When to Sell Gold and Silver Mining Stocks?

by FI Fighter on August 1, 2016

in Precious Metals

silver - 1

Now that we are clearly out of the brutal bear market in precious metals that had first started to take flight in 2011, a most logical question that investors holding mining shares will have is this — “At what point do I start selling and booking profits?

As readers are fully aware by now, as it pertains to commodities (particularly mining stocks), my own belief is that you never, ever, ever make the mistake of holding these assets for the long haul. In other words, unless you’re buying shares of an extremely well run and diversified streaming and royalty company like Franco-Nevada (FNV), you really have no business tempting fate by continuing to play with fire.

If you hold on for too long, these shares will burn you… badly.

That’s just the reality of commodities… Boom and bust… Over and over again.

Lather. Rinse. Repeat.

The beauty of the mining game is that the insane volatility between extremes create an enormously lucrative market environment for speculators to capitalize on. My thoughts are that you will absolutely never be able to catch the bottom 20% or top 20%, in terms of market timing (it’s impossible)… But you don’t need to at all to prosper! No, instead, what you’re most interested in is making sure you “capture the fat” by having your stock positions squared away and good to go so that you can take the momentum train for a good ride, profiting from that most important 60% window where the bulk of the gains are made.

How do you know when you’re approaching a market bottom?

Easy, you will observe all the following:

  • Investor sentiment will be beyond NEGATIVE… Just thinking about buying (let alone actually having the stones to do it) will make you a contrarian.
  • When you mention to others that you’re thinking about buying shares, they will all tell you that “you’re insane“, “that sounds super risky“, “you’ve gone off the deep end“, “share prices are only going lower“, and “stop trying to time the market“.
  • You have essentially ZERO competition trying to purchase these shares because almost nobody else out there cares at all.
  • All-time lows are seemingly being established by these stocks on a weekly, or monthly basis… In many cases, it will feel like it’s happening on a daily basis. Just when you think prices can’t possibly drop any further, they get a whole heck of a lot cheaper!
  • Fundamentals? What fundamentals? You mean NEGATIVE enterprise values, P/E ratios below 5, P/B well below 1, etc., etc., etc.
  • Miners are selling their goods at or below the cost of production… Many companies go bust and close up shop. Mines are put on care and maintenance, or companies resort to high-grading material to reduce expenses to an absolute minimum… It’s all about survival.
  • It’s damn near impossible for any gold company to raise capital… Nobody is willing to lend. Companies almost can’t even fathom the thought of a capital raise because it will dilute existing shareholders into oblivion… However, if they reach the end of the rope and have literally no other choice, mining companies will issue out shares and give away warrants (full warrants!) as though they were going out of style… At this point, they don’t care… Please, please, please, somebody (anybody out there with deep pockets) take the bait!
  • The mainstream will be pumping out articles regularly, citing “expert forecasters” who are certain even more doom and gloom is in store! STAY FAR AWAY!!!

Let’s look at the share price of Endeavour Silver (EXK), for an example of a most beaten down and badly bruised silver mining stock from earlier this year, in January.

Endeavour Silver 1:15:16

At $1.10/share, I assure you that it ain’t easy trying to convince anyone to buy… I remember when EXK actually hit $1.00/share, and I was like, “OMG, how can I raise more capital!?!

Anyway, you get my drift… When an asset class is absolutely hated by everyone, you should be the one jumping up and down with joy, in contrast, thanking the market forces (and market Gods) for giving you an “opportunity of a lifetime“, gifted to you on a silver platter.

But ALWAYS remember — Nobody rings a bell at the bottom, or top…

You must do you own due diligence to get comfortable enough with pulling the trigger to both buy and sell… From my own experience, each time you do, it will always feel like a brutal mistake you are making… Buying or selling at market extremes always feels like the wrong thing to do!

That’s how these things work…

OK, so back on the topic of selling…

Well, since fundamentals mean jack shit when an asset class is selling off, why the hell should they matter on the ride back up?

As a macro investor, I’m learning, certain fundamentals indeed mean jack shit… In other words, I don’t care about fundamental valuations the least bit (to be clear — we’re talking in the context of precious metals mining stocks)… You can fixate all you want on: P/E, P/B, P/S, enterprise value, market capitalization, free cash flow, revenue growth, earnings growth, dividends, blah, blah, blah…

I will simply choose to ignore traditional valuation metrics because all that stuff is just noise… They don’t matter (although logically speaking, they should)…

Ultimately, investor sentiment trumps all.

When it comes down to it, you will know when to sell gold and silver mining stocks by following investor sentiment, plain and simple, by keenly observing how it changes ever so subtlety each year (towards more and more bullish)… until we reach fever pitch.

Fever pitch… Mass hysteria… The Fear of Missing Out (FOMO) takes over.

That’s right… When FOMO kicks in full force, it will be well past time to get the hell out of dodge!

What are the signs of FOMO?

  • Well, what do you know… Suddenly, the retail investor is talking about gold and silver for a change… and NOT laughing about it in the process.
  • What’s that? The Wall Street Journal has a picture of a golden bull on the front page?!?
  • The mainstream media actually has a decent word to say about precious metals? Gold is no longer considered a “pet rock”? No more SELL AS FAST AS YOU CAN recommendations? Go figure…
  • Bloggers will actually be writing about and discussing gold and silver stocks… in a positive light! When buy orders are being reviewed, in the comments section of the article, you will find the following type of remarks aplenty, made by other bloggers and readers: “Solid move!“, “Excellent new purchase!“, or “I’m thinking about adding shares soon myself...”.
  • Seeking Alpha authors will be pumping out new articles of your favorite gold and silver stocks on a daily, or weekly basis… instead of one new article every… year… And the Stocktalk section won’t be desolate like it was in 2015 for basically every single gold and silver stock out there…
  • There will be new junior mining companies being listed on the TSX-V, or ASX on what will feel like a daily basis… Most new companies won’t have any real projects and instead will rely solely on marketing hype to push their share prices out of the stratosphere… And it will work, time after time, again and again!
  • The HUI/GOLD ratio will be approaching historical “norms”, or setting new highs…
  • The Gold/Silver ratio will revert back around 30-40, or even lower…

 

So, as you can see from the above, my criteria for selling has nothing to do with the fundamental valuations of each individual mining stock that I own… Nope, I’m going to rely primarily on investor sentiment to be my guide… and a few key ratios.

Very simple, indeed.

Does this all sound too crazy for you to believe?

Well, when we were operating at the Depths of Despair, companies with real legitimate assets were easily sporting NEGATIVE enterprise values… What that means is that the company had more cash in the bank than the market capitalization of the entire company! Their land holdings and “assets” were deemed more worthless than ZERO… The market prescribed a NEGATIVE value! Does that make any freekin’ sense to you at all!?!

 

Well, it happened…

 

So, I’ve seen some pretty crazy stuff on the buying extreme end of the spectrum… Why should it be any different on the selling side, during the Heights of Greed? I sure don’t expect it to be… When investors inevitably get consumed by greed entirely, you need to get scared shitless and start planning your exit strategy, pronto…

 

But until that happens, or anything even closely resembling that type of insanity occurs, I know instinctively that it’s probably too premature to be selling just yet… Instead, I will just nibble away, mostly selling partial positions to reduce my cost basis further. But no, I don’t anticipate liquidating the bulk of my shares until the timing is roughly right and it feels like it coincides with the abundance of investor stupidity… Again, I just want to capture the 60% window of this crazy rollercoaster ride…

 

Just give me that, and I’ll walk away plenty happy… The latecomers to the party can have all the scraps that are left over, I insist… I concede defeat… I don’t care for the final 20%, because I know that I can’t possibly time things well enough to capture it.

 

And then we will repeat this song and dance all over again, just like we ALWAYS do…

 

Human behavior is entirely predictable and it never changes. That much, I am certain of.

 

Fight On!

{ 21 comments… read them below or add one }

1 SharonNo Gravatar August 1, 2016 at 9:17 am

Sweet thanks for writing this. I sent it to my parents too 😉 lol.

Reply

2 FI FighterNo Gravatar August 2, 2016 at 3:33 pm

Sharon,

Just one person’s opinion, I could be totally wrong, but thanks for sharing!

Take care!

Reply

3 AdrianNo Gravatar August 1, 2016 at 12:39 pm

Regular reader since I went over your previous posts months ago on BCM and how helpful it was. Thanks for all the info. I’d like to add some other factors too to the “mania” point.

1) Possible overnight re-valuation of gold in monetary system
2) DOW = 1oz of Gold
3) Taxi drivers giving advice on junior miners

I personally expect a multi-year bull heading out to maybe even 2022… with gold above 10K.

Just wish I got in sooner at Jan lows… fell out of touch after watching 5 years of downtrends. Going to make some purchases in August. Out of a baseball game with 9 innings…. we’re probably in the 2nd.

Reply

4 FI FighterNo Gravatar August 2, 2016 at 3:36 pm

Adrian,

Great points you make there, and there are a lot of things that could happen to keep pushing gold prices higher. Haha, the image of taxi cab driers and hair stylists giving out “hot tips” definitely seems to come into play when markets are at their peaks and extra frothy. Definitely worth paying attention to the word on the street.

I’m with you there — A typical bull market in gold lasts for a few years, so I would have to say I’d be shocked if this recovery is just a major head fake and we start heading back much lower. So far, we’ve seen strong attributes of a legitimate bull market, which are higher highs, and very quick/short-lived corrections.

It’s not too late… With hindsight we would all answer getting in at January was the ideal time to do so, but 1, 2,3 years from now, today’s prices could just look like a blip on the radar. Who knows?

I would agree, 2nd inning, says intuition, and no later than the 3rd…

But we shall see!

All the best!

Reply

5 Midwestern LandlordNo Gravatar August 1, 2016 at 1:32 pm

Nice post Jay. Glad that you have a solid plan in place. The contrarian point of view is really funny as it relates to human behavior. The same person will think that buying at all time lows is complete absurdity (due to negative trends in the asset class) but will have no problem buying later for a higher price when all of the sheep start buying. It reminds me of why you moved completely away from Bay Area real estate. Fear of missing out took full effect and that is not the time to continue that game. The good part is you were able to ride the wave up on real estate and now gold / silver. It is the exact place every investor wants to be. But it does take some intelligence and guts and not everyone is well suited to play the game.

Reply

6 FI FighterNo Gravatar August 2, 2016 at 3:40 pm

Midwestern Landlord,

Thanks! It took some time to develop this plan, and because the markets are so dynamic, there’s no way I could have put this together even a few years ago… This discussion about planning gives me an idea of another post I need to write.

Yup, human behavior never ceases to amaze me. The whole idea of buying low and selling high seems to always get lost and forgotten during market extremes. We must never lose sight of that, and for certain, I felt that real estate in places such as the Bay Area were overheated and the odds greatly increased to risks on the downside, which is why I stopped buying.

The ride up is most exhilarating if you can get positioned before the ascent. 🙂

All the best!

Reply

7 Rudy SMTNo Gravatar August 2, 2016 at 7:34 am

Jay,

great article again. I love your simple approach to the matter, that’s why I love it. Simple is sexy!

Regarding the FOMO, one more to add:

– The dividend bloggers are investing in gold. RUN!

One more thing. The gold price didn’t suffer as much as we think in the last three years. The reason we think gold has lost value is correlated to the US$.

However, against other currencies, the gold is been flat for the last three years.

Have a look at the chart in the middle page here: http://goldprice.org/

Reply

8 FI FighterNo Gravatar August 2, 2016 at 3:42 pm

Rudy,

Thanks! Glad you enjoyed the article. In regards to FOMO, I agree with you that it’s worth noting what other bloggers are doing, and if precious metals become too popular we might just start getting some “Gold Investing” blogs popping up onto the scene… To my knowledge, these type of blogs are practically non-existent right now… the only gold blogs you’ll find are from ardent “goldbugs”, mostly…

Very true in regards to gold priced in USD as well… In other countries and currencies, gold has been shining bright for years now. If you were in Argentina, Brazil, Venezuela, Russia, South Africa, etc., gold has been performing tremendously… But currencies are volatile and the USD won’t stay strong forever relative to the rest of the world…

It’s all waves and cycles, as I like to believe.

Best wishes!

Reply

9 JonNo Gravatar August 2, 2016 at 10:23 am

Hi Jay,

I’ve got another tricky question for you…

Try to pretend you weren’t sitting on a sh*tload of gains right now, and you were just getting started. Would you actually BUY at these levels, or just HOLD?

I bought heavily into gold with you in late Jan – pretty much exactly market bottom, and purely by luck! I then sold out totally in April to buy a house. I gained 60-70%, which is amazing. But now it pains me to look at the prices…I would’ve been much better off staying the course. It wasn’t really a choice I made, however, as we needed a house!

However, now I have some more cash and it’s burning a hole in my pocket, particularly given my FOMO.

What would you recommend?

Reply

10 AdrianNo Gravatar August 2, 2016 at 10:26 am

I would still be buying up until the previous highs of 50 Ag and 1900 Au. It’s got a long way to go still.

Reply

11 AdrianNo Gravatar August 2, 2016 at 10:27 am
12 JonNo Gravatar August 2, 2016 at 10:30 am

Take your point of 1900 Au…but the HUI to Gold ratio is less useful, in my opinion. Basically, since the advent of ETFs people buy the physical stuff much less…so there’s been a structural change here rather than a cyclical one.

Reply

13 AdrianNo Gravatar August 2, 2016 at 2:29 pm

Hi Jon – I’ll let Jay answer you as it is his blog.. don’t want to take away from it. I’m not entirely clear on your reasoning though – as physical demand is skyrocketing with refiners not being able to meet demand – melting down bars from the 80s which is rarely seen. Institutional and major funds usually plow into the HUI and GLDs of the world – so it was just a point of reference for all it’s worth. It was so beaten down that the resulting end of the pendulum is an extreme switch to the other direction.

In short – still nowhere near the top and I’m sure you’ll be fine if you put more into it now – even with corrections along the way up. Congrats on your success so far.

I only wish I stumbled across this blog earlier as I fell out of favor with following the market after 5 years of being beat down. Major learning experience…

Reply

14 JonNo Gravatar August 3, 2016 at 3:29 am

Sorry, I wasn’t very articulate before.

Historically (ie until last 10 years or so), ETFs didn’t exist so people wanting exposure to gold without owning the physical underlying metal had to buy miners, which propped up the value of the HUI, to a degree.

Now, if a fund or retail investor wants exposure to gold without owning the metal, by far the most elegant solution is for them to buy a gold ETF. This has two effects: depressing the price of the HUI and increasing the price of physical gold (to the extent the ETFs are physically backed).

This is not cyclical (unless you view the existence of ETFs as cyclical), but is a real change that won’t be fully reversed. As such, expecting the HUI / Gold ratio to return to pre-crisis levels is very optimistic because the status quo and history aren’t really comparable.

15 FI FighterNo Gravatar August 2, 2016 at 3:47 pm

Jon,

That is a very tricky and tough question to try and answer. I should start by saying that as a blogger with no financial background or certification I can never recommend anything to anyone… I can just share my own thoughts…. Anyone should always do your own research and due diligence.

OK, with all that said, I’d like to start off by congratulating you on those gains. Anytime you can bank 60-70% in realized gains, that’s nothing to sneeze at! And with the markets mostly sideways this year (or at least they were until after Brexit), you are outperforming most investors by leaps and bounds… Landing a house in this gold trade is a HUGE accomplishment!

With that said, I can see why you would like to get back in the game for some even more gains… It’s tough to say when is a good time to buy b/c these stocks are insanely volatile… In general, whether we are talking about bull or bear market, I prefer to load up and get into positions after a pretty substantial correction… Let’s say a 4-5 session pullback… As of now, perhaps gold retests near the $1,300/oz mark, or something like that, might be a good window… But again, it’s very tough to say, b/c if we start breaking to the upside and clear $1,400/oz, then it could just be another leg up again…

So, the strategy of working in tranches is a good one too… Don’t buy your entire allocation all at once and ease your way in… That way if the stocks run away, you do have something to show for it…

Anyway, I will be writing some more posts about this very topic soon, so please keep an eye out on that, and my own thoughts on strategies.

All the best!

Reply

16 FI FighterNo Gravatar August 2, 2016 at 3:51 pm

Adrian,

Thanks for sharing your insights and thoughts! I think you’re helping to create a very healthy discussion, so by all means feel free to keep posting, I really appreciate your feedback and I’m certain readers do as well 🙂

Also, just like you, I also very much like to use the HUI/gold ratio as a barometer for “froth” in the market, as well as the DOW/gold…. Basically, anything relative to gold outside of USD, since that’s the one everyone fixates on… Oil/gold, median single family home/gold, etc., etc…

If gold ever looks expensive relative to many other asset classes out there, I will be looking to sell and swap into something else… For instance, if less than 10 ounces of gold is all it takes to buy 1 share of the Dow Jones, that’s an indicator I would take seriously as telling me it’s time to start looking to exit out… Below 5, I will most definitely be completely out… As neat as it would be to hold on until 1:1 ratio, I very much doubt I will be comfortable enough to hold out for that long… But if someone out there can manage to pull that off, they will have scored the gains of a lifetime! And then be able to trade expensive gold for cheap Dow Jones shares 🙂

Take care!

Reply

17 AdrianNo Gravatar August 2, 2016 at 9:42 pm

Not sure if message went through… just re-pasting here again.

I’m going to try and hang on until at least past the 5:1 and try to sell in a curve around the top…. 4:1.. 3:1.. peak… and through on the downturn. Just one indicator of course, as there are many like you mentioned.

Here’s a couple boxes I drew around the 80s bull market and now. Close similarities to the couple blips on the way down, followed by a move up and then the push downward.

http://image.prntscr.com/image/ce1b6b69fdfd498f85c3a1e24f9caed4.png

Seems like the same thing happening now except larger. Another view of comparing the two runs.. albeit ours is longer:

http://image.prntscr.com/image/799b7e2d775c4c92ae26d713e310d155.png

Sadly I wish I had the same amount invested as you. Nowhere close.. Only around $20K.. most of that financed by debt which I would normally never do… but found a deal on 0.99% interest…. have the physical metal to back it up….. and I turn 30 this year.

I figure triple digit silver is in the cards in this once in lifetime bull run… and if stocks moved 200-500% on a $5 silver move…. another $70 move up should be a 20-30x in shares.

Reply

18 FI FighterNo Gravatar August 3, 2016 at 3:39 am

Adrian,

Thanks for sharing your thoughts and those plots. If we do indeed see triple digital silver, these miners will be trading out in the stratosphere (unless the cost of everything else like fuel, labor, etc. is also going the way of inflation). Silver tends to make large vertical spikes when it moves though, so it will be exciting when the momentum train picks up steam.

Best wishes!

Reply

19 JonNo Gravatar August 3, 2016 at 4:05 am

Sorry, not sure if this was picked up on HUI / Gold ratio:

Sorry, I wasn’t very articulate before.

Historically (ie until last 10 years or so), ETFs didn’t exist so people wanting exposure to gold without owning the physical underlying metal had to buy miners, which propped up the value of the HUI, to a degree.

Now, if a fund or retail investor wants exposure to gold without owning the metal, by far the most elegant solution is for them to buy a gold ETF. This has two effects: depressing the price of the HUI and increasing the price of physical gold (to the extent the ETFs are physically backed).

This is not cyclical (unless you view the existence of ETFs as cyclical), but is a real change that won’t be fully reversed. As such, expecting the HUI / Gold ratio to return to pre-crisis levels is very optimistic because the status quo and history aren’t really comparable.

Reply

20 Roadmap2RetireNo Gravatar August 3, 2016 at 8:42 am

Great post, Jay. You like staying 2 steps ahead of the crowd, dont you? 😉

Do I qualify in the list of bloggers who start painting gold/silver in a positive light? 🙂 I am definitely with you there that you can never catch the bottom or top 20% or so, but the rest can be ridden….and my investments in gold/silver has done extremely well over the last few months. I still think that we are getting started with this bull market and there is plenty of room to run and we are nowhere close to mass hysteria. Although….I am starting to see an occasional mention of how good gold/silver is doing in MSM and outside the mining/commodity circles — its starting to catch everyones attention.

I am looking to hold these company through the next crisis — there is no other asset class that interests me currecntly, except perhaps real estate. Hard assets are where I want to be when this circus ends.

R2R

Reply

21 AlessoNo Gravatar September 23, 2016 at 6:46 am

Hi FI fighter!
I’ve been reading and following you since you started to invest in dividend growth stocks (that long hahahaha)!
Missed the boat on precious metals but maybe I’ll jump into uranium….
Thanks for the great post
Fight on 😉

Reply

Leave a Comment

 

Previous post:

Next post:

Copyright © 2012 FI Fighter