Investors with beaten-down gold/silver mining shares in their portfolio have three choices: Dump those losers for the tax loss before year-end; hold on in the hope that they’ve bottomed and will go up next year; or take advantage of others’ tax loss selling to pick up the bargains thus created.
Commodities analyst Marin Katusa recommends the last option. Here’s an excerpt from his recent post on the subject:
As you read this, the calendar is halfway into November.
For some folks, this means heading south to a warm place like Florida. For some, it means breaking out the winter coats and hats.
For top resource investors, it means tax loss selling bargain season.
It means Christmas comes early…and the presents can lead to hundreds of thousands – even millions – of dollars in extra profit.
At the end of the year, investors and speculators start looking at their portfolios and formulating plans to reduce their tax bills.
This means deciding if positions should be held to get short-term gain tax treatment or long-term gain tax treatment.
But more often than not, it means deciding to sell stocks based on factors that have little to do with their underlying values.
If you’ve read my work for a while, those words should trigger your interest. You know that most of the time, the market places the correct value on assets. But not all the time.
As investors, we find our edge during those rare times when buying and selling decisions are not made based on values, dividends, or cash flows. But instead on external factors like fund redemptions, tax considerations, or fear the world is about to end.
These periods are one of the only times that values seriously decouple from prices.
This is exactly what happens at the end of a brutal year like the one in 2018 in the resource market.
Investors dump stocks simply to lock in losses or gains because their upcoming tax bill is first and foremost in their minds.
That’s why the next seven weeks are called “tax loss season” in the global markets.
Will Tax Loss Selling Hit the Gold Sector in 2018?
Below is a chart which shows the performance of gold bullion along with senior, mid-tier and junior gold producers. Surprisingly, the seniors are leading the charge down. This is a telling sign of where institutional and passive fund money is going.
Unquestionably, it’s been an ugly year for gold stocks. And this group are prime candidates for tax loss selling. Investors will want to rid their portfolio of the have nots and put more money into the have’s.
And the last 90 days have been truly terrible in the gold markets.
Earlier this year in an edition of my premium research service, Katusa’s Resource Opportunities, I wrote:
The senior producers, which you would think are the safe, stable businesses, are actually the worst performers – down nearly 30% year to date and likely to continue their downtrend during tax loss season. Barring a substantial move in the gold price, I think gold producers are going to be under serious pressure for the remainder of the year.
Tax loss season is around the corner, and I think many investors who own these “safe and stable” large producer names will be hitting the bid. Assuming I’m right, this should provide a great setup for getting into many de-risked companies after the washout.
Lo and behold that prediction came to light for alligators thinking of pouncing.
In late October, Goldcorp, which is one of the world’s top 5 producers of gold, was trading at its lowest level in 16 years.
Think about how hated the gold sector is becoming.
The last time Goldcorp (GG:NASDAQ) traded below $9 was in 2002. This was back when gold was trading for under $300 an ounce!
The Real Boxing Day Bargains
Though tax loss selling comes around every year, this season’s opportunities may prove to be particularly juicy for investors.
However, stocks that are already under pressure now may not be out of the woods yet.
Tax loss season may be prime time for building portfolio positions, but that doesn’t mean you get to skip your due diligence. You still have to find the right companies to buy. Companies with proven, low-cost deposits in safe jurisdictions, led by strong management teams are the kind of companies that we look out for at Katusa Research.