Jeff Clark's  Instablog

Jeff Clark
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The son of an award-winning gold panner, Jeff Clark has been around the gold sector since 2005. His family has owned mining claims in California, Arizona, and Nevada. As an active investor with strong writing skills, it was natural for Jeff to become an analyst and editor in the mining industry.... More
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Hard assets alliance
  • How To Play Your Gold Stocks Now 0 comments
    Nov 27, 2012 6:07 PM

    After a year or more of depressed prices, gold and silver stocks reversed with a vengeance. GDX (the ETF proxy for the Gold Miners Index) was up in just two months (August and September). Those who followed our lead and bought or averaged down this summer have profited handsomely. It's been a fun ride, and I'm convinced we'll see many more surges like this before it's all over.

    What was perhaps more important about the surge in gold stocks, though, was the leverage they demonstrated, which is one of the primary reasons we invest in them. Here's a comparison of GDX to GLD from August 1 to November 1.

    (click to enlarge)

    (Click on image to enlarge)

    This chart shows the advantage of building your position on dips. It lowers your cost basis and takes leverage to a higher gear.

    So, what now?

    First, stocks ran far and fast, no doubt, and nothing goes up in a straight line, even in a bull market. That's why the October lull wasn't concerning to us.

    Second, we also should consider seasonality. Here's the updated monthly performance of gold stocks since the bull market started in 2001, along with their year-to-date performance.

    (click to enlarge)

    (Click on image to enlarge)

    You'll see that October is typically the weakest month of the year for gold stocks. It wasn't surprising that the dip wasn't big this year, since stocks had been weak most of the year.

    It's the big picture, of course, that we're most interested in. With the Fed, ECB, and BOJ pulling stimulus rabbits out of the printing hat, and the UK, Switzerland, and China all adding to their balance sheets, gold is headed a lot higher and will subsequently pull the stocks with it.

    Further, the seasonal pattern in stocks does not apply to gold.

    (click to enlarge)

    (Click on image to enlarge)

    On balance, October is a strong month for our favorite metal, though that wasn't the case this year. This is a good reminder that shopping season could strike at any time.

    For now…

    1. Maintain full exposure. Enjoy the ride, but don't be surprised to see a pullback, or at least some consolidation. As the chart above shows, this is a strong time of year for gold, so we want to be fully invested. In the big picture, we've got a long way to go.
    2. Have your shopping list ready for whenever the next correction strikes. There's no crystal ball perched on our desk, but we know further pullbacks will arrive at some point, so be prepared to pounce.
    3. Consider taking a free ride if you're sitting on a large gain. Calculate the number of shares to sell to take your initial investment off the table. Then your remaining shares are a "free ride," meaning risk-free. If you go this route, do not sell your entire position; you could lose out on further gains.

    Navigating the bumpy waters of precious-metals investing is especially challenging right now. With the right guidance, your investments can be positioned to help keep economic trends from robbing your savings and investments. Learn more here.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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