I allocate about 75% in top picks (strongest companies). The remaining 25% in more riskier plays with considerable upside potential like AUY. I consider AUY a good company, with a lot of potential. Hope that answers your question.
What if I am wrong and gold heads lower? At some point (especially below $1000/ounce) miners will start going bankrupt and as a result supply will diminish. Not a pretty scenario to be sure, but such is investing - just like the law of the jungle where the strongest survive we must as investors must pick the strongest companies.
A few more points to consider on why gold is heading down:
Gold is largely sentiment driven. For about 11 years gold did nothing but go up - that is a powerful trend and as the saying goes - the trend is your friend. During the years it went up sentiment became very positive, and then when the crisis happened gold shot up to $1900 (in 2011). Since then it has come down to where it is today $1145. Lots of bounces to get to here, and with each bounce as the price went lower sentiment became worse. Is the worst over like some suggest? Difficult to say - but I don't see a reversal happening where it goes back up outside of two scenarios:
1. Geopolitical event: It could be either political or economic. It has to be something big/serious.
2. Supply & demand dynamic tightens: The price continues lower until miners start going out of business reducing supply (anything less than $1000 should result in this). But with global gold production currently at a all time historical high it might be a while before that dynamic tightens. After this year however, production it forecasted to diminish - especially so if miners start going out of business.
My 2 cents.
Precious metal miners are really getting pummelled. Many are at 10 year plus lows.
That said, looking back over the past two years, all my analysis on individual miners was one big waste of time. Why do I say this? Because of the correlation between the miners and the underlying metals they mine. Sure that correlation like many others can be broken at times, but always it reverts back to it.
So why even watch the mining sector? Good question to ask - and it is probably better to just wait until the underlying commodity itself comes into a buy range. In 'system' I try to compensate for this, where the target price of the commodity does have a significant impact on the companies in that sector. There is however a problem: For the past 8 years we have had low rates - globally. All that money sloshing around worked its way into every asset class including the precious metals. Low rates can skew free market pricing mechanisms, and after 8 years do any of us know the true value of anything? Thus even though my system or any others can be highly effective - it is compromised because of low rates.
So what happens to borrowed money when rates go back up? IF the Fed stays true to its statements, we will find out in the coming months. I don't think it will be orderly - that is for certain. What I see happening is them (the Fed) doing a token rate hike or two, and which point volatility will spike, the economy will likely buckle, and they will blink - ceasing to do anymore rate hikes. Who knows, maybe they will even do another round of QE. In that environment gold should shoot up in a huge way - that is what I am banking on.
I agree with almost everything you wrote. That said - I have learned the hard way that what I think should happen in the markets isn't what necessarily happens - at least in the near term. That is why I average down, only try to pick quality companies and am prepared to wait however long for the market to see things the way I do.
I do believe $1100 POG is a possibility, and though some suggest the miners will not be sold off as a result - I am not so sure.
In the long run though none of this will matter. I have already chosen a selection of miners, and the lower gold goes - the more shares I will buy.
Posted this a while ago
By moneymongol • Jun 26, 2015 5:32 PM
1st Target Buy Price: $3.53 (start buying below this point - an amount of about $2,750)
2nd Target Buy Price:$3.00 (amount $3,600)
3rd Target Buy Price:$2.47 (amount $3,600 plus $1,075 in call options)
4th Target Buy Price: $1.76 (amount $1,600 call options only)
5th Target Buy Price:$1.06 (amount $1,900 call options only)
I don't expect it to hit the 4th or 5th target buy price. If it does, I would do a risk assessment to determine the health of the company. If the first 3 target prices are reached my position is about 90% common stock and 10% options. If all 5 target prices are reached, then my position becomes 70% common stock and 30% option. All options are 2 year in duration with low sell targets.
So for me, AUY hitting near $3.00 is a good thing. In fact I honestly hope it tanks much harder so I can buy it cheaper. As long as I feel confident that it will go back up in the future 5-10 years, I see no reason to stress or fret about its current poor price action. The way I build the position is quite simple but has proved very effective for me over the years.
This morning the price hit $2.48 (one cent off my 3rd purchase price).
So far so good.
If gold goes down to $1100, I say the miners get slammed hard. To $1000 and they will be decimated. I know that correlations don't always hold, but I am hard pressed to see miners do well until the price of gold heads back up - and that I don't see happening for at least 1-2 months or longer.
Your words on October 10th, 2014: Sold everything. Lost 60% of my initial investment. Pretty much my children's college fund. Thank you Pengrowth for making lives better.
You lost your kids college fund twice in under 1 year?