Jon Herring

Yesterday, IDE received an email from one of our readers that sums up the way a ot of people might be feeling right now:

“I have been long gold and silver stocks for some time. But it seems I got a bit carried away when the price of gold and silver went parabolic over the last few months. I didn’t want to miss the big move and bought more than I should have. Let’s just say this correction has been painful. It has left me wondering if this is just a temporary setback, or if the bull is leaving the building.” 
-- DF, Tennessee

The short answer is that the precious metals bull market still has years left to run. The fundamentals for gold and silver – including increasing demand, lagging supply and ongoing monetary debasement – are extremely bullish for the long term.

That does not mean we will not see sharp corrections and long consolidations in the long march upward. If you have hit your pre-determined stops on certain positions, you should sell those positions. I would never advise someone to revise their trading discipline as they go along. The first rule of successful investing is to check your emotions at the door, set a plan and follow your plan.

But my best long-term advice for anyone who is long the precious metals (and that should be everyone who cares about the preservation of their wealth) is to “be right and sit tight.”

However, to weather the inevitable volatility, it’s important to remember the rules of asset allocation. No matter how bullish you are on the metals, or how confident you are in the ultimate demise of the dollar, you should not have all your eggs in those baskets. On the conservative side, I recommend about 15% of assets in precious metals. For those who are more aggressive, more bullish on the metals and more willing to endure the volatility, 30% or more might be appropriate.

It’s also important to understand the inherent volatility and relative safety of what you’re investing in. The great thing about mining and exploration shares is that they magnify price moves in the metal. But that goes both ways. If gold were to fall 10%, mining shares might fall 20 or 30%, and in some cases even more. Exploration shares would generally fall even farther.

Not to mention that a lot that can go wrong for a mining stock that might have nothing to do with the price of the metal the company is producing.

You’ll sleep a WHOLE lot better if the base of your holdings are in the physical metals themselves. If you want to build a precious metals portfolio, I believe you should start with bullion and rare coins – metals that you can hold in your possession.

From there, you might consider investing in the streetTRACKS Gold Shares ETF (GLD) and the iShares Silver Trust (SLV). Both of these ETFs hold the physical metal. Each share of GLD equals 1/10 of an ounce of gold, while one share of SLV equals 10 ounces of silver.

After you have established a position in the physical metals, only then consider investing in mining and exploration companies. Start with an ETF (or possibly a mutual fund) to spread the risk. The Market Vectors Gold Miners Trust (GDX) is a good representation of the strongest mining companies, and it also includes exposure to silver.

Only after that, would I consider investing in the individual blue-chip mining companies, followed by the second tier companies. And finally, with the smallest allocation of your funds (and only after funding all the other parts of your portfolio) consider the junior resource exploration companies.

These are the companies that go out and find the natural resources and precious metals the world is demanding so hungrily. The risk in these companies can be high, but the rewards can be extraordinary – especially in the latter stages of a precious metals bull market. The key is to spread your risk widely by placing small bets on a range of the best companies you can find.

Investor’s Daily Edge contributing editor, Dr. Russell McDougal is an expert at finding tomorrow’s big winners in the resource exploration field. And he has made a fortune doing it, closing out DOZENS of gains better than 400%... many over 1,000%... and recently a 9,233% winner! Go here if you want to learn more about his advisory service, Resource Windfall Speculator.

It’s certainly not fun to watch prices of your metals stocks go through the floor… but just think how it will feel to watch them blast off to the moon. It might not be tomorrow… but I’m certain it will happen. The long term uptrend in the metals is still firmly intact.

The bailouts, handouts, tax rebates and “free money” interest rates are highly inflationary. Gold and silver are your protection against the debasement of the money supply. Be right, and sit tight.

Jon Herring

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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