Recalibrating Expectations and Actions In A Gold Bull Market
With the gold bull market firmly in action, gold investors need to recalibrate.
I don’t just mean that we need to get used to being happy instead of disappointed. What I mean is that we need to recalibrate our expectations for what stocks will perform and rejig our plans for risk management.
In the bear market almost nothing worked. Since 2016 we’ve been in a not-bear-but-not-bull market where we could find wins, but only by ferreting out the very best of the best. With every other stock, treading water was a win and news, whether good or bad, was primarily a liquidity event.
In that environment, we clearly had to be hyper selective about what to buy. We also had to be rigid about managing risk. Both of those approaches have now changed.
We no longer need to be hyper selective about what we buy. And risk management is about making more money, not about protecting small hard-earned gains.
Let’s start with buying. In the last three years I wrote and talked endlessly about my criteria for finding the best of the best – top notch management, safe jurisdiction, tight share structure, access to capital, and drill-ready targets or strong fundamental value with exploration upside. Of course, companies offering all of this are still the best of the best and should perform as such going forward. But they are no longer the only stocks that will run.
When gold goes on a run, lots of money starts pouring in – and gold is a small market. The money can’t all fit in just the best of the best; in addition, many investors in a gold bull market aren’t gold experts. As a result, a bunch of other kinds of companies attract attention and jump in value.
In a gold bull market we see pre-discovery companies with good management and marketing rise in advance of drilling. We see strong response to exploration success even when management or share structure aren’t ideal. Companies with lots of ounces in the ground provide leverage to gold’s gains, whether or not the ounces make a lot of sense to mine. Producers offer leverage to gold’s gains, because of the simple math that a higher gold price with no reason for cost increases means higher profits. And producers running just one or two profitable mines do more than lever gold because the market knows they are very likely to get taken out as the market runs.
After years of limited investor interest, gold stocks are undervalued. With gold moving and attracting attention – for strong, fundamental reasons – investors want to buy gold stocks. That flood of interest will float a lot of boats. The best of the best should still outperform (especially companies with tight share structures) but I’m loosening my requirements and buying more kinds of companies to get as much benefit as possible from this rising tide.
OK, so what about portfolio management? What needs to change there?
The bottom line is that, in a bull market, decisions about whether to sell a stock are not about avoiding losses but about how to make the most money.
In the sideways market we sold at least some if a stock doubled because we were focused on protecting rare gains. Now, the focus isn’t on protecting the gain; it’s about relative appreciation potential. If a stock is well up, is it likely to double again? Or should you sell that stock and buy something that hasn’t moved yet – and so still offers the chance of a multiple?
In general, if a stock is well up, don’t ask: How much higher might this go? Instead ask: Is the money I’ve made here best deployed by staying in this stock for further gains or moving elsewhere?
It’s an important question because of my first point: so many more kinds of opportunities are moving or will move up that you need to think about rotating capital to where it can multiply – double or triple – not keep it in a stock that might give another 30%.
Of course, a bull market doesn’t mean stocks will only gain. Some stocks will still slide – and in a bull market you should make the decision to get out of losers even earlier. If a gold stock isn’t performing now, or at the very least isn’t performing by September/October, something is seriously wrong and you should exit. That’s a generalization, of course, but it’s one with a lot backing it.
I need to comment now that everything I just said applies if you like to be pretty active in managing your portfolio. If you are more inclined to establish gold positions and then leave them to appreciate for the next year or two, the above discussion does not apply – and, in fact, you should probably buy the kind of stocks I cover in Maven Metals for their lower risk leverage to this gold market.
To back up that statement, let me just quote Rick Rule in a recent interview:
“In a natural resource bull market, the best of the best companies can generate 200 and 300% returns. So build a portfolio around the best of the best before you worry about the rest. It’s difficult for people to understand, having heard the stories about 1,000% gains and 1,500% gains, how much money there is to be made early in a resource market owning very good companies.
“So I would say concentrate probably 60-75% of your portfolio on very, very high-quality companies. I’m talking about the Barricks, the Wheatons of the world.”
Two or three hundred percent in a few years is darn good. It’s especially good given it should happen without you needing to do anything – no trading in and out of explorers based on drill results, no trying to evaluate financing opportunities and then remembering to exercise warrants, no betting on what companies will get taken out or deciding what to do with acquirer stock if a deal does happen.