Gold Stocks for 2013 (the less risky strategy)

by JDH on January 12, 2013

We are now two weeks into 2013, and as discussed here last week, you the readers expect gold to gradually increase for the year, by about $50 a quarter, ending the year around $1,850. It would appear that our view is not unique, as many others appear to share that view that gold will continue it’s gradual ascent through 2013.

For some historical perspective, gold has risen for 12 consecutive years (which you certainly can’t say for the stock market, or most other markets). The best year of those twelve was 2007 when gold was up 32%. The last two years the gains have been more moderate, up 9.1% in 2011, and 8.3% last year. If you hold physical metal, you made money last year.

If you owned precious metals stocks, you got killed.

The Gold Miners ETF (GDX) was down 9.8% last year, after falling 16.3% in 2011. The Junior Gold Miners ETF (GDXJ) did even worse, dropping almost 20% last year, after falling 38% in 2011. So, in a 12 year bull market for gold, the junior gold miners have, on average, lost half of their value in the last two years.

We understand that gold stocks are not the same as the actual metal. There are more risks with gold stocks, including:

  • bad decisions by management
  • financing problems
  • production issues
  • exploration risk
  • etc.

As a result, gold stocks tend to be more highly leveraged to the price of gold. Leverage is great when prices are increasing. As we have observed for the last two years, leverage can kill you going the other way.

So what do you do? Gold is up from this time last year, but it’s lower than it was a month ago, and lower than it was three months ago. Do we conclude that the bull market is over, and sell? Do we assume that this sideways consolidation will continue for another year, so we should move the sidelines and re-enter the market when it heats up again?

Perhaps, but I believe a more prudent approach is to look at the big picture.

The government continues to print money like crazy, which ultimately is inflationary. I realize that inevitable and imminent are not synonyms, and we may move sideways this year, or lose money. But leaving the game makes no sense at this point. Bull markets tend to end with a blow-off top, and we have not reached that point yet in gold. Moving to cash as the government depreciates the value of the currency does not seem wise.

So, my strategy is simply this: I want to keep my risk low, so I will hold some cash, but I will also hold blue chip gold stocks that pay a dividend. I’ll have some junior explorers for their potential upside, but I won’t bet the farm on it.

Over the past week I’ve increased my holdings in the following blue chip stocks:

I also have buy orders placed for more shares of FNV.TO – Franco-Nevada Corp. at $54.25. One of my big winners last year was RGL.TO – Royal Gold Inc., but since it is already big holding I have not purchased more.

Royal Gold pays a decent dividend, so given a choice between holding cash or RGL, it’s an easy choice. I view it as a cash alternative.

I have lots of stink bids in for lots of other more speculative stocks, but the orders are considerably below market, so they may or may not get filled. That’s fine, because I see no cause for panic buying at this point.

I don’t need to be fully invested. If the market will just stumble along this year, I will place my stink bids so I’m buying on days of market weakness, and I’ll place some orders to sell partial holdings after periods of strength. I’ll retain my core holdings. It won’t be a spectacular year, but I should be able to use that strategy to eke out a profit this year. That’s the plan.

And, while we stumble along this year, I intend to continue to watch the interesting discussion over on the Buy High Sell Higher Forum about Physics, and life in general. Some of the theories presented there may be crazy. Some may be correct and change our conventional way of thinking. I have no idea who is correct, but that’s not the point. The point is to continue questioning our conventional way of thinking, so that we don’t miss future opportunities.

Thanks for reading, and see you next week.