Precious Metals: Staying the Course (January 19, 2016)

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When it comes to investing, as the saying goes, “The markets can stay irrational longer than you can stay solvent.” As it pertains to gold and gold mining stocks, this quote is resonating more truly with each passing day.

I started investing in gold stocks in 2015, and I’ve got to say, I’ve never seen things as bad as they are right now!  Since the start of the new year, many stocks have been caught in a severe negative downtrend, and it just seems like new record lows are being eclipsed by the minute.

As a speculator (who believes they are doing the right thing by seeking out deep value), this can at times be most frustrating and disheartening…

Like I’ve mentioned in previous posts, I have many friends who are also investing in this space, and some of them are starting to get extremely emotional…

Gold mining stocks are not for everyone! They are beyond volatile, so if you can’t stomach the pain, you shouldn’t be participating in this sector… For newbies, I’ve always believed that it’s more prudent to start off by buying just a small tranche, as opposed to rushing on in and trying to buy up everything all at once… You’ve really got to first ride out a few rallies and sell-offs to see if you’ve got what it takes to stay the course…

It ain’t always that easy…

Otherwise, you’ll end up like some of my friends who are heavily distraught at the moment, and lamenting their decision to participate in this trade…

Such is life.

If market timing was easy, we’d have all been retired many years ago, right?

Anyway, I’m just gonna keep on doing what I’ve been doing — Buying more on the dips, and looking for more opportunities.

I’m very much hard-headed that way…

With that said, I made the following purchases to close out last week:

  • Purchased 4,500 shares of B2Gold (BTG) @ $0.717/share
  • Purchased 15,000 shares of Teranga Gold (TGZ.TO) @ between C$0.445/share and C$0.43/share

You’re not going to be able to convince me that these stocks aren’t worth buying… If I thought many of these companies were cheap before, well, they are now selling for 30% less than what I originally purchased them for…

All across the board…

If ONLY one of my positions was taking it on the chin, I would have a lot more reservations with dollar cost averaging (DCA) down… But when the entire portfolio is off BIG, then that just tells me that the entire sector is in (more) liquidation…

So, no worries here… Despite the fact that my portfolio is currently down over 20% and $55,000… 🙂

Seriously, with the way gold mining stocks have been selling off, you would think that the spot price of gold was cratering through the floor…

Gold is actually holding up quite nicely in USD:

Gold priced in USD:

Screen Shot 2016-01-19 at 8.27.37 AM

It’s doing even better in other currencies…

Gold priced in CAD:

Screen Shot 2016-01-19 at 8.25.37 AM

Gold priced in AUD:

Screen Shot 2016-01-19 at 8.25.50 AM

Gold priced in ZAR:

Screen Shot 2016-01-19 at 8.26.01 AM

As you can see from the charts above, gold is in a strong uptrend right now in most currencies outside of the USD (it’s actually even setting record highs in countries such as South Africa)… The story right now (and for the last few months) has been all about the almighty dollar!

But that’s obviously a story that can’t go on forever (unless you believe in Janet Yellen and the Fed)…

For example, in Nunavut, Canada:

Screen Shot 2016-01-19 at 8.37.46 AM

I can’t wait to see the latest earnings report for our largest multinational companies!

Yes, I do believe the USD still has legs to run (the world flocks to USD when they get scared), which is why I hedge in both cash and gold… Nevertheless, I still feel like gold (and some of the first world currencies, like CAD) are the much better value right now, which is why I have no problem converting USD into CAD to purchase gold shares.

Two birds with one stone…

As I mentioned in the previous post, I do strongly feel that DCA into stories that are coming off of relative strength (AMZN, FB, NFLX, etc.) is a risky move in a deflationary environment… On the other hand, I have no qualms with DCA into a sector (gold mining stocks) that is already in severe liquidation…

Exhibit A:

TGZ

Exhibit B:

NFLX

Which stock would you buy?!?

Yes, things can get worse, and they probably will… But I feel like a kid in the candy store right now, so I really don’t care…

At some point, valuations will matter to the markets again. They always do. Today, gold stocks provide deep value in spades… How about the FANG (Facebook, Amazon, Netflix, Google) stocks?

Not so much…

But when it comes to excess frothiness, the dot-com boom was not an exception! Subprime was not any different! And Zero Interest Rate Policy (ZIRP) will prove that history just keeps on repeating itself, over and over and over and over again and again…

I’m just going to do my best to stick to the best mid-tier producers with: strong balance sheets, minimal debt, great assets (operating outside of the US), and low cash costs/AISC…

Besides, with declining fuel costs, expenses are actually going down for miners (a much welcomed relief)… And the low spot price in USD doesn’t actually hurt too badly if you’re buying companies who operate gold mines elsewhere, such as in Australia or Canada (the labor, for instance, is paid in the local currency). As I already mentioned, those other currencies (CAD, AUD) are currently being taken out to the woodshed…

So, at first glance, a low spot price in USD might seem scary for gold miners (commodities such as gold are sold/traded in USD in the marketplace), but it’s all relative… As long as every other currency out there is also losing the fight badly against the USD (which they are), that low spot price gets offset by lower operating costs.

Anyway, as usual, I think it’s important for US investors to look at things outside of just our own borders… Americans hate don’t understand gold with a passion, yes, but look elsewhere and the populations of basically every other country on this planet sure wish they had some (a lot of!) physical gold right now…

One more chart for you:

Gold priced in RUB:

Screen Shot 2016-01-19 at 8.57.02 AM

No, I can’t claim to know the first thing about Russia, but WOW!!

Anyway, in a Currency War, fiat currencies get devalued and debased… over and over again.

 

But that’ll never happen in America, right?

 

That’s for you to decide… I’ve obviously made my bets in regards to where I think things are headed in the future…

 

Happy Hunting!

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Early FI – My Revised Thoughts (Nine Months Later)Mining Stocks – Rules of the GameLithium – A Most Hated Sector (August 16, 2016)Sell Your Losers and Move OnPortfolio Update: Adding Shares of Perseus Mining (April 08, 2016) Recent comment authors
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mike
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Randy
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Randy

Both feet would be if you sold your rental properties and jumped in. If you are young and can afford the gamble now is the time. I agree 100% with you that this sector is beat down and will eventually pay off. It is a matter of being patient and non-emotional. I am there with you my friend.

Jon
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Jon

Good stuff. I’d like to hear your opinion on the Chinese buying gold and the future shanghai gold exchange fix if possible!

Sean
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Sean

I bought some ag, auy, ngd, kgc , cde and started a position in premium. It looks like people are selling miners in anticipation of major gold drop which could happen in march/April. I think the miners are already priced for the drop in pms. After the low, we are going to see new highs in the metals and the miners. By next year I think things will turn strongly in our favor.

ishkbob
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ishkbob

Interesting read. Not sure I agree with the approach to investing in gold and miners. I’ve owned some gold and miners since 2008 and have learned some hard lessons in their behavior. It’s a very irrational space filled with lots of moving parts, and I’ve learned the hard way that I’m not smart enough to understand all the economic complexities involved in the gold trade. Who’d have thought that gold would collapse by 40% during a period of unprecedented money printing? It was too late by the time that I realized that what would seem to be such an obvious… Read more »

The Dude
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The Dude

Why would there be a correlation between money printing and gold? That does not make much sense to me. There could be an indirect relationship if the increase in money supply via money printing leads to inflation, but not if the velocity of money is so low as it was in the past few years. If the velocity of money is low enough, money could be “printed” indefinitely without seeing any inflation. Also, since gold costs money/spade to store, does not provide any intrinsic value other than its use as a commodity, then why would you hold it in a… Read more »

ishkbob
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ishkbob

Agreed with all you said. I failed to appreciate the importance of money velocity in the equation, and simply looked at money supply. Live and learn 🙂

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