Precious metals have always been a volatile asset class, and in a bull market that should not worry investors unduly unless they are trading for short-term gains or worse still have bought on margin with debt.
Even professional gold traders are reluctant to use margin finance. This certainly accelerates the upside potential of price movements but equally it can quickly wipe out your capital base in a sudden down swing. That gold can suddenly correct was evident last week with the biggest daily fall in two years. Silver pulled back even more sharply from $22 to $17 an ounce.
However, investors who boldly bought into the gold and silver share portfolios
listed in this column last week did not fare too badly at all. Some shares hardly moved despite the precious metal price correction.
Hold on to stocks
This seems to indicate that shareholders do not want to give up their gold stocks in the current bull market. Indeed, this is probably sensible as there are many examples of panic share sales that are later regretted in a bull market, as retracement can be equally rapid and the trend is still upwards.
A more intelligent strategy would be to fish around for a few stocks that have been downed in the events of last week and buy them now at cheaper prices. For if gold is in a cyclical bull market, as many experts believe, then cheap stocks are going to become a rare commodity as the gold bull market moves ahead.
It is easy to find experts who see the yellow metal hitting $1,200 an ounce this year and silver $25. And over the subsequent two or three years there are many who point to $2,000 and $50 an ounce, with the potential for a price spike to far higher levels.
But as precious metal prices rise there will be a subtle rotation of funds within this asset class into those stocks now regarded as the most risky. This is similar to what happened in the IT stock boom of the late 1990s, which ended with the dot-com IPO boom.
In the case of precious metals investors start with bullion, graduate to the larger producers and then switch to the smaller producers, and last but not least the junior exploration companies. The latter own the claims to areas likely to produce future gold supplies, and the value of this land will show exponential growth in the later stages of a gold boom.
At least that is what happened last time, and it may not be different this time. Veteran gold bug Jim Sinclair is offering private wagers that juniors will perform in the same way this time, and has invested $23m in just one, unnamed company himself. Follow the smart money, perhaps!See also:How to ride the gold and silver bull market: Part 1