Don't let summer steal your seasonal gains
My bottom call has held. Gold touched US$1,142 per oz. on Nov. 5th and has not returned to that depth since. Instead, yesterday’s close at US$1,262 marked a 10% gain in just over two months.
Equities are tracking gold’s gain. The Gold Miners ETF (GDX) is up 30% since Nov. 5th. Its little sibling, the Junior Gold Miners ETF (GDXJ), is up almost as much.
Gold’s gain is part seasonal effect, part real rebound, part Swiss effect. I wish I could say the recovery is in full swing and it’s onwards and upwards from here – but that is not what I see happening.
I think we are going to see continued strength from gold, from exploration and development equities, and from miners in the weeks-to-months timeframe. The seasonal effect usually stretches until mid-March, so perhaps until then.
Then I expect a drawback, a summer that saps strength and returns many equities to their late 2014 levels. Why? Because summer doldrums are as well established as early-season gains.
In the last 13 years, the Venture has reversed direction after the first quarter seven times, turning gains into losses. In five of those years the reversals were dramatic, with summer losses erasing, on average, 180% of seasonal gains.
In another two years, losses in the first quarter accelerated in the second – the season was bad but the summer was worse. And in another two years the summer essentially offered nothing, gaining only a few points after strong first quarter runs.
|If you want to hear more, come down to the Vancouver Resource Investment Conference Jan 18-19th.
I will be speaking twice: 2pm Sunday and 11am Monday. Or drop by booth 1404 for a chat!
That means summer doldrums have been in play 11 of the last 13 years. The two anomalous years were 2003, the start of the last big bull run, and 2009, the year investors grabbed gains after the economic tsunami of 2008.
That creates two takeaways:
1. Lock in seasonal gains before summer. Seasonal gains regularly evaporate in the summer, so it is essential to lock in profits. “Sell in May and go away” rhymes nicely, but selling by April is more prudent. As the chart shows, May has occasionally offered gains (2006 and 2013) but more often the index trades sideways or starts to slide.
2. If the real recovery gets underway later this year, we might skip over the doldrums in 2016, just as happened in 2003 and 2009.
Point #2 we can revisit in a year. For now what matters is #1, which is why I just sent my subscribers a note detailing what gains they should lock in now.
I am recommending partial sells because risk management is essential to successful investing. A gain on paper is great but it is not real – and can disappear overnight. And while selling early is frustrating, selling late is costly. I would rather be disappointed I missed additional upside than see my gains vanish because I held on too long.
There are a multitude of risk management strategies. Mine boil down to:
1. Buy with a plan. Right now my focus is to take advantage of the seasonal rally. I plan to lock in gains by April at the latest, earlier if the hot seasons starts to cool.
2. Sell some once you are up 25%. Four of my buys are in that category. The drive to sell is not because I think these picks have run out of steam – it is to lower my cost base. By selling some, I reduce the amount of my cash still on the table, while retaining the ‘free’ shares earned through the gain for continued upside.
3. Know your loss limit. Even when all signs indicate the price should go up, accept that the market is not always logical and price action is a reality. Know your limit.
Those are the basics. Discipline is essential. And profitable. Here’s an example from my current Top Pick: IAMGOLD (TSX: IMG).
I recommended IMG as an undervalued gold producer positioned to ride gold’s rebound, making the pick on Nov. 5th at $2.39. Yesterday IMG closed at $3.60, a 50.6% gain.
IMG could well keep rising – but discipline says it’s time to sell some and lower my cost base.
Initial purchase: $10,000 worth of IMG at $2.39 –> 4184 shares
IMG now worth $3.60, valuing 4184 shares at $15,062
Sell half: Sell 2092 shares –> recoup $7,531
Retain 2092 shares at a cost base of $2,469 –> just $1.18 per share
The advantage of such a low cost base is huge. If IMG gains even another 10% to reach $3.96, the gain on my remaining shares would ring in at 236%. If IMG starts to slide, I will still come out on top provided I sell above $1.18…and IMG has not traded below $1.50 in the last decade.
Resource Maven finds and explains the news that matters every day in the world of resource exploration and development.
Or follow Maven: Facebook (www.facebook.com/resourcemaven)
To learn how to turn resource knowledge into investment success: subscribe to Resource Maven: The Turning Point.
EDITORIAL POLICY AND COPYRIGHT: Companies are selected based solely on merit; fees are not paid. This document is protected by copyright laws and may not be reproduced in any form for other than personal use without prior written consent from the publisher.
DISCLAIMER: The information in this publication is not intended to be, nor shall constitute, an offer to sell or solicit any offer to buy any security. The information presented on this website is subject to change without notice, and neither Resource Maven (Maven) nor its affiliates assume any responsibility to update this information. Maven is not registered as a securities broker-dealer or an investment adviser in any jurisdiction. Additionally, it is not intended to be a complete description of the securities, markets, or developments referred to in the material. Maven cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. Additionally, Maven in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned. Furthermore, Maven accepts no liability whatsoever for any direct or consequential loss arising from any use of our product, website, or other content. The reader bears responsibility for his/her own investment research and decisions and should seek the advice of a qualified investment advisor and investigate and fully understand any and all risks before investing. Information and statistical data contained in this website were obtained or derived from sources believed to be reliable. However, Maven does not represent that any such information, opinion or statistical data is accurate or complete and should not be relied upon as such. This publication may provide addresses of, or contain hyperlinks to, Internet websites. Maven has not reviewed the Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the convenience and information of this website's users, and the content of linked third-party websites is not in any way incorporated into this website. Those who choose to access such third-party websites or follow such hyperlinks do so at their own risk. The publisher, owner, writer or their affiliates may own securities of or may have participated in the financings of some or all of the companies mentioned in this publication.