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Can I use mining stocks as “leveraged gold?”

October 12, 2012, 12:00 PM Przemysław Radomski , CFA

I have some thoughts for your comments: First, I think many of us are holding much of our 'investment' capital in various retirement vehicles. As you point out, getting in or out of long term investments is an infrequent occurrence, but still, selling or acquiring physical metal in these vehicles is pretty involved and also takes some time. Additionally, I have always looked at mining stocks as a sort of 'leveraged gold', the place where the real money can be made, precisely because these stocks either under- or over-perform.

Therefore, the idea is to be aware of what they are doing presently and adjust investment moves accordingly. In short, try to use a lot of money and a few very well supported moves to make a profit, rather than accomplish the same results through many, many trades with much smaller amounts of capital each time.

Mining stocks certainly behave as “leveraged gold” in the short term. However as far as medium-term moves are concerned, previous years provide no proof of the leverage still being in place. The situation seems to be reversing, but we're still waiting for a confirmation.

As to the adjustment of investment moves: if capital's default mode in this case is "in the market" then the above can be described as our "investment" category given that there are indeed only a few very well-supported moves. Because there will only be a few of these moves, the main thing that will push the portfolio's value higher will be the continuation of the secular bull market in precious metals. If one wants to make profits on trades, then there has to be more of them. If one doesn't want to get too emotional about their positions (this is a very important factor often neglected by beginner investors) the size of a single position cannot be significant.

We believe (based on our research on trading and investing in gold) that the best results are achieved if investment (as mentioned above) is combined with speculation in small doses, and the sample portfolios reflect that. There are also psychological benefits from dividing capital into these two categories. If you know that you have separate capital for trading, you are much less likely to "mess" with the investment part too often (thus taking on positions that are too big and that increase the risk of getting emotional about the position, which consequently increases the odds of selling before a move up and buying before a move down).

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