If you’re like me, you’ve been trying to sneak in to a few select gold stocks using limited risk set ups. Of course the right trade the past 18 months has been short gold and being short has been a dream because, especially the run this year, hasn’t threatened major chart stop loss points. In other words, one of those trades that never made you worry.
On the other hand, those who were heavily long mining stocks expecting an armageddon day have been slapped around badly. First off, and I do understand this because I do come from the camp that our central bank policies are dangerous, people hang on to mining stocks because they think there will be some kind of explosive event that will cause gold to go to 10k in one day and that these stocks will launch.
But consider these points:
- the large cap miners are very liquid. Trying to pick a bottom is unnecessary because you can always jump in (and out) testing uptrends.
- if the type of event that people fear comes, I think mining stocks may drop along with other paper assets. In that case you’d want your physical gold.
- #2 is unlikely so don’t plan for the highly unlikely with large risk positions. I would count accumulating physical gold as a low risk position regardless of the price swings. I would regard having a big chunk of your money in mining stocks as a big risk position.
Getting In Quietly?
So with that said, is there any way that you could sneak into gold positions to supplement your bullion holdings? I think so. And I would use selected very small gold companies with excellent prospects and use small position size. Why not the large caps? Well they’ve almost become small caps too but I would rather test those with cheap call options or trade them in an uptrend.
With small/micro gold companies, you have opportunities that are not so sensitive to the price of gold. For example, one company that comes to mind owns a robust gold deposit in Eastern Europe. They have government support and the extraction process is low cost because the gold is in a hill and some of that gold is actually “leaking” out of the hill. Extraction costs will be much lower than these deep underground projects so price sensitively is lower. They could make money on 1200-1300 gold whereas some miners need 1500+ to break even.
Another company that comes to mind owns interests in multiple mining projects globally. One currently pays them a nice royalty which covers their G&A. They spend their time finding and surveying potential properties. They then will offer a large joint interest in the properties to companies that agree to complete exploration and development costs – effectively de-risking the project. These companies are often referred to as “prospect generators” and gold mining analyst Brent Cook has an excellent free resource on his website explaining them – you can read that by clicking HERE (you have to join his email list to get it – free).
Are these ideas fool proof? No but they offer a bit more diversification into the gold complex. Meaning, these companies will rise and fall with the price of gold but they will also rise and fall with the success or failure of their projects. Remember we are talking about 100m-300m dollar companies. A successful project could easily multiply the share price. Which is why a company with a good exploration team and multiple projects could be an intriguing idea. because if one project falls through, they likely have many more.
Risk Levels
What level of risk am I willing to take? At this juncture, with gold collapsing, I will take a stab and view it as a final blow off sell. But I still don’t want to assume it’s over. So I will start small – maybe adding position sizes of 0.4% of account value. And start with one and at most 2 stocks of junior mining companies.
Overall Strategy – the Sneak Attack!
Personally, my plan is this:
- continue to accumulate bullion
- add a small company stock as described above (or two) at prices my research says is cheap.
- Try options on the big liquid mid/large caps if setups prove favorable.
- Then trade the miners if the trend goes strongly the other way. And then I might trade in size.
If we never get there, I’m not risking that last step. My first 3 steps could be accomplished by risking 1% or less of capital for the entire YEAR. Some of these options are cheap – and buying small companies with lots of cash on the books means they won’t go to zero.
This is what I am doing and will do if the set up goes right. You do what’s best for you, as this is not meant as advice. This suits my ultra risk-avoidance personality well. You may desire more “action.” Do your own research and consider consulting an advisor. Also, since mining stocks involve geology (not my best subject), I would consider using professional research to help you if you can afford it. Otherwise, learn it yourself or avoid the small mining stock sector altogether if you don’t understand the risks.
Though I assume anyone who’s been long the last 18 months “understands” the risks!
For more Brent Cook (I am not on his payroll by the way – I just find him to be very generous and soft spoken, and a good educational resource) watch some of his TV interviews where he discusses what he owns and how he goes about choosing investments in the mining sector:
Here is one example – Brent is VERY realistic. If you’re listening to hyped up newsletter writers, you need to sober yourself with Brent.
Note: I did not mention specific companies on purpose. My site’s goal is to educate, first.
