Right now, it’s clear that this is the most exciting moment in the world of gold since August 1971 the President Richard Nixon suspended the U.S. dollar’s convertibility into gold.
It’s a time filled with promise — and risk.
A great promise if you already own a producing asset or an advanced-stage project with a sizeable resource.
The risk is twofold: a sharp correction can hurt inexperienced investors, and fear of missing out (FOMO) can lead companies to overpay for assets.
Consider the Relative Strength Index (RSI) and how traders use it to spot overbought conditions.
Martin Pring, the man who wrote the big book Technical Analysis Explained, long considered the Bible for traders, has a simple advice: When a stock is overbought, one must have the courage to sell and to buy when it’s oversold.
When RSI crosses above 70, it enters overbought territory. Most traders use a 14-period RSI by default. To moderate short-term swings and adopt a more conservative stance, I rely on a 20-day RSI.
Generally speaking, A lot of stocks can have a great run without ever getting overbought. But once they do, that’s usually your cue to start taking some profits. And if you’re thinking of jumping in at that point, unless you’re a momentum trader—approach with caution.
What I am seeing is gold in overbought territory on a daily, weekly, and even monthly basis!
Is this bullishness justified?
There is cause for optimism. After all, the old-world order is being torn down. Countries and people are stumbling their way into the future, unsure what it might bring. Hence the appeal of gold as a timeless refuge in an age of uncertainty, a store of value when countries are drowning in debt.
But nothing goes straight up. Every experienced investor knows this.
When sentiment reaches the extreme —either bullishness or pessimism — its sets the stage for reversal.
The I Ching — the classical Chinese Book of Changes— captures this principle succinctly: When things reach their extreme, they reverse.
There will be corrections along the way. Will they be sharp? Will they last long?
In the meantime, lots of juniors with weak projects are coming out of the woodwork and doing a financing.
I know it because I have been approached with many offers. I see the announcements on Stockwatch on a daily basis.
- They Received PDAC’s Viola MacMillan Award. Then the Wheels Came Off Their Companies.
- Thwarted Chinese Investments in Canadian Juniors: Much Brouhaha about Nothing
- Mali’s High-Stakes Game of Chicken Pays Off as Barrick Folds under Pressure
I don’t blame these companies for cashing up now. In these volatile times, the window of opportunity can shut at any time. Managements are doing what they must to survive.
The promoters who have survived this recent down cycle are tough. They are opportunists. If you were them, you would do the same — seize the opportunity while it presents itself.
From investors’ perspective, success in investing in junior miners hinges on separating quality from hype, finding the real deal and dodging the pretenders.
Along the way, watch for those who abuse shareholders. Yes, there are management who reward themselves with a million-dollar compensation for running a little junior. Imagine a stock that has been down 70% or more for years, and at the same time, managements are awarding themselves big pay year-after-year, while owning very little in the company.
This culture of abuse has a long history on the TSX Venture because Canadian corporate governance laws are still in the dark ages and shareholders have zero say or veto in management compensation. (How much they pay themselves and how many shares they own are in the information circular that every public company has to put out.)
These abuses have been around forever, less so in the downturn, but they are there.
As Eric Sprott, the legendary investor in the mining industry once acknowledged, the industry produces more losers than winners.
In a market like this, discipline gives one the edge. If you separate quality from hype now, you won’t need luck later.
(Hai Van Le is the author of Into the Unknown – a survival thriller about a geologist held hostage in Mali by Islamic fundamentalists. For more information, visit https://haivanle.com.)
