Flats, your experience sounds very similar to mine and Zugs I agree with you, let your profits run – the best companies will also be the better performers when bullion next breaks out to the upside.
When I first started buying gold stocks 10 years ago, I did it on the “gold to the moon” expectation. And gold did go to the moon, but there have been many more failures than success stories since then, and I’ve copped my share of hits along the way (fortunately I was quite young and didn’t have much money then).
My personal view is that gold will follow a path during the next decade similar to the one travelled in the past 10 years, with central banks “managing” its rate of ascent. One of my friends recently asked me to articulate my current gold investment approach and this is part of my reply:
“Fortunately gold bullion does well in times of financial stress, high inflation or deflation, relative to other asset classes. But there are grave risks in either extreme for gold stocks. Therefore my focus is on producers with low production costs, robust cash flows, plain vanilla balance sheets, and managers who have skin in their own companies which are either paying dividends or soon will be.
My focus is companies that have an excellent chance to meet their production growth targets to 2012 providing rapid NPAT growth potential but without the need for higher operating margins, i.e. a rocketing gold price. To this end, it is absolutely crucial to assess management quality by collating quarterly notes and statistics, determining which producers are meeting objectives and coping well with the inevitable hiccups that occur along the way. Ideally these companies also have superb exploration upside in world-class prospective tenements.
My gold stock investment strategy attempts to be conservative. By focussing on individual businesses, primarily producers, the fact I am investing in the gold sector is almost irrelevant. My focus is on the technical quality of projects (producers, developers and explorers) accepting higher levels of geopolitical risk, diversifying across countries, and shunning less robust and technically mediocre projects in Australia.”
