Mining Stocks Likely To Endure 20% – 40% Plunge
Since June 2019 (the past 16 months), 8 gold and silver companies that have enjoyed triple-digit gains have been featured in these pages. Among them, one company has even rallied over 1,000% — companies that we’ve been following for 3-4 years have seen 600% and 700% appreciations, while others have been up-listed to the NYSE. Truly, in the past 16 months, we could do no wrong.
Those who were brave enough to look the devil in the eye in March and April and capitalize on the panic – when TV screens the world over were broadcasting people dropping dead on the streets of China – have been able to enjoy generationally-high returns in just 6-8 months — buying the crash was, as it always is, the best opportunity to make sensational returns.
Key lessons in the importance of trading tactics has materialized since the August 5th peak, though, such as (1) splitting purchases into increments in order to sustain blows better, (2) taking time to build positions, (3) being early and (4) tolerating risk and volatility.
Somehow, in the past three to four weeks, investors have become convinced (so much so that they’re willing to swear by it) that Joe Biden is heading towards a landslide victory.
As such, they’ve created the following script in their minds:
* A Biden victory is going to make it extremely difficult for Washington to achieve anything between now and the January inauguration.
* No stimulus bill will be passed. If one does pass both parties’ demands, it will be small.
* Therefore, we have no way of knowing how things will develop. In the meantime, we (as in the investment community) will settle for a large cash position.
As you can see by the chart above, everyone and their mama is betting on higher interest rates, for the time being.
I’ve been investing since June 2000, when at age 16, with three years’ worth of babysitting and basketball tutoring savings (which I’ve gathered since the age of 13), my personal banker had convinced my parents that I was mature enough to invest money in the markets. He got them to sign a waiver, so that I, a minor at the time, could buy equities.
Rarely have I made a decision in the twenty years since, which had anything to do with who was in the White House, since 73% of my net worth is tied to long-term strategies, not to cyclical trades. But when it comes to mining stocks, unless one is willing to absorb the risks of timing his trades wrongly and seeing -50% temporary plunges (which, at times, could even turn into permanent ones, cutting losses when things go south and moving on), one SHOULD NOT ever be in the commodities sector.
Even the world’s best gold stock can’t appreciate in price, when gravity is pulling it in the opposite direction. Trading mining stocks boils down to the art of cutting losers fast and sticking with winners for the long haul.
THEORETICAL EXAMPLE: (Total portfolio size $50,000):
* Proper Asset Allocation: Speculative portfolio size (15%, $7,500).
* Proper Diversification: Ten companies, each making up $750, or 1.5% of total portfolio.
* Proper Position Sizing / Stop Loss: Each investment is made in increments of three – 33% initially ($250), additional 33% ($250) if/when the stock falls 20%, last 33% ($250) if/when stock falls another 20%; stop-loss to be set to 36%, below FINAL cost-basis.
Breakdown: Company (A) trades for $1.00. Initial outlay is made ($250 @ $1.00). The stock falls to 80c, so secondary outlay is made ($250 @ $0.80). Commodity prices continue dragging mining stocks down another 20% to 64c, so final outlay is made ($250 @ $0.64). Overall cost-basis: $0.813. Stop-loss is set to: 0.813 *0.64 = $0.52.
Risk/Reward: If company does what it sets to do: 500% potential returns – (don’t do for less). If company (A) fails or if commodity cycle turns bearish, potential loss: 36%.
In numbers: $1,000 could turn into $5,000 (winner) or to $640 (loser), so the equation is risking $360 in order to potentially make $4,000, an 11:1 risk/reward set up.
The biggest investment mistake people make, in my opinion, is buying the whole position on day 1.
Right now, the entire investment community is sure of a Biden victory, which will lead to a few months of wait-and-see until inauguration.
There are long-term trends in place, mixed with short-term sentiment moves. Right now, within the context of a bull market for gold and silver, there’s a short-term trade of higher bond yields. This will hurt precious metals.
Gold could fall to $1,820 and silver to $23/ounce. The mining stocks could undergo a brutal correction phase.
One has to make an individual decision, which boils down to this: Am I willing to stomach a rollercoaster ride until gold surpasses $2,000 again and reaches green pastures?
If one answers YES, then this weakness is a buying opportunity.
If one answers NO, then this weakness is a chance to sell and come back later, when the momentum is strong again.
It doesn’t look good for precious metals in the immediate-term, but looking past January 2021, the case for $2,500 to $3,000 gold is well intact, according to the world’s most sophisticated investors:
The Ball Is In Your Court!