What’s next for gold and gold stocks?

Today, we return to the subject of gold stocks.

We celebrate, we pat ourselves on the back, and we urge caution.

What goes up…

Proably the best investment feeling in the world…

When gold stocks are moving, boy do they move. And when you are on the right side of the trade, there’s probably no better feeling in investing. The last month has been positively stellar. I want it to go on forever. You probably do too.

But I have to counsel caution. Prices can go down as well as up!

My first observation is that the rally in gold stocks has been led by the large caps. In the broader scheme of things that is good sign. In a bull market, you want to see money flowing into the seniors first, before the small caps – the exploration companies and the developers – go bananas towards the end of a cycle.

So from a “is this a new bull market or just a rally from oversold levels?” perspective, this is healthy action.

But the seniors, as measured by the HUI index, have gone from 100 to 157 in two weeks. That is some move! This is large-cap stocks we are talking here, not some volatile small cap that has just hit the bullseye with its drill bit.

If you are on the long side, my counsel is to take some profits or to move up your stop losses. Those are the kind of gains that you don’t want to give back – and they can be given back very quickly.

If your perspective is much more long term, you might want to leave more on the table. Fair enough. But 50% in two weeks! Heck, take that profit and you can take the rest of the year off.

Don’t forget what happened last year. Gold and gold stocks did something very similar. A double bottom followed by a monster bounce. The HUI hit 150 in December 2014; before the end of January it was at 211. Come March, it was back at 154.

A February/March sell-off in gold stocks is so common it has a name – the curse of PDAC. PDAC is one of the world’s biggest mining conferences. It takes place each year in Toronto in early March. And, for some reason, you always seem to get a sell-off just before.

The same goes for gold, by the way. I would be very wary about buying here. Of course, if you’re taking a long-term view that gold is going above $1,500 an ounce over the next three years, with gold stocks rising at the same time, then you should keep your positions. I’m not selling any of my physical gold.

But if your horizon is shorter, I would consider lightening up a little, moving up stops, locking in some profits and so on.

Of course, gold’s now going to pull back 5%, then rally another 25% and make me look like a fool. It has a habit of doing that. This is just one writer’s opinion.

I’ve been asked to cover some of my tips from my MoneyWeek magazine cover story back in October. I’ll do a more detailed update for subscribers, but for now I’ll mention Randgold Resources (LSE: RRS), which was my pick of the seniors. That’s now at three-year highs of 6,000p. It’s rallied by more than 50%. (If you’re not already a subscriber to MoneyWeek, I’d suggest you sign up now).

Gold stocks are overbought right now, though we’ve probably seen the low

This will probably come back and bite me, but I return to the main theme of this piece. Gold and gold stocks are both extremely overbought by most technical measures.

This may just be a bounce from oversold levels. It may be the beginning of a new bull market. I’m not sure – it’s too early to know. My hunch is that we’ve seen the low for gold stocks, but that doesn’t mean they can’t fall from here.

Similarly, stockmarkets are oversold. Every time I start to think markets are going to rally, the relentless selling pressure seems to come back in. Particularly amongst the tech stocks – the patterns look awful. (Did you follow me into shorting Netflix, by the way? That’s been another beauty.)

Whether it’s the action in Deutsche Bank, or the unfolding new subprime that is oil bonds and the repatriation of Saudi sovereign wealth fund investments, there’s a lot of leverage that is unwinding badly.

So maybe this really is the big one we’ve all been waiting for, the one they’ve been putting off for years – 2008 mark II. Maybe the Dow-gold ratio is going back to 1:1.

It could be – and, if it is, I’ve got plenty of physical gold, some long-term positions, some special situations, and I will benefit.

But I can’t help taking the slightly more sober view that when something is overextended, that it’s a good time to lock in some profit, move up some stops and get ready for the next opportunity.

 

  • Jonathan Tedd

    Some canny trading there Dominic.

    I gave up on trading having learned the hard way (ie lost money). I closed all my positions and the account and concentrated on serving one master (day trade to day job) and feel better for it. I wont ever be wealthy and probably not well off. I might manage comfortable.

    Terry Smith fund looks after me now.

    Speaking of which his economic advisor Tim Morgan does another brilliant analysis of what’s happening over at surplus energy economics.

  • Richard Raith

    This is looking like 2008 all over again… I’m loading up on physical gold and if news reports today are anything to go by so is everyone else. I buy small bars and CGT free coins from Baird & Co who are LBMA members here in London and will continue to do so for the forseeable… good luck everyone!