Sunday, October 17, 2010

Gaming The Next Gold Correction

Gold has had a good run lately, and that begs the question, "When is the next correction and should I try to sell and buy back around it?" It's pretty easy to know when a correction is nearing. If you believe in the fractal voodoo, a one month correction is due to start around the end of October. It is of the type after a 64 day cycle that occurred in July this year, not the big four month type that started last December. So why not be clever and dance around it?

Well, if you had been clever enough to dance adroitly around the last two corrections, both the big one and the small one, this is how you would have done in all that tracks the price of gold (click on charts to enlarge):

It would have been worthwhile, putting you 7.7% and 5.5% ahead of a continuous hold. But when you try to apply this cleverness to individual gold stocks, this is the very typical result:

The cleverness backfires and instead of you gaming the corrections, Mister Market games you. And that's if you had timed both corrections to near perfection. In real life, that ain't likely. This doesn't happen with every stock, but it is the very typical case with the very small stocks (LODE, TRE, GBG, GRZ are some other examples). This is because the small miners have their stocks moved much more by their own individual property stories than by the short term fluctuations in the price of gold. It is a much bigger deal to them if a property is making good strides ahead than if gold goes $100 higher or lower. The big mature miners with a huge portfolio of producing properties see their stocks move much more in unison with the price of gold and silver. Trying to game corrections makes much more sense with them. But with the smaller miners, it becomes much more a roll of the dice.

As for a portfolio management strategy for gold corrections, it may make sense to raise cash with the gold and silver ETFs and large miners if you're attempting to trade as opposed to indiscriminate selling. When you are holding a quality junior miner, you are holding a development story that will jump the price of the stock at the most inconvenient of times for you as a trader.

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