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 27.1%
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 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 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 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…
- 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.
- 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.
- 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.
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