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.
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!?!
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.