Buying Low & Selling High vs. Buying High & Selling Higher?
— “Ahead of the Street” Column, by Mitchell Clark, B. Comm.
It’s a great time to be a miner. Metal spot prices are on the rise, and with those higher spot prices come higher stock prices. This makes it a lot easier for a precious metal company to acquire other firms. If you work in the world of corporate finance, one of the hottest areas to be doing deals in over the next 12 months will be mining resource companies.
You can expect a lot of newly issued shares to hit the market over the coming months. As is always the case, stronger stock prices for resource companies mean that companies can more easily raise new capital for expansion. Nowadays, there isn’t as much debt being offered in the marketplace and you can thank the recent financial crisis for this. Banks are still wary of lending money to businesses, so most resource companies opt to issue new shares to finance their mines.
A lot of precious metals stocks have gone up tremendously in value over the last several months. For most gold producers, their stock prices have risen commensurate with the spot price of the commodity.
If you wanted to consider taking on new positions in precious metals now, you certainly would be getting in at the top of the market. The investment wouldn’t be a case of buying low and trying to sell high. Rather, it would be a case of buying high and trying to sell higher. Inefficiencies in equity prices are always prevalent and there is no one right valuation for a company. With resource companies, however, because the underlying commodity (e.g. oil, gold, wheat) plays such a strong role in the financial success of the business, stock price inefficiencies tend to be much less prevalent. If the price of gold goes up 10%, then very often a well-recognized gold producer will see its stock price go up 10%.
A lot of investors become bandwagon investors without even knowing it. They follow the capital markets, they see the headlines, and then they sit on the sidelines for a while before making an investment. Very often though, by the time a lot of investors actually decide to take on a new position in the stock market, the big money has already been made. A lot of people buy into the trend rather than trying to buy low and sell high.
This can be profitable, but usually less profitable than being a patient contrarian. So, the next time a basket of commodities or a particular stock market sector is sitting in the doldrums, perhaps you might give it a second look. It takes courage to buy low and sell high, but that’s how you make the big money. Right now, gold is strong and it’s in all the headlines. Gold prices and gold stocks may very likely keep ticking higher, but don’t forget that the big money has already been made.