The major financial markets are dominated by large funds that behave
like lemmings?follow the herd and suffer the consequences. Investors
should not fall for the commonly held myth that all professionals have an
edge over smaller institutional and individual investors. In this exclusive Gold Report interview, Roger Wiegand,
editor of Trader Tracks Newsletter, discusses the criteria he uses
to select the best mining and exploration companies. He then explains how
moderate trading within a mostly buy-and-hold portfolio can lead to superior
returns without the downsides that lemming behavior can cause.
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The Gold Report: We are going to talk
about "lemming investing," the theme of your most recent newsletter.
Who or what are lemmings and how does their behavior drive the market?
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Roger Wiegand: The lemmings that drive the market primarily
are the big funds, typically mutual funds that manage 401(k) and individual
retirement accounts. Most of those funds are set up on a buy-and-hold basis.
There are hedge funds with lemming behavior as well, but the hedge funds are
more often traders. They are creating a track record of lemming investing as
well because of their huge size?billions and billions of dollars. The
other sector of the market is the retail investor, with approximately 30% of
the market.
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"We think the old
paradigm of buy and hold forever is not a good way to go."
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The lemming investor
market would be most all of the funds and all of the smaller investor's
money. The large funds primarily invest money for the smaller investors
(being the lemmings). They really control what's going on, and they compose
70% of the market. And they do, in fact, establish the trend. Non-lemming
investors are those with large accounts who trade for their own pockets and
the pockets of the seven figure and larger trader/investors. This is the
sector leading/driving the market with mutual fund managers investing lemming
money.
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TGR: In your recent
newsletters, you discuss commonly held investment myths. Near the top of the
list was that the largest "professionals" always have special
insight unavailable to smaller professionals and individuals. Is that what
you're stating here?
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RW: That's correct. The
reason we wrote the article about the lemmings is that we think the old
paradigm of buy and hold forever is not a good way to go. That's not to say
that you can't buy stocks and hold them for an extended period. What we like
people to do on our recommendations in our Trader Tracks Newsletter
is to purchase stocks on a buy-and-hold basis and then trade in and out up to
twice a year based upon the two annual cycle changes. One of those, of
course, would be to sell in May and go away. The other would be the re-entry
after the summer, but then you have to deal with the September-October period
when the stock markets tend to have a risk of large corrections. We called
the correction this fall, and we hit it right on the day. We said it would be
on Sept. 24. It was a mild correction. In other words, the buying stopped,
and prices fell a bit.
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"If an investor
follows a well thought out strategy of stock analysis with occasional
trading, that investor will outperform the large number of lemmings over
time."
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The presidential
election is interfering with market direction right now. People are confused
as to what may or may not happen. We have the overriding negative problems of
a slowdown in Asia, a major slowdown in Europe and a mild slowdown in the
U.S. The U.S. broader stock market has generally been holding up pretty well.
We think that it will be propped up and levitated at least until the voting
is over on Nov. 6. After that, reality may hit home in many markets depending
upon who is elected president. I don't think it realistically matters in the
short term in any way, except for the psychology of the market. While there
will clearly be an impact, it is not clear what that impact will be. Wall
Street favors a Romney election but historically the markets have done better
after a Democrat has been elected. This time is indeed different on numerous
factors.
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Resolution of the
European debt situation is also adding to the overall market indecisiveness.
Spain and some of the other neighboring countries have serious problems and
we don't fully know how bad is bad. Since we talked on this interview, new
meetings and media outflow from Europe tell us they are frightened and afraid
to remark on the true status. However, the International Monetary Fund stated
a very dire warning on Oct. 8, 2012, using the word "alarming."
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TGR: So the lemming behavior
you're witnessing now is that the larger funds deploying capital are ignoring
or glossing over the major macroeconomic problems worldwide?
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RW: The big players
understand fundamental problems, but they also have so much power that they
can move the market, for example, by buying the S&P 500 for market
support. Other strategies they use to keep markets artificially high include
not selling off entire positions or very selective selling of the weakest
issues. The funds can also protect long positions by buying put options. They
have been doing this for years and have a lot of computing power to back up
their analysis. For example, if they felt the market was going to sell off
10% in October, they would want to buy options to the extent they could cover
themselves on just that 10%. That sounds like a lot of money, but it's not
really because the puts are leveraged. This is like buying an insurance policy
to protect the overall investments.
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TGR: You advocate a
"modified" buy-and-hold strategy to your subscribers. That is, a
traditional buy-and-hold strategy with seasonal trading. Does that mean you
are biased toward the long side with minimal short exposure?
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RW: That's correct. We like
to trade. We trade both stock and futures, and we prefer the long side.
Occasionally, we will short. Our short trades haven't been bad, but they
haven't produced the kinds of returns we have gotten on the long side. Our strategy
is focused on the long side. When we see downside pressure coming, we
recommend put options, profit taking and scaling back positions to reduce
exposure and lock in profits. Once the correction is done, we go back in and
buy.
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TGR: This month's newsletter
had a multi-decade chart of the Wilshire 5000, which you called bearish. Are
you negative on equities in general?
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RW: The Wilshire is getting
near a peak, and that chart is a very long (yearly) chart. I prefer to use
monthlies for the big picture. The monthly is telling us we have a bear
market in front of us. The question is how much of a bear market is it? I'm
not totally against stocks, but our preference is in precious metals and
energy stocks, as well as some currencies. I believe we are in a rotation
away from junior stocks and moving toward intermediates. That doesn't mean
there aren't good juniors out there. We have many good juniors in our
newsletter and on our list, and we do prefer them. But we also suggest that
people trade them and be very selective.
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TGR: What is your strategy
with juniors?
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RW: We look for the junior
explorers with these criteria:
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1) Superior management.
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2) Well financed.
(Juniors in the fall of 2012 need to be well financed because if a junior
company has to go back into the market and raise more capital, it could be
vulnerable.) If it's sitting with enough cash to work with a burn rate that
will help it manage the business for two or three years, I think it is going
to be in good shape. We have several stocks in that category in the
newsletter.
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3) Good geopolitics and
geography. We've gotten very selective about geopolitics and geography. There
is much of the world where we prefer not to go anymore. We currently favor
most of Canada, part of Alaska, northeast Nevada, and we like Mexico. It is a
relatively short list.
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4) Proximity to a major
operator. This is really important. If you're going to hang on to a junior
stock and a company follows the rules, we really prefer that it's sitting
next door or in close proximity to a senior miner that's in operation. Mine
building is tough work. It is best to follow a successful company that has
worked out the infrastructure and politics. We all know what's happened to
the cost of building mines and infrastructure over the last 6 to 12 months.
One of my suggested companies had an initial estimate of $95 million (M) to
build its mine. It went back and reconfigured it?then all of a sudden
$95M became $440M. That's a drastic increase due to inflation, availability
of money and many other factors. If you have the first three criteria worked
out, this point becomes critical ? you need an obvious buyer for that
property. We have had several examples of this situation that have worked out
quite nicely.
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TGR: Having a built-in exit
strategy for a junior is a great way to cap off a winning investment. How
about entry strategies? Are you more interested in silver or gold at present?
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RW: We like both. From a
futures trading standpoint, gold may be easier. However, given the high gold
to silver ratio, there is probably more upside in the silver market. For
stocks, there are a lot of companies to choose from. Because we spend a lot
of time analyzing these companies, we are comfortable recommending silver
juniors for greater leverage. But we have some gold companies that are doing
exceedingly well, too.
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TGR: Are there specific
companies that you think highlight all these points: management, financing,
geopolitics and exit strategy in the precious metals sector?
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RW: I have several that I
know well. The first is a fairly new one for us?Global Minerals Ltd. (CTG:TSX.V; DPF:FSE). It has a property in
Eastern Europe, which is out of our preferred geography, but I would call
this a "special situation" on that criterion. Global is located in
Slovakia, which is not only Westernized, it is also mining friendly. Global
Minerals has an old mine that has millions of ounces of silver. The mine was
inoperative, but is being re-opened and dewatered. It has expanded
underground exploration and is increasing resources. The development is
progressing nicely. We got on it at approximately $0.30/share. The last I
saw, it's about $0.44/share. It has so much metal in that mine, and all the
conditions are set up for a great operation?mining friendly community,
good country, a lot of good things going on.
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TGR: Are there any companies
closer to your mostly North American geography criterion that you think are
interesting?
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RW: One of our favorites is
Pretium Resources Inc. (PVG:TSX; PVG:NYSE). We know the management.
We know the property. Robert Quartermain is the
president and CEO of the company. He completed very successful development
projects with Silver Standard Resources Inc.
(SSO:TSX; SSRI:NASDAQ). He
bought these Pretium properties from Silver
Standard and is building up Pretium. Next door is Seabridge Gold Inc. (SEA:TSX;
SA:NYSE.MKT) with 42 million ounces (Moz) gold Proven. There is no senior miner in that
district. I believe that a senior will come in and buy Seabridge
and Pretium all in a package. I think that it's
looking like probably a minimum size of 50 Moz gold, if not more. Pretium
is well financed and has extremely strong management with great experience.
It went in there with a plan this last summer, with 50 geologists and
engineers, three helicopters, and it was planning 70,000 meters of drilling.
The company continues to find glory holes in that property. When Pretium bought it from Silver Standard, many glory holes
were proven already and on the books by top geologists. Of course, Bob Quartermain is a geologist as well. We think that one
could be at least a double or triple.
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TGR: Regarding geopolitical
risk, overall, Canada is a low risk jurisdiction, but portions of British
Columbia might be riskier than some people are comfortable with. Is the
political climate of B.C. better than most investors think?
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RW: I think that the question
about having problems with political situations was more of a concern in past
years, maybe even as recent as a year or two ago. But a lot of that is
starting to fade away. I think much has to do with the fact that communities
are looking for jobs. The mining industry is labor intensive. Consequently,
if they can start up a mine and be successful, it's a real plum for the local
community economically. Political pressure that drives job creation and tax
revenue to the province is an advantage for the Pretium
property.
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TGR: Pretium
already has a large market cap; do you still think there's an upside?
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RW: Pretium
has many advocates. A top New York analyst several months ago, when the stock
was around $8?9/share, did a fine report and was looking for a price on
the shares of around $33/share. We're looking at a price of about $38/share.
We're not that far from where he is.
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TGR: What other junior
companies are you keeping your eye on?
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RW: Another of our
favorites was a junior, and it is now more of an intermediate. That is MAG Silver Corp. (MAG:TSX; MVG:NYSE) in Mexico. MAG Silver
also has joint ventures with another company on this list, Canasil
Resources Inc. (CLZ:TSX.V). MAG Silver's idea is to
build a very large property position. It is looking to build a 100 Moz silver property, which would rival Pe?oles (BMV:PE&OLES),
which is one of the top miners in Mexico and the world. MAG Silver has a lot
of cash. Management is composed of very smart people and is very experienced.
Mexico, especially northern Mexico, is one of the top places to be for
silver. We like the company. We like the whole situation. That one is a
recent recommendation in our letter. We came in last July at about
$8.77/share. The stock is up at around $12/share and still going up. If the
silver prices continue to rise, it will continue to do better.
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TGR: Do most of its projects
wrap up into one district play, because the company website lists many
projects? How do you interpret it?
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RW: It has many scattered
projects, but the main area of interest is really one senior-type play. It is
advancing several projects on its own and with partners. We just think it's a
fabulous opportunity. Peter Megaw is the top
geologist there. He's a colleague and a friend, a person whom I admire
greatly. He has a fantastic reputation in the business and knows Mexico like
the back of his hand. The company has been very responsive in explaining
every facet of the project to investors and we think it's great.
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TGR: Any other interesting
companies that you want to mention?
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RW: One is Timmins Gold Corp. (TMM:TSX.V; TGD:NYSE.MKT). It's in northern
Mexico. Bruce Bragagnolo is the CEO of that
company. He has done work as an attorney with many mining companies in
Vancouver for many years. Obviously, that experience showed him a lot of the
pluses and minuses of the industry, and he started this company not that long
ago. It is an operator, but I would call it a junior based upon price, which
is running around $3/share. We recommended it back in February at
$1.22/share. That particular company and that stock have been excellent for
our readers, traders and investors. We've had some of them in and out of
Timmins four or five times. Some people just buy it and sit on it. If you're
going to do a buy and hold, that would be one of the few that I would put in
that category simply because it is a producer now. It employs about 650
people. The mine continues to expand. It has done everything right from the
standpoint of starting and running a business. Timmins' management is
superior. We would look for that stock to do much better. It's what I would
call a good, growing stock.
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TGR: Would a producer be
more conducive to your modified buy-and-hold, limited trading strategy
because a producer might track the underlying bullion price closer without
some of the drill result-type spikes that you would see with others?
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RW: That's a good point.
That's one of the reasons why we like Timmins. Normally, with a company like
Timmins, the shares might be $10, $15 or $20, but it is a young company, and
it is growing quickly. But, as a producer, not just an explorer, Timmins has
everything in position to continue to produce and to grow, yet is priced
today somewhat like a junior company would be. It's common for us to see
these junior stocks in the $1?3 range and we see a lot of growth on the
upside. Its advantages include superior management, solid financing, low-risk
geography and being a producer. By being a producer it doesn't have to go out
and raise money, even though it is priced like an explorer.
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TGR: All the midtier and senior miners need to start somewhere. Do you
have any other examples?
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RW: We are excited about Gold Standard Ventures Corp. (GSV:TSX.V; GDVXF:OTCQX) in Nevada. It has a
property next door to the big senior miner, Newmont
Mining Corp. (NEM:NYSE), in the Carlin Trend.
That is Newmont's Rain mine and it is doing well. Some years ago, its chief
geologist told management that it was trying to buy this property. In fact,
Newmont was trying to get it for 15 years, but somebody else won the prize.
The group that owns it now has done a fabulous job in exploration and
startup. Not only that, it hired the senior geologist from Newmont to be the
consulting geologist on this project. I view the Gold Standard Ventures
property as an extension of what Newmont is already mining. That's just the
way it's viewed.
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TGR: What is the name of
that district?
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RW: It's called the
Railroad area.
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TGR: And it just added the
Pinion property to the south of that, correct?
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RW: Yes. As you know, that
whole region, generally for the big operators, has been an incredible
producer. I can't remember the number on the amount of gold and metals
they've pulled out of that region, but it's just fabulous. It's the southern
end of the Carlin Trend.
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"If you're going to
hang on to a junior stock and a company follows the rules, we really prefer
that it's sitting next door or in close proximity to a senior miner that's in
operation."
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Another point on Gold
Standard Ventures, which encouraged me early on, is the fact that there's a
very wealthy Canadian investor who bought in early, who owns 20% of the
stock. He has a history of success in investing in these companies. By owning
20% of the stock, that stock probably isn't going to move until there is a
merger, a sale or a something. Consequently, that's a big floor underneath
the price of the shares. We think that one is a top opportunity. We like it a
lot.
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TGR: Even though it ran
quite a bit over the last year, you still think there's upside?
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RW: Yes. In our opinion as
non-geologists, the property could offer a lot more in values.
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TGR: In a situation like
this, how would you build a position given that you are periodically trading
your buy-and-hold strategy? Do you wait for pullbacks or jump in right away?
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RW: We wait for a pullback.
Normally, when we recommend a junior company, we are looking to find in our
technical work?we are technicians?an opportunity that appears to
offer a position for the shares to appreciate 25% in three months. That's our
minimum goal when we initiate a position. Sometimes the price runs
faster?sometimes we get 100% or more. Then you have another decision,
and that is, are you going to sell part or all? But the core of the strategy
is the 25% target. Over the longer view, if you had a company like Timmins,
if you wanted to hold it, and that's one of the ones that I would prefer to
hold, I would be looking to make at least 100%, but you're probably going to
have a longer timeline. You're going to have to look at maybe a year to two
years. However, based upon Timmins' performance over time, they can run fast
with the gold price too.
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TGR: You've given the
readers some really good ideas. Do you want to summarize what you think
investors should keep in mind when they're trying not to be lemmings?
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RW: One important
consideration investors need to keep in mind is the volume of trading in
juniors. If you're going to sell, you're going to have to sell into strength.
If you wait for a peak in gold or silver, you may not have many buyers for a
junior mining stock. With certain juniors, you want to buy and hold, knowing
full well you could get a 50% haircut, but then it will turn around and go
right back up again. The other thing is if you buy the stock and you make a
triple and you see a correction coming, it may be a good time to go in and
take all the money off the table. There are also individual tax questions,
and variations depending on the specific company and position, but you get
the idea.
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I'm very wary of the
broader stock market for this fall for at least a -20% correction. After the
election, we could encounter some very serious problems in credit and in
stocks worldwide. It's no secret that some of the very wealthy people, the
billionaires, are selling millions of shares of general market stock right
now. Some of them have been interviewed to the extent they're afraid of
another 1929 event. Nobody can really call that for sure, but as a
technician, I see the charts are looking like a markets sell-off after the
election. Regardless, if an investor follows a well thought out strategy of
stock analysis with occasional trading, that investor will outperform the
large number of lemmings over time.
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TGR: Thanks so much for your
time.
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Roger Wiegand?aka Trader Rog?produces Trader Tracks Newsletter
to provide investors with short-term buy and sell recommendations and give
them insights into political and economic factors that drive markets. After
25 years in real estate, Wiegand has devoted
intensive research time to the precious metals, currency, energy and
financial market for more than 18 years. He is a regular contributor to the Korelin Economics Report.
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DISCLOSURE:
1) Alec Gimurtu of The Gold Report conducted
this interview. He personally and/or his family own shares of the following
companies mentioned in this interview: Silver Standard Resources Inc.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Global Minerals Inc., Pretium
Resources Inc., MAG Silver Corp., Timmins Gold Corp. and Gold Standard
Ventures Corp. Streetwise Reports does not accept stock in exchange for
services. Interviews are edited for clarity.
3) Roger Wiegand: I personally and/or my family own
shares of the following companies mentioned in this interview: None. I
personally and/or my family am paid by the following
companies mentioned in this interview: None. I was not paid by Streetwise
Reports for participating in this interview. Roger Wiegand
trades only futures and commodities for his personal retirement account. He
prefers not to recommend shares and then be an owner of them for ethical
reasons.
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