There’s something about being correct on a market view early on in your career that sticks with you for life. It’s probably more of a burden that anything else, at least it was for me with precious metals. I was wildly bullish on gold and silver from early 2009 and was quite vocal about this with friends, family, cab drivers… anyone who would listen really. Gold topped out in September 2011, it would be another 2 years before I came to the realisation that the bull run was indeed over and I should wait for price action to setup before getting bullish again.
During 2015, the gold price continued lower, breaking to the downside through $1100 and looked ever more bearish. Meanwhile, there was a stealth bull market happening in ASX gold stocks as the AUD gold price shot from $1300 to $1600 on the back of a weaker AUD. The All Gold Index (XGD) had moved sideways for most of the year as a result of a heavy weighting in NCM, but the mid tiers like EVN and NST had doubled. Not to mention the 16 bagger move in the turnaround story St Barbara (SBM). If there was ever a time to get interested in gold stocks again, it was now.
The Experiment Begins
By the time 2016 rolled around, I had built up significant cash reserves from intraday trading which I was not putting to work. Gold blasted out of the blocks in the January, rising about $160 in USD terms and so I began hatching a plan to begin pyramiding into a gold portfolio where I could hold positions for the longer term. In February, I setup a separate trading account so that I would be conscious of separating my intraday trading from the gold portfolio. I then started buying many of the junior producers. Throughout March, April, May and June gold stocks were melting up, so I kept buying more and adding to existing positions. All my intraday trading profits each month were ploughed into additional purchases in the gold portfolio.
At this stage, I wouldn’t have called myself a position trader. I was definitely buying nice technical setups and adding to my positions at optimal times using TA, but I hadn’t considered an exit plan. I was convinced that after a 5 year bear market, this was the turning point for the next big leg up in gold stocks that would last many years – I was a long term investor. By the time July came around, I was sitting on some massive gains, some of which i had locked in along the way and then rolled the proceeds back into different gold stocks. At this stage, the portfolio consisted of about 12 stocks with a portfolio value of circa $1.3mill. Despite the fact that i hadn’t had any losing positions as yet, i figured there would inevitably be a few duds in the portfolio – but the winners would more than offset the losers and the rising tide of the gold price would eventually lift all boats, or so i thought. No need to cut the losers.
How wrong I was …. enter Doray Minerals (DRM).
I first bought DRM around 1.03 – 1.08 in the last few days of June as it pulled back from the breakout – good trading, the stock powered higher. Over the course of the next month, gold stocks became extremely frothy. A pullback and some consolidation would have been healthy. DRM pulled back slightly below my entry, but i was willing to hold.
My error and the big lesson I will discuss here concerns the June Quarterly report which was released on 29th July. Before I speculate about why this was significant change in the fundamentals for the company, its worth stating that this type of after the fact, ‘look back’ analysis will never be a part of my decision making process. I now have a blanket rule for all my longer term positions – that is, if there is price sensitive news and the stock is being sold on volume as a result, I get out as quickly as possible – the SFAQL Rule. You have heard this market tag line before no doubt. SFAQL – Sell first, ask questions later. If the stock recovers, consolidates and then begins to break higher again, you can always re-buy it, no big deal.
Now i will share my thoughts on what went wrong with DRM, because i think there are a few valuable lessons here, but it comes with a few caveats – a) I’m not a mining analyst and don’t pretend to be an expert on the subject. b) I have never invested in mining stocks on the basis of fundamentals. However, I have noticed what seems to be a big disconnect between the actual risks involved in moving a mining project from the development stage into production, and the level of optimism from investors in the lead up to this event. Punters always seem to get caught up in the excitement of news headlines like ‘Australia’s next gold producer’ and the prospects of near term positive cash flow. They forget just how quickly things can turn sour during the commissioning phase where there is typically a huge increase in costs, and a high chance of problems and delays in the ramp up to commercial production. A miner’s financial position can deteriorate rapidly if things go wrong during commissioning. A good example is Orinoco Gold (OGX) who began commissioning in late June 2016 – this was a total disaster.
Anyway, back to Doray Minerals. During the middle of 2016, DRM was commissioning the plant at their Deflector project. There has been all sorts of problems with regards to processing the oxide and transitional zones which has resulted in huge cash burn. I don’t pretend to know much about the finer details nor the hiccups they were having with Andy Well during that quarter, but I will make the general comment that if you’re long a gold stock that has run up nicely on news flow coming into plant commissioning phase, its worth considering selling into this excitement. I say this now in hindsight, but back then i hadn’t given this as much thought since I was attempting to hold for the long term – nor had I established my ‘SFAQL Rule’ which I have outlined above. So I made the decision to stick to my guns and hold DRM as it spiralled to the downside. Bad decision. I eventually took my loss in DRM more than three months after that dreaded quarterly report. I sold DRM along with almost every position in my gold portfolio two days after Trump won the US election. My exit price in DRM was 53.5c, resulting in whopping great loss of $49,000 – the single biggest loss I had ever taken.
Similar mistake, different trade – Alicanto Minerals (AQI)
I was late to the party in this one also, buying in late September at 40c when I noticed a few larger insto buyers paying up for the stock during the company’s drilling program. I added a few on the dip in the following days. Admittedly, there was no clear technical setup here – so wearing my position trading hat today, I would not have taken this trade. But at the time, I was looking to get involved in the stock since Alicanto had, and possibly still has all the hallmarks of a great exploration story. An earn in agreement with Barrick Gold, some big Canadian names on the register like Sprott and Robert Cohen’s Dynamic Fund. It was a well marketed story and there was big expectations leading into the drill results which were released on 4th October. Unfortunately, the market wasn’t impressed with the announcement. I sat there like a deer in the headlights watching them crush the stock in front of my eyes without selling a single share. I held 180,000 units, so it was a decent position given how illiquid the stock is. If I began selling at the first sign of weakness when the stock resumed, I probably could have exited with an average sell price of 33c. Instead, I held on until I eventually liquidated my gold portfolio after the Trump win. Selling AQI at 23.5c for a loss of $28,000. It was these two losses in DRM and AQI which lead to my decision to implement the SFAQL Rule – it has served me well ever since.
Liquidating my gold portfolio was an extremely tough decision for me to make, since it meant admitting I was wrong and aborting my long term plan. In the months leading up to the election, the entire market was ‘bullish gold if Trump wins’ – and yet the opposite happened, they aggressively bought stocks and dumped gold. I gave them two days to change their mind. Gold still hadn’t bounced, so I sucked it up and began liquidating my positions. It was the right call to make. Despite my disappointment, I was also somewhat relieved. From August through til November 2016 there had been some huge down days in gold stocks. There were single days where I witnessed $100,000 swings in my open PnL. This was having a negative impact on my psychology and effecting my intraday trading. If I was going to dabble in longer time frames, I would need a proper plan. And so my gold portfolio would become my position trading account. Since this time, I have tried to be lot more methodical in my approach. I’m still struggling with making good exit decisions with my position trading, but I’m committed to pressing on and refining my process. I will share a few of the more positive experiences in future posts to come.