Gold breaking out of a five-year trading rut in the $1,300 range was a significant financial event. It was evidence of a major shift in global markets. Gold rising above $1,400 and staying there showed the new market reality has staying power. The way gold rose above $1,500 and keeps probing recent highs shows that gold “wants” to go higher . Perhaps much higher. Silver playing catch-up tends to confirm all this. The data tells us that we’re in the early stages of a major gold bull market—which begs the question of how to best ride a golden bull.
Or, more precisely: “How does one ride a raging, bucking, leaping, charging and sometimes reversing gold bull without getting gored, thrown off, or trampled?”
Less metaphorically: “How should our strategies change in this changed market?”
The general strategy while precious metals prices were stagnant and related stocks were on the deep discount rack was tohuntfor great bargains and hold for higher prices. Now, we’re starting to see higher prices, and have to start thinking about when to sell. Clearly, you can’t “buy low, sell high” without the “sell high” part.
For more on when and how to sell, please see my article on exit strategies
What’s less obvious is that our buying tactics and criteria will have to change as well. During the bear market, it was easy to see a great company on sale with all the dreck, wait for a day when gold prices were falling sharply, and bid under market to scoop up shares dirt cheap. That doesn’t work so well when expectations are mostly that even on a down day for the market, prices will bounce back and head higher.
For the savvy speculator, the worst part of all this is that valuation becomes very tricky—no, no tricky: insane.
In a bear market it’s easy to find spectacular value in resource companies selling at deep discounts to book value. Developers sell well below bankable feasibility study net present values. Junior explorers will sometimes even sell below cash in the bank. This type of insanity is great. It makes it possible to do the “buy low” part of speculation for those with the courage to be contrarians.
In a raging bull market, valuations rise far above any semblance of connection to objective reality—and that doesn’t stop them from rising even more.
So, what to do? Do we abandon our speculator’s discipline and start chasing stocks?
No. We don’t want to pay foolish prices and hope for greater fools to come along later. But we do have to exercise a different sort of patience than we did while waiting for the bull. We need to be patient while waiting for the major corrections that every bull market has so we can buy clear winners at relative discount.
For those of us who built a portfolio while prices were lower, this is easier. We already have some great stocks. There’s no need to chase anything new, even if it looks exciting.
A pure “blood in the streets” speculator doesn’t buy during a bull market at all.
I know quite a few speculators who are basically all in on great companies and have been waiting for years for this bull market. If that’s you, don’t fear missing out on the next exciting discovery. You should do just fine with what you have.
Of course, some companies do fail to deliver. If we have to liquidate a loser, it’s natural to want to redeploy into shares that are going vertical. But we don’t have to. We have the rest of our portfolio. And if we do decide to redeploy, discipline still pays. There are alwaysfluctuations. Volatility becomes our very best friend.
What if I’m not all in—or if I’m just getting into gold and silver stocks?
Well, I’m not going to lie and pretend it makes no difference. The fact is that if I missed the bloody bottom, I missed it.
That doesn’t mean we need to wait a decade or two for the next “blood in the streets” opportunity. But it does mean that we must, from the outset, recognize that we’re entering at higher prices and that increases our risk. That makes it all the more essential to be disciplined and make volatility our friend.
Note: I’m not saying it’s easy.
It’s really hard to stay disciplined when stocks keep leaping higher, leaving us behind. I understand. FOMO is the stuff manias are made of. It’s what makes people pay $20,000 for a single Bitcoin—or the equivalent for a tulip bulb. And that’s not the outcome we want.
So, what do we do? Well, we do have to loosen our standards of valuation. If we insist on buying only stocks in companies that are objectively undervalued, we’re done. We’re out of the market until the next bear settles in for a long, cold winter. But if we accept the risk of speculating on relative undervaluation, we can still win big on companies that have the right stuff, as their shares keep moving higher.
What is relative undervaluation? It can be several, things. It can be a stock that’s down 25% or even 50% from recent highs, with no bad news specific top the company. It can be a stock in a company that’s getting a lower valuation due to perceived political risk that may be overblown. It could be a stock that’s down on real bad news, but way overdone. One of my favorites is when a company looks fully or overvalued based on a mineral resource estimate that is a year or two out of date—but we know that drilling since then has added tremendous value in the ground
The idea is not to buy high and hope to sell higher to a greater fool. The valuation may not be cheap today, but we have high confidence—based on real factors within the company and not just the market’s mania—that valuation will be higher in the future. That’s a relative valuation I’m willing to speculate on, if I’ve researched the opportunity in depth and the reward justifies the risk.
Baron von Rothschild’s blood in the streets guidance is the ideal. The reality most of us face is that most of us don’t have the courage or liquidity to buy at such times—we come into the markets later.
That’s when the great Canadian philosopher Wayne Gretzky’s guidance comes into play; we skate to where the puck will be.
That’s my take,
Friday, August 30, 4:54pm, EST, 2019