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Mining for a Secret Gold Strategy

Mining for a Secret Gold Strategy

“What’s your edge?” the pretty blonde asked me.

That morning, it was a young woman from a major French bank. The previous day, it was a chic man from an exclusive Swiss financial institution. It was nothing new. These banks always sent the same fresh-faced men and women in sleek, dark Euro-styled suits, armed with checklists in beautiful leather binders. Their job: to vet hedge fund managers like me. I’ve had to endure endless interviews with an army of them, once meeting 10 times in just one day.

At every meeting, I was asked the same question about “our edge,” a reference to a hedge fund’s secret sauce.

Every hedge fund has one. It’s the thing that we use to generate big gains for our clients. In turn, those clients hire experts to drill us, hoping to understand what makes us so successful. They try to work out if our system is real and how long it will last. Sometimes I’d see 300-page analyses on it.

And, honestly, that’s all silly and ridiculous.

Any good investment strategy is a simple one. One that you should be able to explain in about three lines. My hedge fund had one, and since leaving it, I’ve spent time honing that edge to improve my technique — something that’s been particularly useful in gold stocks recently. In fact, I used this strategy to make 22% from gold mining stocks in just two months — and there’s still time to get in.

So what was this edge?

The hedge fund’s edge was this: We made our investments when stock prices were crazy cheap.

Stocks tend to drop to those lows because of one main reason: fear. Investors sell, sell, sell when they’re in a panic. It’s what ensues after a bubble bursts, like in 2000 … when tech and Internet stocks collapsed. Or when a scandal hits the airwaves. That’s what happened in 2001, when utility stocks collapsed after Enron went bankrupt. And it’s that type of panic gold mining stocks dealt with recently.

Our edge was that we bought when others wanted out at any price and stocks were ridiculously cheap. And then we just held on. We purchased the companies that we felt were certain to survive whatever the problem was, and we knew that, in time, their stocks would soar.

Why? Because investors eventually come back to those same stocks. When fear falls to the wayside, they flood back into the market, bidding up the stocks we bought on discount.

That was our edge. We did it in 2001 and in 2002. And our clients made billions from us systematically utilizing it, time and time again. For example, in 2002, we bought utility stock CenterPoint Energy for $2 a share, and sold it for over $10.

However, at our hedge fund, we were only doing one thing right: We were buying stocks while they were down. Every now and then, timing was an issue. Occasionally those cheap prices dropped further, sticking us with good investments at losses. There were times we had to wait years for a good time to sell.

But since leaving the hedge fund, I’ve refined this strategy through hundreds of hours of research, and then, through trial and error. With this new technique, I’ve narrowed down my timetable to be much more precise — because that’s the key to stock picking: timing.

Now you’re getting the benefit of all my work when you read my commentaries. In fact, the most recent example of my strategy’s success was in a gold stock recommendation I made here a couple of months ago…

A 22% Gain in Less Than Two Months

Using my new system, I perfectly timed our entry into gold stocks. Those of you who bought gold mining stocks when I recommended them February 25 are now up 22% in less than two months. Congratulations, if you got this gain.

Gold stocks are a classic case of the “buy them when they’re crazy cheap” trade. As I told you in February, mining stocks had simply no business trading where they were. That’s what happens in a crash, though — stocks become phenomenal bargains.

Now, even though they’ve soared 22% … we’re still in the early days of this trade. I believe those stocks are going to keep climbing.

Look at this chart of gold and gold mining stocks, and you’ll see why there’s still time to profit:

HUI - Mining Stocks

The gold line denotes the price of the precious metal, while the green line signifies gold mining stocks (as represented by the NYSE Arca Gold Bugs Index [HUI]).

Clearly, gold mining stocks are still excessively cheap compared to gold. They are at price levels that match when gold was trading under $700 — but the yellow metal is nearly $1,300 today. See, mining stocks have become so cheap that even after the recent 22% surge, they are still trading at 12-year lows! Sounds crazy, but it’s true.

Investors dumped mining stocks because they were simply making fear-fueled trades, exactly what happens at the end of any bear market. But it wasn’t connected to anything resembling reality.

Just remember that underpinning this new bull market are solid fundamentals — low costs and profits. That’s because we know that gold mining companies can get an ounce of gold out of the ground for $836. At current prices, gold mining companies are making over $400 per ounce. Even if gold went down from here, these companies are making money.

Don’t Miss This Golden Bull Market

In the end, this is simply where you want to be as an investor, and there’s still time to get in. Gold mining stocks still have great potential because this bull market is just taking off — we’re still in the first or second innings. And right now, you’re buying gold mining shares as if gold is about $700 — when its current price is $1,250.

In other words, you’re buying gold at a near 50%-plus discount when you buy shares of gold mining companies. It’s as simple as that. If I were at my hedge fund, we’d be scooping up those shares by the bucketful.

You should know, though, that in my experience opportunities like this don’t last. Soon, the big-money investors are going to come and push up the prices. You want to get in before that happens … and the way to do that is by buying stocks of gold miners because their prices are going to skyrocket.

Here’s how you can get in on this opportunity: Buy the VanEck Vectors Gold Miners ETF (NYSE Arca: GDX). This exchange-traded fund (ETF) has all of the elite gold mining company stocks in it, such as Newmont Mining, Barrick Gold and Goldcorp. It also offers exposure to medium-sized gold mining companies, such as Kinross Gold and Eldorado Gold.

Now, if you like trades like this — ones that give you quick, big gains — you should look out for my new advisory letter, Profits Unlimited. Readers are going to get exclusive access to my special system that will get you into stocks at ridiculously low prices, right before they surge higher … just like what happened with gold mining stocks.


Paul Mampilly
Editor, Profits Unlimited

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