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One thing that is intriguing about the precious
metals sector is the vast composition of the companies in the sector. The entire
equity sector can be divided in so many forms and ways. We can divide the
gold and silver stocks, the producers and non producers, the explorers and
the developers, the royalty companies and non-royalty companies as well as
those making money and those not making money. To make money in this sector
one really needs to have a plan and know what they are doing. Specifically,
one needs to define an investment and a speculation.
Though the sector itself
is risky, there are still numerous companies that can be defined as an
investment. An investment is something which you receive a return on your
money and a return of your money. Therefore we are looking for companies that
are making money and have the reasonable ability to grow cash flow and
earnings. The royalty companies and large and senior producers fit this bill.
An investment in GDX or a gold mutual fund fit this category. Mid-tier and
smaller producers with experienced management, a track record and a strong
financial position can be categorized as investments.
Anything and everything
else falls into the speculation category. How about a large developer with 10
M oz Au? It is a speculation. No one knows if the owner will ever be
acquired, much less if the project will ever go into production. Even if a
junior explorer or junior developer are trading at
$10/oz in the ground, it still qualifies as a speculation.
Why are we talking about
this?
Many gold bulls were hurt
in 2007-2008 and again this year as they forgot that most of the companies in
this sector as speculations. They forgot that shares can fall tremendously,
even as the metals remain firm or even rise. You cannot just sit in your
juniors and think they will be up 50-fold by the end of this bull market.
After all, you should know by now that most juniors will fail and even fail
in this historic bull market.
This year provides a
clear example of the difference between speculating and investing. GDX is
down 14% while GDXJ is down 33% while the CDNX is down 38%.
 
Going forward, one has to
have a plan that distinguishes between investing and speculating. How much of
your portfolio should be in Gold-related investments and how much should be
in speculations?
Obviously, we are coming
out of a difficult year and those who held too many speculations will feel
jaded. They will feel that the juniors will never gain or that gold stocks
will always underperform the metal. The result of this year will cloud their
thinking for 2012 and beyond. On the other hand, the real professionals were
cautious this year. They held high cash positions and focused most of their
risk-capital on investments and not speculations. Since the market is likely
to make a major low within potentially days or weeks, it may be time to
consider some of the speculations, rather than become really defensive and
only sit in a few large cap stocks.
Your job, Joe Investor is
to figure out the right balance for your portfolio and then shift accordingly
with market conditions. Your investments should earn you a return of your
money and a return on your money. Whether that is 80% or 50% of your
portfolio depends on your risk tolerance, time horizon and other factors. In
our premium service, we look for both investments and speculations in this
sector that can make you money.
If you'd like professional
assistance in navigating and profiting from the bull explosion that lies
ahead, consider learning more about our premium service.
Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com
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