In my view, the prevailing idea of "investing" connotes efforts to discover investments which are somewhat less risky by virtue of a few attributes such as:
- solid income streams (or the expectation thereof) and reasonably predictable financial circumstances
- companies with a long history of being able to survive during times of plenty and famine
- companies which are regarded favourably by investors as evidenced by measures such as relatively low volatility and investment by large institutional investors
In contrast, I consider that "speculation" involves the following characteristics:
- shorter time horizons (generally)
- a willingness to bet against the prevailing direction of the herd
- an ability to see opportunity and act on it when others are either blind to it or unwilling or unable to act
- a mental ability to tolerate a greater degree of risk than most others
So now to gold. There is a variety of reasons for speculating on the part of the small, individual investor. (Note that, for the purpose of this article, I am excluding miners and other agents which speculate for reasons which differ from small guys like me.)
Security
It is difficult for most people in the western world to appreciate this reason as they have not experienced the devastation of war, rampantly corrupt governments which do not blink at reappropriating the wealth of their citizens through any manner of techniques, banking systems which are not well developed or managed, and economies which are fragile. Further, gold is highly valued by many cultures, not only as a "store of wealth" but for social reasons e.g. gift giving during certain seasons.
As citizens in countries such as India become wealthier, the demand for gold increases.
In my view, the "security" aspect of speculating in gold is a rather long term trend, something which generally does not come into effect during the short term world of speculation, except during periods of instability. It is then that prices increase.
Reversion to the Mean
In my view, this is the principal motivation for speculating in gold. The following article presents a very compelling argument in this regard.
- The divergence between the S&P 500 and Bloomberg Commodity Index is at an all-time high.
- The bear market in the TSX Venture now stands at 1,090+ days
- Gold stocks have never been this cheap relative to the price of gold.
- The gold bear market is closing in on being the longest in BGMI history.
- The ratio between the gold/silver sector to the S&P 500 is unprecedented.
Speculating with the Expectation of Gains
In the October 2015 edition of the Financial Passage Maker I outlined a few of the characteristics I look for in my search for speculative bets in mining companies. At this stage in the mining cycle, I concentrate my efforts on companies which have income streams from existing mining operations, good balance sheets and management with proven track records. I look for companies which can ramp up operations fairly quickly. I also search for streaming companies who are able to secure income streams at reasonably low costs at the bottom of the mining cycle. (This said, there is more competition associated with this business model than in years past.)
As the rebound in the sector begins to gather momentum, I look for businesses with operations in well-established mining camps where supporting infrastructure is present: e.g. manpower, support services, power, transportation. This reduces start-up costs and time to production. The element of surprise is also reduced. I once speculated in Apex Silver and lost a lot of money at the time. It was a new venture in a remote area and encountered a mine-ending barrier. The value of time to market is significant:
http://www.northernminer.com/news/apex-silver-forced-into-fire-sale-of-san-cristobal/1000224428/
At the height of the cycle, I may indulge in a few explorers as the mania of the crowd takes hold. Through past experience, I have learned to exit quickly from such speculative positions and to be satisfied with modest gains as opposed to holding on for multi-baggers ... the risk is simply too high. The time for the multi-baggers in generally in the early stages of the rebound in the cycle. I have learned this lesson well.
Final Note
In my efforts to search for potential bets, I never make an effort to tap into mainstream media sources. Rather, I conduct my own independent research and arrive at a "view" on my own. I also act on the view on my own - this as opposed to soliciting the views of others on chat rooms and the like. Only once I have narrowed down my list of potential bets do I consult chat rooms in an effort to discover things that I might have ignored. Beyond a certain point, I do not delve deeply into the financial aspects of a company as the fine points can be manipulated easily.
I speculate only with money I am prepared to lose although I take steps to minimize that possibility by:
- ensuring that the companies meet my investment criteria
- spreading my bets among several companies as opposed to concentrating them on one or two
- scaling my positions according to my perception of risk i.e. I will bet more on companies with great balance sheets and nice income streams and less on explorers with "great ideas"
- taking profits - this could entail selling out parts of a position or exiting it entirely in the event that a better opportunity emerges
Sometimes, the results of speculation can be astonishing and gratifying. Will the silver peak of past years be repeated? Maybe not so dramatically, but most assuredly in a way that will droop the pockets of a few speculators.
The question is "When?" It's all about reversion to the mean.
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