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.

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