After a year or more of depressed prices, gold and silver stocks reversed with a vengeance. GDX (the ETF proxy for the Gold Miners Index) was up in just two months (August and September). Those who followed our lead and bought or averaged down this summer have profited handsomely. It’s been a fun ride, and I’m convinced we’ll see many more surges like this before it’s all over.
What was perhaps more important about the surge in gold stocks, though, was the leverage they demonstrated, which is one of the primary reasons we invest in them. Here’s a comparison of GDX to GLD from August 1 to November 1.
This chart shows the advantage of building your position on dips. It lowers your cost basis and takes leverage to a higher gear.
So, what now?
First, stocks ran far and fast, no doubt, and nothing goes up in a straight line, even in a bull market. That’s why the October lull wasn’t concerning to us.
Second, we also should consider seasonality. Here’s the updated monthly performance of gold stocks since the bull market started in 2001, along with their year-to-date performance.
You’ll see that October is typically the weakest month of the year for gold stocks. It wasn’t surprising that the dip wasn’t big this year, since stocks had been weak most of the year.
It’s the big picture, of course, that we’re most interested in. With the Fed, ECB, and BOJ pulling stimulus rabbits out of the printing hat, and the UK, Switzerland, and China all adding to their balance sheets, gold is headed a lot higher and will subsequently pull the stocks with it.
Further, the seasonal pattern in stocks does not apply to gold.
On balance, October is a strong month for our favorite metal, though that wasn’t the case this year. This is a good reminder that shopping season could strike at any time.
For now…
- Maintain full exposure. Enjoy the ride, but don’t be surprised to see a pullback, or at least some consolidation. As the chart above shows, this is a strong time of year for gold, so we want to be fully invested. In the big picture, we’ve got a long way to go.
- Have your shopping list ready for whenever the next correction strikes. There’s no crystal ball perched on our desk, but we know further pullbacks will arrive at some point, so be prepared to pounce.
- Consider taking a free ride if you’re sitting on a large gain. Calculate the number of shares to sell to take your initial investment off the table. Then your remaining shares are a “free ride,” meaning risk-free. If you go this route, do not sell your entire position; you could lose out on further gains.
Navigating the bumpy waters of precious-metals investing is especially challenging right now. With the right guidance, your investments can be positioned to help keep economic trends from robbing your savings and investments. Learn more here.
Muck About says:
Gold and silver are the only “buy and hold” there is to be had. It’s called “life insurance” and life you save might just be your own.
Can gold and silver go down?? Sure they can – and do – but until our fiat paper money has intrinsic value and acts as a store of value (versus being inflated away), gold and silver is the only game in town to maintain wealth over time. Sure, ag land is good – and may get better, especially that within short distances of urban areas, but that takes work — or you lease it out. At least, except by government decree, no one can steal ag land from you.
Whatever gold and silver is bought, take possession and forget about it – and hope you can leave it to your grandchildren.
MA
Well-loved. Like or Dislike:
6 
0
27th November 2012 at 9:15 pm
sangell says:
Gold mining stock hasn’t been good to me. There has only been negative leverage. You need 10 or 20% moves in gold to get 5 or 10% moves in miners. There is always a problem. Oil goes up in sympathy and it causes mining costs to rise. Oil goes down and gold doesn’t ‘nationalization’ risk.
Idiots must run these companies.
Like or Dislike:
3 
0
27th November 2012 at 9:25 pm
Eddie says:
Silver held up very well today, even though it was options expiry. The wave theorists and cycle counters say we’re starting a C wave. That’s a good thing.
Like or Dislike:
3 
0
27th November 2012 at 9:30 pm
Jimi d says:
From “Extraordinary Popular Delusions and the Madness of Crowds” (page 15) with reguard to John Law aiding France’s adoption of a new paper currency:
“With a weakness most culpable, he lent his aid in inundating the country with paper money, which, based upon no solid foundation, was sure to fall, sooner or later. The extraordinary present fortune dazzled his eyes, and prevented him from seeing the evil day that would burst over his head, when once, from any cause or other, the alarm was sounded”.
Sounds like Benny Bernanky !
Like or Dislike:
2 
0
27th November 2012 at 9:18 am