A Major Silver-Gold Bottom? How to Play it.
The following is from an interview done of David Smith by Jim Goddard for Howe Street (HoweStreet.com).
Jim: Today’s show is A Major Silver-Gold Bottom? How to Play it.
David: I pose that as a question – is this a major silver/gold bottom? I think there’s a high degree of likelihood that it is. Nothing is certain, but if you go by the odds, and if we assume that this could be the case, then how do we play it?
Jim: If so, what would your first steps be?
David: The first step I would take would be to clean out the dead wood, stocks that you think are on life support and may never rise again –ones about which it is apparent nothing much is likely to happen on the good side. I’d get rid of them, take out the little bit of money you get from offsetting them and put move into some dogs that barks. It’s fairly easy now because we’re seeing some of the really good stocks that are quickly moving upstream. Some of them have risen 50 percent from their lows, and they’re holding those moves, so we know that those are some of the better ones out there. The best ones start rising first, as the old saying goes, that “the cream rises to the top.” So, if you have favorites that are moving in the right direction, you might want to redeploy funds into those stocks or add more to ones that you already have.
Jim: Is this the time again, to dig into your research and find out who has the best chance to stay healthy and profitable?
David: It really is. But just because a stock is moving up this week doesn’t mean it’s going to be one of your better ones or even one that’s automatically going to make it. It’s just an indication – you go back, do the research – and of course, I’m prejudiced about this because I work with David Morgan and The Morgan Report – but we have a tremendous listing of companies who have stood the test of time. All of the stocks in our listings– as is the sector in general – are down from where they were a couple of years ago, but we have a lot of good survivors. Some of the stocks I have noticed in the last week or two are ones that have been very strong on the upside.
Jim, I have access to a lot of different market letters. And I think ours is one of the very, very best for people trying to put together a quality portfolio, because it gives them a lot of good suggestions for their own research, so if there’s someone listening who’s not a subscriber to The Morgan Report, I think that they should seriously consider taking a test ride subscription, and see for themselves if they think it’s as good as I believe it to be.
Jim: An investment house in Las Vegas told me that for the last three months their phones have been quiet. Then all of a sudden, during the past few weeks, people are again interested in getting into the gold and silver market. Is that a good sign?
David: It is. I think the mood is changing, the psychological mood, because the metals themselves have been very strong in terms of physical purchase, even though the price has been soft. But, now people are looking at those mining stocks and they’re seeing this massive disconnect, which in some respects is greater than it has been during the last ten years of this bull market. They’re saying, “You know what, this is a rubber band that’s being stretched so far out of shape that it’s either going to snap, or come back into some kind of equilibrium.” The good stocks on that continuum are going come back, I think in 6 months, 12 months, 18 months from now. During each of those timeframes, people are going to go, “Man, I can’t believe where these prices were compared to where they are today.” There’s always risk above a zero price, but if you wait for prices to go where you think they’re going, now you’ve got a new set of risks.
Jim: David, I know we’re looking at how to take advantage of what looks like the bottom of the gold and silver market, but let’s put our eyes overseas. You were one of the first to mention great concern about Zimbabwe nationalizing precious metal’s projects, and other areas of concern as well. Has Zimbabwe had the big impact you feared it would?
David: This is just one more nail in the supply coffin. Zimbabwe is not going be an overnight mover on any of these markets, but it is one more effect at the margin, which brings up the question of how much supply is going to be there down the line? South Africa, big time, has been on people’s radar screens, and the latest from Zimbwabe is just one more indication. We have problems in South America with things coming out of the woodwork about whether or not the governments are going to charge more fees, pull mining permits or whatever. All of this is getting to the point where people are more concerned about what supply is going to be, whether it’s the PGMs, gold, or silver. I think as you look at your portfolio – and by the way, what I am suggesting are things I’m doing in my own portfolio as well, so this is not just theoretical – these are things that people might want to consider.
If you have a core position in a particular company or a series of them that are down sharply, and you’ve kept that core, you’ve ridden it all the way down for whatever reason, and you still have tremendous confidence in that company – if you’ve got a company that was selling for $13.00 two years ago and it’s selling for $3.50 now, and you have the money, it might not be a bad idea to add some more to the position, so that you can get back to breakeven a little quicker on the upswing.
Jim: Also you know that everybody is looking at prices now. They’re incredibly low, but can you be overly tempted to say, “Well, obviously, it’s at its lowest point. I’m just going to throw everything in at it”?
David: Yes, it’s just part of human nature. I feel that going all in is always a risky proposition. This is the sort of thing I used to do years ago, but I don’t do it anymore. There’s a saying that when prices are going your way, your position is always too small, but when they’re going against you, it’s always too large. I do think a certain amount of being conservative and keeping some dry powder is important, but you can reconfigure your portfolio and you can make selected good buys when the prices go where you want.
For example – some of the ones I’m plowing funds into have gone up 50 percent in the last 2 weeks from their lows. You could try to buy those if they move back down against the 50-day moving average, because that’s where technical traders look to add their own positions. For example, consider some of these leveraged ETFs, which I think is another good intermediate trading tool, as opposed to a core holding, but leveraged ETFs, which give you two or three times the move of the underlying stock or the metal, can really juice up your portfolio. You could put a stop below the lows if you’re wrong. So you might be able to construct a risk/reward of four or five to one if you did something like that.
Jim: One of the business channels I was watching today only had one recommendation for gold, and that was one of the very largest companies. They said a lot of the juniors are in trouble, and if they have a major write-down, you might be left holding the bag. Is that a big concern?
David: It’s always possible, but here’s the thing. If you’re an uninformed investor and are just throwing darts, you’re going to come out about the same way as these people who are talking heads about gold stocks – but they’re not gold bulls anyway. It’s easy to say buy one of the two or three largest gold companies in the world and maybe you’ll make some money, but you have to make some effort to dig beneath the surface. Find quality miners that have held up well, that have cash in the bank that are producing. Even if they’re not making money right now, they’re producing. A couple I follow are not producing at all now, but they can start up quickly when metals’ prices recover. They’ve cut their burn rate way down, and continue to add resource and reserves, so they’re not sitting on their hands.
You need to get acquainted with the better stocks, and then, if you like them, take a position. If you’re going to just depend upon the people who talk about every investment under the sun and they’re masters of none, then you will probably be disappointed when looking for outsized gains.
Jim: Is the management style of some of the companies you’re looking at important? Some are pretty loose with their money, while others have always been tight.
David: Money management in these companies is absolutely critical. For some that I’ve held positions in for four or five years, every time something comes up, they have handled things the right way, the best way. They have a track record, and I have no doubt that they’re going to continue behaving the same way in the future. If they don’t, well, then I might sell the company. But, for now, they’re continuing to do what they’ve always done. That helps me feel comfortable in adding to my position. If people decide to look at some of these ETFs like NUGT, AGQ, USLV, or GDXJ, for example – just mentioning the few I remember – and if you had a 25 or a 50 percent profit, what’s wrong with selling a third or a half. If we enter into a chop before we get to a big breakout later, you’ll be taking some profit. And if things go lower than you expect, you’ll have extra money to buy back at a better price – and maybe even do the same thing again if prices continue into an extended sideways trading range.
So, hold onto the core positions, then consider lightly offsetting on some of these additions with a portion of the gains you’re making on the leveraged ETFs, and I think you may have established the potential to do very well.
Jim: Is your message don’t panic if some of these things go down, it’s because when they do write-downs, perhaps they’re doing the right thing, acknowledging losses so that they can move ahead?
David: That can be a consideration – as long as after you’ve done the research, you still come up with the answers you seek. No matter how sure you are of a company’s current price, don’t go all in with that position at a given price point. Buy tranches into weakness. The companies I have just alluded to that are trading up 50 percent over the last few weeks. Try to buy when they drop 25 percent or so. You may not get filled, but there’s a better chance than you might expect that you will. If you buy a big position all at once, chances are you’re going to shortly regret having done so. Maybe you’ll have the courage to hold on and be right over the longer term, but in the interim, it’s quite possible that you’ll give up and sell out at a loss.
This is all about preserving your psychological and financial capital, being patient once you’ve taken your position, setting your stop loss – things like that. I feel strongly that regardless of when this move gets underway, it is nevertheless now in the process of forming a powerful base. I think we’re going to see massive, unpredictable, explosive moves in both directions going out over the next 6, 12 and 18 months. Here in the United States we say, “It’s cast in stone. The Canadians would say, “It’s written in the rocks.” Both ways of saying it are valid, in my view.
David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.
As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?
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