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Gold Stocks and My Lack of Conviction

The times when I am able to make a lot of money in the stock market have been those for which I have a strong conviction in the underlying conditions.  When I believe that I have either a cyclical or secular wind at my back, my inclination is to stick to an investment and hold it to significant gains.

Compare this to when I invest because something looks cheap or seems undervalued.  In  such cases I don’t really have conviction in the mechanism of value realization, I am often found to be the one with weak hands, and I end up selling after experiencing more pain than I can handle.

This was the case last week with gold stocks. I sold most of my positions after gold collapsed to under $1300.  The stocks I sold; Argonaut Gold, Timmins Gold, and Brigus Gold, had all been much higher only days earlier.  In the case of Argonaut I ended up selling for a small profit, while both Timmins and Brigus were sold for a small loss.

I sold because my thesis for holding gold stocks was weak.  I bought these stocks because they had gotten to what I felt was a ridiculous level – I felt that the market was not discerning between good gold stocks with low cash cost mines and low capital expenditure projects and those with high cost operations and high cost projects.

While that may have been, and still be, true, it does not address where I think the gold price is going in the short term.  And the problem is that I have very little conviction in the immediate forecast for the metal.

I still think the most likely long-run outcome is that gold prices rise much higher, because I don’t see the mechanism by which the money printing strategies of central banks fix the underlying problems that we have with the economy – high levels of both government and individual debt and a lack of diverse importing replacing cities.

But the path gold takes to get there could be rocky.  In particular, its clear that the market believes that quantitative easing has worked.  And indeed, the US economy is getting better.  Whether the economy, and the financial markets, can continue to improve without massive injections of money is an open question.  But until that question is answered, which could be 6-12 months away, the working assumption appears to be that it will, and that is going to be bad for gold.

We’re coming close to a moment of truth here.  We will see whether the government tactics worked or didn’t.  Depending on the outcome, gold is either going to soar or collapse further.  I have some inclination of that end game, but I have no faith in what happens in the interim.  The thesis that gold stocks are cheap is weak because cheap stocks get cheaper.  I don’t sleep well with that in the back of my head, so I sold.

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