Gold bulls have been waiting six years for the developments of the past fortnight to occur – a breakout through $1380 which has left behind a base formation that has been six years in formation. It’s a once in a decade scenario and what surprises me is how few people recognise the significance of it, how even fewer people are actually profiting from it and even more surprising is of those that are profiting from the gold breakout is just how quickly they want to take profits. Six years of waiting to take profits within six days, sound ludicrous doesn’t it? But yet I find myself constantly witnessing this behaviour.
Any why? Well this comes down to the whole psychology of waiting. Waiting, no matter what it is for is a frustrating exercise. Waiting in traffic, in line or even to find that special person in life is a challenge that makes even the best of us do some crazy things. Road rage, cutting in line, even blind dates………….
So gold bulls who have been riding the ups and downs of the past few years have grown ever more frustrated at its reluctance to “get going”, scarred by numerous false breaks and huge portfolio swings. Eventually when these profits reach a level not seen before they are quick to lock in the gains and end the emotional nightmare – right at the time they should be doubling or tripling their holding. Remember the movie the Big Short? Being early on an idea, even when you are eventually right can almost send you broke. So, what’s the lesson? Charts. Study them. Learn them. It is the best way to improve timing so you don’t waste precious capital and time sitting in investments that are not producing any return. Enter when the trend begins and ride the appreciation, not the swings and roundabouts that can, as we have seen with gold, take years to eventuate.
The chart below shows this gold breakout and clearly it’s a big deal. Regular readers will know I have been highlighting the probability of this gold breakout and in turn been promoting Newcrest Mining (NCM) since earlier in the year.
Before discussing what to do now, let me tell a story of a terrible trade I conducted back in 2004. I bought Paladin Resources (PDN) from memory around 20c and three weeks later sold it for 76c. I distinctly recall giving myself a high-five, I was that proud. Over the next three years during the bull market the stock reached over $9 and technically if I still held the original position I could have bought my own island. I just hope my children don’t find out and blame that poor decision on why their inheritance is so small. Every trader I think has a similar story of the one that got away. I have many. Although there were plenty of other opportunities to capitalise on over the next few years within the resources sector, I never made anywhere near the money if I just held onto Paladin. What’s the lesson?
The way I view this is that gold is embarking on a once in a decade revaluation. Gold does rally when the stock market appreciates. It does not need doom and gloom to boom. Nor is its sole purpose to be a hedge against inflation. With trillions of dollars worth of bonds across the world now yielding negative interest rates, gold’s relative value increases substantially. With currency wars breaking out across the globe, gold is the only stable measure of value. Explains why central banks are so aggressive in buying it. Just before the breakout two weeks ago the Russian central bank bought 6 tonnes of gold.
From all of this that we know about gold as well as all of my (and I assume readers tales too) of stocks that “got away”, gold is something we should not be letting get away in the first six days of this six-year breakout. Instead we should all have a core holding of key gold stocks – a position we won’t touch for 12 months or when gold signals the trend is complete – and ideally some physical gold or financial instrument that reflects the price of gold directly. Finally with trading capital, we buy every breakout and every deep pullback that surfaces. Sure we might buy the odd false breakout, but in y 23 years of watching stocks get away, these huge once in a decade trends don’t have many false breaks and missing even just one can make all the difference to owning an incredibly small parcel of Sydney land or owning your own island.
I am actively and aggressively buying breakouts and consolidations on gold stocks. So far my expectations have been playing out in 2019 with the likes of NCM surging 50%. With gold now breaking out and holding above US$1400 I see no evidence to deviate from the plan. A fortnight ago I highlighted some of the local gold stocks on my list/portfolio and I can only emphasise that this is a must have exposure. Resolute Mining (RSG), Silver Lake (SLR), Northern Star (NST), Newcrest Mining (NCM), Evolution Mining (EVN), Regis Resources (RRL) and Saracen (SAR) are the safest and favourite picks. I honestly see no reason to go out the risk curve and try and find an explorer that hasn’t run yet. You can be trapped in a low liquidity, full of promises, hopeful that doesn’t end up delivering. Sure, there will be exceptions to this rule. All I am saying is do your due diligence, be careful and only buy them AFTER you own some of the aforementioned producers.
See while I missed out on really capitalizing on Paladin 15 years ago, it was a bull market and there were plenty of other stocks to take its place and profit from. In 2019, step outside the gold sector and my “yield crunch” thematic and no, its not a bull market. It is a minefield of winners, losers and maybes. It just emphasizes that if you let this gold bull market get away, in this cycle, there isn’t another booming sector to replace it.