PMs: Your Game Plan Going Forward


"With shares, a more active approach to portfolio management is needed."

In our last commentary, we quickly covered the current outlook of gold, silver, the mining shares and the juniors. The breakout in the sector continued today as gold reached a new high and the mining shares (as per the HUI or GDX) closed near a 9- to 10-month high. The juniors (GDXJ) and silver continued higher. Most important, both GDX and GDXJ gapped higher and made strong closes and on large volume. Everything is on track and there is little reason to think otherwise.

However, to keep things on track one should have a plan. First of all, one needs to have separate thinking when it comes to the metals and the shares. Buying coins or bullion should be viewed more as insurance than an investment. For the newbies who have yet to accumulate or are just getting started, consider a dollar-cost averaging type program. Whether you use GoldMoney, BullionVault or another site, take as little as $100–$200/month and begin accumulating the physical. This is an easy and effective way to build your insurance position.

Trading, speculating or investing in the shares is not a form of an investment, nor is it insurance. Gold holds its value over time, but the gold shares do not. We buy these stocks in order to sell them one day. Even in a bull market, mining shares fall 20%–30% in a routine correction. Thus, when dealing in the shares, one needs to take a more active approach in managing his/her portfolio.

A mining stock portfolio should be comprised of core positions, established junior miners and perhaps a few speculative positions. The balance of the portfolio is up to you. If you want less risk, then you would weight your portfolio in core positions and established juniors. If you want more risk, then you could weight your portfolio in the established juniors with some speculative positions.

For "core positions," we prefer funds or ETFs to large-cap stocks, which tend to lag the metals over time. In other words, instead of going with a basket of large caps, we'd consider using GDXJ (the juniors ETF) or TGDLX (Tocqueville Gold Fund). Both have outperformed the GDX over time and each holds many stocks, which reduces the risk associated with holding an individual mining company. If you want less risk, then you can opt for GDX. For those getting their feet wet in this bull market, we'd recommend starting with one of the aforementioned three—GDX, GDXJ or TGLDX.

When considering juniors, we need to define the size of these companies. In our opinion, a development company or producer with a market cap near or exceeding $1 billion is not a junior. Conversely, a company with a market cap of less than $150M may be too small to be a viable junior. We prefer companies that fall in the middle of that range and have the ability to become $1B in market cap and/or would be a strong takeover candidate. For those with knowledge of the precious metals markets, the juniors may be the largest portion of your portfolio. We orient our service most towards this segment.

Presently, we would weight the junior portfolio more in silver than gold. In recent weeks, we've written about the better values in this patch and, currently, we have more recommendations on silver juniors than gold juniors.

Finally, the speculative portion of the portfolio, which should be nil unless you are an expert in this space, should focus on special situations that have home-run potential. This also includes warrants. Why dabble in tiny companies to make only 50%? These are the stocks with at least five-fold potential in the next 12 months. Sometime down the road, this segment of the market will go crazy. For the time being, dabble in only the legitimate tiny juniors.

If you are interested in receiving professional guidance in navigating this bull market and finding the best and most reliable juniors, consider a free 14-day trial to our service. Precious metals are running now, but it is a long road ahead. Proper guidance, risk management and a plan for your portfolio are all essential to making money and keeping it.

Good luck ahead!

Jordan Roy-Byrne, CMT
[email protected]

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