIRMATION yet. I BELIEVE it will happen soon.
So let’s assume that unless price crashes to $1775 in a few days, that we are now in the gold bull you saw from 2009-2011. In THIS scenario, as long as gold is over the 200, I’m happy. The bull is in trouble when there’s a long run up followed by a pull back that breaches the 200dma. THAT is a warning signal. What KILLS the gold bull, IMO, is when the 200 crosses over the 400. I’m OUT at that. IF the 200 crosses BACK over the 400 up, I’m back in. But you saw from 2011 on, this is what it looked like.
You have a LOT of trading opportunities here in 2011-12, but that is NOT a great time to hold and get stopped out everywhere. Are we at 2009 or 2012?
Here I have showed you…
- STRATEGY – how to know when to get into the gold and gold equities market. Also – when to GET OUT
- WHAT to buy- how to compile a mining stock portfolio, and what kinds of miners are out there and their levels of risk. YOLO is not an investment strategy.
- TACTICS – looking at a MACD, you COULD potentially trade the gold bull when price is above the 200dma and buy/sell gold/silver equities based on the MACD of each stock. When RSI gets hot, you may see SOME profit taking because the MACD COULD lag after a massive event which takes the equities down.
- How to fish. Some of you are great with questions, other out there want me to hold their hand, tell them when to buy and sell, and be a therapist. I’m not licensed to be any of those things – so I don’t mean to be rude to people. I’m hoping here to have provided you something of a primer for how to trade these and not get your ass handed to you daily.