The Miners

[MediumTex]

.255 now. I guess the bottom is in

I really hope this thread doesn't turn into a gyroscopicinvesting.com version of http://www.bogleheads.org/forum/viewtop ... =5934 

Oh geez, I read some of that thread a while back.

It was like taking a six hour guided tour through someone's living room.

[Wonk]

Okay guys, where are we at with the miners?

Lots of ugly out there right now.

Maybe no one else in the market likes miners, but I do.  They aren't for the faint of heart or for short term traders unless you have balls of steel.  I've been--and will continue to be--a buyer with a long time horizon.  I don't see myself exiting until the secular gold bull ends in a star burst.

[MachineGhost]

When real rates are rising as they are currently, gold and gold stocks go down.  It's not about present value, but future expectations.  Gold stocks and gold also collapse going into a recession which still looks probable.

Ignore macroeconomics at your peril.  Value investors are infamous for it.

[Straight Ays]

My new thoughts on this sector are really just basic without a lot of volume from the very smart and talented people that analyze, dissect, graph and predict. 

I've entered a long term investment in this sector.  I view the volatility as a plus.  The complexity of the things that drive this sector are fantastic, and it makes predictions hard to be correct.  Conflict, sovereign manipulation and metals consumption, currency manipulation "wars", consumer appetite...the list goes on, but the more emotional it gets the better the ups and downs. 

I know the miners will go back up at some point because they provide a service that the world can't go without.  The world market needs metals to be taken out of the ground. But when will they go up and why, I have no idea.  They might go down a lot more before going up again, which is fine, I will buy more shares. 

The historical returns are impressive enough on those run ups for me to be patient for years.  I might need years to fully reap the benefit.  So any money I use cannot be leveraged, borrowed, or needed on a short time horizon.

I'm only allowing 20% of my variable portfolio to be locked up in this sector.  I don't want to ruin my ability to participate in the market.  I will buy in modest amounts all the way down, whenever that is.  I bought some more vanguard precious metals fund at 14 something.  My next buy point is somewhere in the 11's or 12's.  As far as an exit, I will exit once I've made an annual average of 15 - 20% or so, it's negotiable with my future self.  I like vanguards precious metals fund, mainly because it's cheap costs, narrow holdings, volatility, but has a capitalization of 3b, which makes me feel more secure with it's longevity.  I may never fully exit this sector, but that decision will be made later, depending on circumstances.  I'm not reinvesting dividends.  Those will be sent over to my permanent portfolio.

[HB Reader]

Okay guys, where are we at with the miners?

Lots of ugly out there right now.

Maybe no one else in the market likes miners, but I do.  They aren't for the faint of heart or for short term traders unless you have balls of steel.  I've been--and will continue to be--a buyer with a long time horizon.  I don't see myself exiting until the secular gold bull ends in a star burst.

Wonk & MT --

It is very ugly for the PM miners out there.  But like Wonk, I've maintained a small position (~10% to ~15% of my VP) in this sector for several years. On occasion, I've changed the composition slightly (between mutual funds, ETFs and individual stocks) depending on my sense of the most undervalued areas.  In my experience, the ETFs (like GDXJ) have actually performed the worst.  Will the sector eventually pay off?  I don't know.  But the sector has been out of favor for so long that it won't take much new investment interest to move prices dramatically.  I remember something very similar to this back in the late 1960s -- it wasn't so much an upward move in gold (although rising prices did provide some increased "visibility") that got things going -- but more a sudden realization by many successful conventional stock speculators (emboldened by recent gains in blue chip stocks and excessive stock market liquidity) that the whole sector had long been ignored and would be the next great opportunity.

I'm not betting my future on this happening again, but given the continuing liquidity injections of the world central banks we are seeing (regardless of the eventual triumph of inflation, deflation or prosperity) makes me think this may prove to be a pretty interesting speculation before too long.  I am encouraged about how little I've heard it touted in the media.

Just an observation.     

[AdamA]

-- but more a sudden realization by many successful conventional stock speculators (emboldened by recent gains in blue chip stocks and excessive stock market liquidity) that the whole sector had long been ignored and would be the next great opportunity.

I love when someone posts something about the miners, for some reason.

I'm tempted to buy some, in the form GDX, GDXJ, or VGMPX.  The problem I always have with speculations like this is that if it turns out to be a good bet and the sector takes off eventually, I have no idea when to sell the position. 

How do you guys do it?  I was thinking maybe to enter a 50/50 position with a mining fund/ETF and some cash and just rebalance at 40 and 60% or something. 

[AgAuMoney]

I have no idea when to sell the position. 

How do you guys do it?  I was thinking maybe to enter a 50/50 position with a mining fund/ETF and some cash and just rebalance at 40 and 60% or something.

That would work.

I like to set up definite targets like that, usually with a comparison other than cash.  For example, my GDX position is a full weight position.  That means if it gets enough larger than the other full weight positions to be worth skimming, I'll skim.  If it gets too much smaller, I'll supplement.

My GDXJ position is 1/2 size.  Same management, but scaled by 1/2.

My SLW is a full size position.  It started out as 1/2 but grew up (matured) until I considered it worth risking a full size position in the company.  Since then I've skimmed off the top a few times and supplemented a couple of times after the first time I skimmed.  Pretty much playing with "house money" at this point but I stop tracking down at $0.01 per share.  However I do add up when I supplement so I'm still showing a few $/share positive basis for my holding.  (Its in an IRA so I don't give a rat's *** what the IRS would consider to be my basis.)

SAND started out 1/4 size.  When the company matured enough and then was listed on the NYSE then I graduated it from 1/4 size to 1/2.  Now if it gets too far below 1/2 size I'll supplement. But re the max, it is now allowed to grow up to full size.  In other words, I won't skim until it is too much larger than full size.

[smurff]

You could put up trailing stops, but gold shares are pretty volatile.  As the prices rises you move your stop price up, and you never lower the stop price.  You'd probably have to set the trailing stop at or above 30% just to deal with the volatility.

[MachineGhost]

You could put up trailing stops, but gold shares are pretty volatile.  As the prices rises you move your stop price up, and you never lower the stop price.  You'd probably have to set the trailing stop at or above 30% just to deal with the volatility.

35% has been traditional in advisories.

[rickb]

Gold/XAU ratio at 10.90.

Pretty wild.

I'm not suggesting that this ratio necessarily means anything in and of itself, but any time you get into an area that has very rarely happened at any time in history when it comes to the relationship between a producer and the value of their product, it's worth taking a closer look.

Gold/XAU is now 13.8 (!).

Market Trend Forecast says insider buying ratio is over 10-1, see http://www.themarkettrendforecast.com/f ... rave/ 

Seems like it might be time to think about buying some GDX, GDXJ, or SIL.

[l82start]

GDXJ has been as low as 10.?? in the last week or so, there was a thread calling it a good buy at the 11.30/11.60 range

[MediumTex]

GDXJ has been as low as 10.?? in the last week or so, there was a thread calling it a good buy at the 11.30/11.60 range

Volatile.

[l82start]

yep volatile  
i picked up a few "just for fun gambling shares" around then and have been watching it pretty much daily.. it has been as high as 13.00 since then as well..    it has also spent a fair amount of time in the 25.00 to 40.00 range in the last few years...

[buddtholomew]

Under what economic conditions are miners expected to outperform other asset classes? I currently have a 5% allocation to GDX in my variable portfolio and would like to analyze whether this holding complements the portfolio and is likely to enhance performance over the long-term.

VP Asset Allocation and Percent of Total
US Total Market 18.48%
US SCV 5.94%
REIT 5.24%
INT Large-Cap 10.17%
INT Small-Cap 6.30%
Emerging Markets 9.41%
Mining 5.12%
Fixed Income & TIPS 39.34%

[AdamA]

Under what economic conditions are miners expected to outperform other asset classes?

I'm not sure anyone knows the answer to this.

I think it's fair to say that the Miners correlate less with the overall stock market than a lot of the other sectors (energy, utilities, etc).

I think if you're going to own the Miners you do so either as pure speculation that they will take off (b/c they are historically pretty cheap right now), or as an attempt to get a little bit of diversification premium out of your stocks. 

[buddtholomew]

My GDX holding is down approximately 25% again (re-balanced and recovered 24% last month before the recent decline) and I waiver between investing additional capital or holding until a re-balancing band is breached. The decline this week in equities and bonds has lowered the value of the entire VP, but none of the assets have deviated substantially to trigger a purchase. I am eager to exchange from Stable Value to GDX, but fear that I am "jumping from the frying pan into the fire." I realize no one can predict the future, but am I being impatient and/or is the recency effect of a successful averaging down trade clouding my view? Also, I don't want to end up with too much exposure to the gold commodity as a significant portion of my wealth is invested in GLD and the PP.

[AdamA]

My GDX holding is down approximately 25% again (re-balanced and recovered 24% last month before the recent decline) and I waiver between investing additional capital or holding until a re-balancing band is breached. The decline this week in equities and bonds has lowered the value of the entire VP, but none of the assets have deviated substantially to trigger a purchase. I am eager to exchange from Stable Value to GDX, but fear that I am "jumping from the frying pan into the fire." I realize no one can predict the future, but am I being impatient and/or is the recency effect of a successful averaging down trade clouding my view? Also, I don't want to end up with too much exposure to the gold commodity as a significant portion of my wealth is invested in GLD and the PP.

That's a tough one, but I say go big or go home...as long as you have cash to do it (ie, you don't have to pull it out of your PP).

[AdamA]

The Miners are lovin' The Fed today.  Up almost 12%.

[buddtholomew]

Tell me about it...moves of +/- 5 to 7% are not uncommon. I prefer the up days of course.

[AdamA]

The Juniors are up almost 40% YTD.  Wow!

[HBstudent]

Juniors are +43.7% YTD, +47.7% 3mths, but -32.1% 1yr. 
From the low of 28.85 on Dec. 23rd GDXJ is +54.7%

I had to check because today I was reading a piece called "Doug Casey: Education of a Speculator" and came across a few interesting bits from when he was speculating in the early to mid '70s:


Doug: Actually, I decided to start really educating myself at that point. Among other things, I read Harry Browne's seminal book, How you can profit from the coming devaluation, and that led directly to my first big score in the market. I read that book in 1970, and I bought gold coins. More important, as it turned out, is that I bought gold stocks and had a wild ride from 1971 to 1974. I made a lot of money, in percentage terms at least, since I was just out of school and had almost no capital to start with.

I then launched my second business venture—

L: Wait, wait… There was a big slump in gold in the mid-‘70s. Are you saying you bought early, before Nixon closed the gold window, and then sold at the top of that first surge, realizing gains before the slump?

Doug: Yes, I did. But it's not as heroic as it sounds – I had no crystal ball. I sold near that interim top to invest in my second business, which was a company to market precious metals to the public. I have to say that I learned more painful lessons on that deal than I did crashing the Ferrari. Not only did I lose all the money I had built up, but I lost a bunch of money I didn't have. It took me years to dig myself out of that hole. I never declared bankruptcy, but I had significant negative net worth for some time.
...
Doug: Well, I had to dig myself out of that hole, so I redoubled my efforts to earn money. One of the things I did to earn money at the time was to write my first book, The International Man.

L: And thus was born a guru …

Doug: Well, it was Crisis Investing, a couple years later, that really put me on the talk show circuit. The other thing I did back in the mid-‘70s was to become a stock broker. Have I told you the story of how I managed to buy precisely at the very bottom of the mid-‘70s market trough?

L: No, please do.

Doug: I became a stock broker in 1976, which was fortuitous timing for someone who liked gold stocks. So, I'm sitting there at my office in Washington DC, and I got a call from a guy – his name was Elmer – who impressed me as being one of these rich good old boys. I talked to him about what I thought would be good investments for him, and he said, "I'll come into town and put a little bit of money with you." The way he talked, I thought "a little bit of money" was going to be several hundred thousand dollars, at least.

When he came in, it turned out that he was an average Joe who rode in on a bus and really didn't have any money to speak of. But I put a portfolio together for him, worth about $2,500, which included a thousand shares of a stock called Grootvlei, a thousand shares of Bracken, and several hundred shares of Anglo American Corporation of South Africa. Because gold had fallen almost 50%, from $200 at the end of December 1974, Grootvlei and Bracken were penny stocks – substantial producers, but with high cost and short-life mines – that were each yielding indicated dividends of about 50 to 75 percent. Even Anglo was yielding something like 15%.

L: Those are pretty amazing dividends.

Doug: It's incredible what you can get in dividends alone when a market is at a bottom – something people seem to have totally forgotten about today.

At any rate, the day Elmer came in happened to be the day that gold hit its absolute bottom for that cycle – $103.50, if I recall correctly – and also happened to be the very same day there were big riots in Soweto that made headlines in the U.S.

So, Elmer gets hit with these two things at the same time, calls me back up and says he wants to cancel his order. I said: "Elmer, this isn't Woolworth's. You can't really take the merchandise back." But rather than paying me for what he ordered, he hung up the phone on me.

Having entered the orders for the stocks the previous day, I had to ask myself what I would do about it. It was something of a revelation to me – it was clear that I was dealing with a typical member of the public, a representative of their mindset. I figured he must be the perfect contrary indicator. In today's terms, I had to ask myself if I was just talking the talk, or if I was willing to walk the walk.

So, I journaled those stocks I bought for Elmer into my account and held them until I sold in 1980 or thereabouts. By then, I was getting several times, annually, what I paid for them in dividends alone. It was a fantastic hit, at least in percentage terms.

L: So it was an accident?

Doug: Yes, completely. I didn't know it was the bottom. I just knew the stocks were really cheap. I believed what I had told Elmer about those stocks, and I figured it was more intellectually honest to keep them.

It turns out that I was right. People didn't want stocks that were off 90% and yielding 60% – they figured there had to be something wrong. They'd rather buy something that's gone up ten times, proving it has a good "track record." Track records are the best way to judge people, but the worst way to judge stocks.

L: I don't think I've ever heard of anyone picking the exact bottom of that cycle.

Doug: I got lucky, but it's a perfect example of why it's essential for a speculator to be a contrarian. You've got to believe in your thinking enough to buy when everyone else is selling, even with frightening images on TV, like the riots in Soweto. That's why it's critical to have an understanding of economics, politics, and the technical details of various businesses; only then can you hope to be immune from the blather you'll hear on TV and read in the popular press.

And when it came to gold, few people had a clue. I remember one politically connected investment guru of the day – Eliot Janeway – saying, that if the U.S. government didn't support the price of gold at $35, it would fall to $8. He didn't have a clue. But he influenced scads of people.

L: That's a great story. What a pity for good old Elmer.

Doug: Yes. I have no idea what happened to him after he hung up on me, but I thank him for appearing at the right time. Elmer was completely ignorant of economics and the markets, but he nonetheless taught me a more valuable lesson than any teacher in four years of college.


When they were out of favor in the mid '70s some junior mining stocks were trading so low the dividend yields were between 50% and 75%!  Amazing!  Some of you might remember Doug Casey because he was a consultant for the Permanent Portfolio mutual fund a couple few decades back.  Also Terry Coxon works with his research group now.