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 guidance in navigating what lies ahead, while
managing risk, consider learning more about our premium service.
Good Luck!
