Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Using Gold's Cyclical Model to Trade Junior Gold Stocks

Commodities / Gold & Silver Stocks Dec 01, 2009 - 02:38 PM GMT

By: Bob_Clark

Commodities

Best Financial Markets Analysis ArticleGold is cyclical. Can knowing this help us make logical trading decisions about low priced gold stocks known as Juniors? Do these wild, speculative stocks even care  what the price of gold is doing. Even if they do, why would I want to gamble on such a high risk investment? Lets take a look.  

Since gold has bolted to new highs, I am getting more questions about the gold ETF, gold stocks, their options and juniors in particular. Here are a few of the questions and issues.    


Gold is so expensive, so is the gold ETF, how do I protect such a big investment? 100 shares of  GLD costs $11,500 and I don't want to trade 3 share odd lots, any ideas? I don't have a lot to invest but I want to participate, should I buy options? Are gold futures the same as the gold ETF?

Are Juniors as risky as people claim?    

I am not a stock picker. My business focus is on strategic risk management. We use ETFs because of their diversity and liquidity. The GLD ETF is not diverse at all but it does trade on a stock exchange and is very liquid.

Here are a few of my thoughts. Many of the vehicles that we trade today were designed when the price of gold was much lower. When GLD was started, gold traded near the $400 dollar range. At that time a regular 100 oz gold futures contract was worth $40,000, now it is worth $115,000.

Trading two or three shares on an odd lot basis is do-able but full service brokers may charge extra. With large positions you should protect yourself, large draw downs on unprotected positions can be confidence shattering experiences, even when you are right long term. The last drop in GLD was nearly 35%!

Once you start trying to defend against draw downs, you find yourself in the arena with the Fat Boys. They are the ones with all the talent, money and technology. They  make the rules. Their computerized systems are designed to find and trigger stops. There is no B-league in the investment world, when you trade, it is against the best. They are often on the other side of each trade you make. They are the ones that sell you your options as well. It is beyond the scope of this article to get into all the pitfalls that lay before us when we place our bets. Yes bets, all investing is a form of gambling, the odds may be in our favor but they are still odds.   

I like the odds.  

The point of this is that buying a junior gold explorer at this time in the cycle may not be as risky as it first seems. In fact the risk may be lower than our other choices. If I am right about where we are currently in the gold cycle, (see my F.S.N article, Gold a cyclical recipe for disaster ) then there will be a lot of merger and acquisition activity taking place in the gold sector in the near future. At acquisition time, valuations will be partially determined by how many ounces the buyout target has. As the big fish swallow the smaller ones, they in turn will be hunting frantically for juniors to buy. Intending to increase their reserves relative to their market cap and make themselves more attractive. It won't be as important how mineable those reserves are, as long as they are cheap. Here's the thing, the bigger a gold company is, the higher value the market attaches to their reserves relative to their price. Some Juniors are trading at $15 to $20  per ounce based on proven reserves. Some of the bigger miners are trading at $300 plus. When they buy a junior, those acquired reserves increase to $300.  

There is a new ETF which just began trading. It is composed of junior precious metal companies. (symbol GDXJ) It does not have much history and is not useful for analysis. It does show however, that many small stocks have been bid up aggressively lately.

When it comes to junior gold sector, I would suggest going a different route than buying an ETF .

Instead do your homework. Find a stock that has proven reserves of more than 2 million ounces, which are in a safe country and is priced in the $20 an ounce range. For example, a company with 100 million shares outstanding priced at .40 cents, means the company is worth 40 million dollars. Divide the 40 million by the 2 million ounces they own and you get the dollar value ($20) of each proven ounce of gold in the ground. Find one that still has some kind of a believable story.  

What about the cycles?   

In the chart below I have compared the cycles in gold to a unremarkable, unnamed Junior. I have chosen it as a generic representation of  juniors in general. If anything this one is a major under performer. I only go back 10 years because most juniors weren't around more than that long.

We essentially get to see one 8 year cycle,(red line) which actually came in a Little early. This is not unusual in a late translation bull market in which you have a rapid 35% decline. We know the sum of all cycles larger than the 8 year cycle are up because of how late the 8 year cycle topped out. (see MY f.S.N. article Gold a recipe for disaster )

We do see commonality in their cycles. There are two things that stand out. One is the cycle low in 2005. Hardly noticeable in gold but very dominant in the junior. We note that it is of 4 years duration (orange lines), which is half of the 8 year cycle. Not unusual. We also see that the junior tends to lag gold by 5 months. Also notice that the junior made its cycle high in 2002 and then retraced back up toward it while gold ran to repeated new highs. That rally was over 1000% in 8 months, it went too far, too fast and investors wanted to cash in.   

What next?  

We have just made a 1 year low (red bar, brown dot) which is higher than the last 1 year low, so the sum of all cycles larger than the 1 year cycle are up. Last years low coincides with gold's 8 year cycle low.  Therefore I assume that we have the following situation. The 1 year is going hard up. The 4 year has bottomed and is going hard up and the eight year is going up as well. The rally should last another year at least before the 4 year cycle possibly tops out. There are many juniors with similar charts to this one. It shows me that cyclical modeling does work with small companies. 

  chart 

To conclude

If the gold market has made a major low and the big gold companies have as well, it follows that the money that will be thrown at the sector over the next three years will filter down to the little guys. The cyclical picture of most of the juniors I looked at is very promising. Many will go up 1,000% or more, all you can lose is 100%. Purchasing 100 shares or even 1,000 shares of a .25 cent junior won't break the bank. They are like options with no expiry date, plus there is no premium over intrinsic value. You don't have to worry about the Fat Boys gunning for your stop loss orders either.  

If you do choose to buy some juniors, pick ones that actually have some gold. Whether they will become buy out targets really doesn't matter. What matters?  Whether they have a plausible story and will anyone "buy that story". Anything with a pulse will have its five minutes of fame. Don't over invest in any one stock. Don't pay more than $1.00. Get gold in the ground for $20 or less. Don't bet the ranch. Spread the risk. If you get a windfall, take it.  

Compare your favorite junior to gold's cyclical model as I have done above. See how it stacks up. If it does not, find one that does. Then with your mind, visually extrapolate the evolving three year uptrend into the future by using past cycles as a guide. 

Used judiciously, Juniors are a good strategic risk right now.

Bob Clark is a professional trader with over twenty years experience, he also provides real time online trading instruction, publishes a daily email trading advisory and maintains a web blog at www.winningtradingtactics.blogspot.com  his email is linesbot@gmail.com.

© 2009 Copyright Bob Clark - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in