As this edition goes live, I'll be in New York City at the New York Hard Assets investment conference, meeting with mineral exploration companies and giving a talk or two. It may be too late by the time you read this if you don't already happen to be in Manhattan, but if you are and would like to come to the show, I always like meeting readers in person.
Meanwhile, back at the metals ranch, the whole suite has sold off over the last two weeks. Fears of further trouble in Europe and decreasing growth rates in China have copper, lead, zinc, aluminum, and other industrial minerals on the retreat, and the precious metals as well: gold, silver, platinum. But is this a problem or an opportunity?
I'd guess you know my answer.
Jeff Clark's take on gold stocks below is focused on just that one metal, and it's written with investors who are relatively new to the market and under water in their portfolios in mind. If that's not you, the article isn't for you, but if you're feeling anxious about the direction of the gold market and gold stocks, Jeff's article can still help.
Senior Metals Investment Strategist
|Rock & Stock Stats|
One Month Ago
One Year Ago
|Gold Producers (GDX)||42.42||46.49||54.91|
|Gold Junior Stocks (GDXJ)||20.26||22.67||35.82|
|Silver Stocks (SIL)||18.69||20.81||23.94|
|TSX (Toronto Stock Exchange)||11,694.67||12,026.76||13,419.74|
By Jeff Clark, Senior Precious Metals Analyst
Which adjective best describes your feelings about gold stocks right now?
The continual drubbing of gold stocks is enough to drive any man or woman mad.
It's maddening because we're investing for all the right reasons: The big drivers for our sector are still in place, and even though gold stocks were cheap six months ago, they've managed to get a whole lot cheaper. Worst of all, no one can say for sure when the bottom will arrive.
So what do we do? And if you're all in, is there really anything you can do? I think there is. Whether it be examining yourself or your holdings or taking specific actionable steps, see if you find some of these strategies useful while we wait for our sector to turn around – which we are sure it will.
#1: Examine Your Core Beliefs about This Sector
Why did you invest in gold? And precious-metals equities? Having a firm grasp of the specific reasons you invested in each asset is crucial. Why? Because if you invested in gold simply because it was going up, you may get impatient and sell early. If you bought gold because the dollar seemed to be falling against the euro, you may get spooked out for the wrong reasons. If you bought because someone else said it was a good idea, you may be too afraid to add to your holdings when you should.
I initially bought gold because it runs in my blood, but I started buying in earnest and continue buying it now because I don't trust what governments are doing to our currencies. Plain and simple, if the Fed is going to print as much money as they please, then I'm not willing to bet my life and my savings and my future standard of living and my kids' college education and my retirement and my wife's IRA on the idea that that money won't somehow spill into the economy and cause inflation. If you want to believe Bernanke when he says he has "controls" in place and an "exit strategy" for all those trillions of dollars already added to the system, go right ahead. If you think other governments that are trying to keep their currencies "competitive" won't join the race to the bottom, be my guest. But I'm not willing to take that risk.
I think more money printing in the US and around the world is highly likely, whether they call it "quantitative easing" or try to hide it under some other guise – especially if we get another deflationary scare. And if the dollars I work so hard for at Casey Research and through all my investments are likely to continue to be diluted and price inflation is a near-certainty, then I'm going to protect them by buying gold and silver.
And let's not forget the monetary base that exceeds $2.6 trillion, the national debt that will conservatively reach $20 trillion by 2015, the $1.3-trillion US budget deficit, the approximately $4 trillion in US Treasuries held in foreign central banks, the vulnerable and propped-up economies around the globe, the still-unresolved European debt crisis, and the many negative real interest rates that show no sign of reversing course anytime soon. These are massive megatrends that ultimately won't be derailed by the minor fluctuations caused by pit traders selling gold stocks or some CNBC loon claiming the metal's in a bubble.
I put my money where my mouth is: approximately 13% of my investable assets are invested in gold and silver bullion. My fear isn't that I have too much; it's that I may not have enough. You have to decide for yourself what your personal allocation should be, but keep in mind that mathematicians tell us anything less than a 5% exposure has a statistically insignificant impact on a portfolio.
I say all this about gold because I think that is the key to gold stocks. If gold and silver are destined for higher levels, gold stocks will follow. I know they're not doing that right now, but I'm convinced we're simply in the middle of one chapter of a very long book (Kip has fallen in a well, but Lassie is on the way). The bottom line is this: Gold stocks do respond when gold goes higher – and gold is going higher because of completely unsustainable fiscal and monetary actions of governments all around the world.
There's obviously a lot more that can be said on the topic, but the point for now is that it's important to take a moment and ask exactly why you've chosen the investments you have. And then make adjustments as necessary – that may mean some selling, it may mean some buying, it may mean doing nothing.
For some investors, therapy may be in order – gold therapy, that is. If so, read this report on gold and watch this video calling a market bottom. The audio collection from our recent Recovery Reality Check conference would also be good therapy.
But I suspect most investors just need to take a break from constantly checking their brokerage statement and to give things time to settle and turn around, however long that takes. If upon honest reflection this describes you, then go to the movies, learn Chinese, volunteer, pay more attention to your spouse or kids, or get a second source of income so that you produce more than you consume and save the difference.
With that basic understanding in place, here are a few further steps to consider…
#2: Be Picky
For the current environment, we want to own only the best of the best. Now is the time to focus on those ships with the best crews and most seaworthy hulls. Buy companies with proven management teams, strong balance sheets, low political risk, and big growth. This gives us the best chance to succeed; the better companies will do well when things turn around and won't drop as far if the markets continue to falter. A good example is Yamana; gold stocks as a group are down 22% over the past year (as measured by GDX), but AUY is up 15%. The better companies will not only reduce risk but outperform the market when things turn around. And gold stocks will turn around.
Take a look at your holdings and determine if they're among the best in the industry. Is some trimming and/or adding in order?
#3: Build Cash
Worried about another 2008-style crash? Having lots of green stuff in your account is your secret weapon.
For those who don't have a lot of cash right now, let's say I deposit $50,000 into your brokerage account, and you log in and see that cash sitting there right beside your gold stocks… might you feel a little less gloomy? You still wouldn't like where gold stocks are, but you'd have the ammunition to not only stay alive but prosper when you felt ready to dip a toe in the water.
Or to dive in… Louis James told us of more than one investor who profusely thanked him for recommending buying gold juniors in the fall of 2008 – which they were able to do because they had large cash reserves. Remember, to really be successful in any type of investing you need to have the 2 Cs: cash and courage. If you don't have those, the odds are heavily stacked against you. Those who followed Louis' advice made a bundle of money, and I specifically remember one who said his life was permanently changed for the better because of his ability to follow the two Cs at the time.
If your brokerage account doesn't have much cash, ask yourself what you can do to raise more. Can you: a) sell a holding that maybe deserves to be sold? b) consolidate or refocus some of your holdings? c) save more every month, or start saving? d) look for a way to generate more cash?
#4: Don't Ignore Dividends
We devoted the April BIG GOLD to this idea and named the top dividend payer in the gold industry. The point here is that we can be paid to wait. And because of lower stock prices, we can lock in some mouthwatering yields right now. A few companies have their dividends tied to the gold price, too, meaning payouts will grow when gold resumes its uptrend.
And here's something to consider: look at the growth in payouts in our industry.
(Click on image to enlarge)
In just two years, major gold producers have dramatically increased dividend payouts, with many doubling or more. If this trend continues – which I believe it will as gold rises – then our industry will become increasingly attractive to mainstream investors.
Think of it this way: if our market goes sideways or even continues drifting down, non-dividend (or weaker-dividend) paying companies won't gain anything, while the strongest payers will let us build cash or buy more shares. Locking in some attractive yields now is a very sensible strategy for part of your portfolio.
No one knows if we're at the bottom, but keep in mind that eventually everything bottoms.
With that in mind, buying some shares of the higher-quality companies at current levels is actually a smart move – and that will still be the case even if we get a further selloff. How can I say that? Because I know someone who bought GDX at around $30 in September 2008, thinking he was getting a good price; even though it dropped all the way to $17, he was back in the black by December and up 65% a year later.
Remember what Doug Casey says: "You don't make money buying when you're optimistic. You have to actually run completely counter to your own emotional psychology." In other words, you have to buy when you least feel like doing so.
If you haven't already, nibble. I think a year from now you'll be very glad you did.
#6: Don't Give Up
Even if you're convinced we've got it all wrong, I would encourage you not to sell now. You'd likely be selling many stocks at their low points, while simple reversion to the mean should put you back in the black and perhaps hand you some nice profits, depending on your cost basis. Pull up a 2009 chart of GDX and you'll see what I mean.
And if you're all in? Then you have to be patient… though I would still be doing #3 above.
If you're a weary gold stock investor, I hope you'll find some of these tactics useful. My advice is to view our current circumstances as an opportunity to take the necessary action so that when our sector turns around, you're in a position to profit, perhaps in a life-changing way.
The lack of skilled workers has become one of the most acute issues dogging the mining industry. According to the article:
Currently there is a "massive talent gap" that is going to get worse because the global mining industry is experiencing the biggest wave of workforce retirements in 70 years – the oldest baby boomers turned 65 years old in 2011. …
A shortage of skilled workers was the second biggest business risk for mining in 2010, 2011 and is forecast to stay the number two risk (resource nationalism/country risk is the number one risk) for miners again in 2012.
The problem is most prevalent in South Africa, Australia, Canada, and South America.
Lack of skilled workers leads to halts or even cancellations of projects and increased costs as unions, aware of the labor deficits, demand higher wages and benefits for their members.
Gold supply from mining has shown small but steady growth in recent years, but some experts predict a slowdown in the coming years. There are multiple reasons for that, with shortage of skilled people, mine depletion, and lack of new big discoveries among the most noticeable.
What Do Americans Think about Gold? (Mining.com)
A recent Gallup poll shows that gold leads investments as the one judged best for the long term. A full 28 percent of Americans think of gold as the best tool for long-term investing, while 20 percent selected real estate, 19 percent voted for paper investments, and only 8 percent preferred bonds.
While gold is still the top pick, the percentage of Americans that viewed gold as the best investment actually declined 6 percent from last year.
Ironically, gold ownership remains low on a historical basis: in April the United States Mint sold only 19,000 American Gold Eagles, the lowest amount since 2008. On an annual basis, gold purchases have declined from the first four months of 2011 (358,000 coins) to the same period of 2012 (181,000).
Comparatively high hold prices could be responsible for the slowdown, though the current weakness opens up opportunities for investment both in physical metal and gold ETFs. As contrarians, we're using this disconnect in public perception to buy gold and gold stocks.