-- Posted Monday, 18 July 2011 | | Disqus

As a geologist by training, it's no surprise that S&A Resource Report Editor Matt Badiali takes a data-driven approach to investing. In this exclusive Gold Report interview, he shares calculations for trailing stops and strategies to take profits with prospect generators and points to the signs of gold price manipulation.

The Gold Report: Matt, in the June edition of S&A Resource Report, you wrote that resource stocks could see some pullback once quantitative easing (QE) was no longer injecting money into the system. QE2 ended last week. Is your thesis proving correct and what are your strategies to mitigate post-QE2 portfolio risk?

Matt Badiali: A lot of the resources—silver, oil and even gold—pulled back at the end of April. We felt there was enough commodity risk that we wanted to be careful investing in a lot of those companies. However, we jumped back into several silver companies because they just got too cheap not to take action. It looked like they had been oversold.

I still feel oil is inflated. I think gold is still in a bull market, but no bull market goes straight up. With the end of QE2 we could see gold reverse a little bit. My recommendation this month was coal. With European countries jumping out of nuclear power, coal is a fairly bulletproof market; it has less commodity risk than the rest of the group.

TGR: The headline on that article was "Ignore the Noise and Focus on the Big Trend." What is the big trend?

MB: For one, gold is still a fantastic long-term investment. That won't change until the U.S. and Europe get their financial houses in order. That's when I'll start looking bearish on gold and silver. We've seen a spectacular run in the silver price, then a big correction. Eric Sprott, for one, makes the case that silver will appreciate more than gold over the next year or two.

TGR: But for silver to return to its long-held ratio of 16:1, it would have to accelerate at a rate more than double that of gold. That's a steep climb.

MB: I think inflation is still one of the best arguments; silver remains a good store of value. But silver also has one foot in industry, where demand is rising.

TGR: You've also written about the manipulation of the gold price. You made your case by looking at single day jumps in the price of gold and other commodities over the last 10 years. Over that span, gold had gone up more than 5% in 1 day only 3 times, oil went up more than 5% on 53 days and silver on 32 days. More to the point, gold never went up more than 10% in a single day over the previous 10 years. That would suggest the gold market is being controlled. Are you concerned about placing so much faith in a market that is being controlled by non-market-related events?

MB: Well, let me preface this by saying I went into this as a skeptic. I'm a geologist, a scientist. I looked at the gold price at Eric Sprott's suggestion; he gave me an idea that I could test with data from Datastream. When we did the math, I was shocked. So, now I do believe that the gold price is being manipulated somehow.

As to my concern about investing in a manipulated market, I do my absolute best to hedge commodity risk by finding companies that are undervalued. You can't argue with the long-term trend: the price of gold has gone up every year for the last decade. Either the manipulators are doing a terrible job or the trend is so inevitable that all they've managed to do is dampen it a little bit. The implication is that if the manipulators lose their ability to manipulate, gold prices could soar.

TGR: Let's move on to your specialties. You recommend using trailing stops to lock in profits on equities. A trailing stop is triggered when an equity goes below a certain percentage of the previous day's closing price. Given resource stocks' inherent volatility, how do you determine trailing stops for junior resource equities?

MB: My colleague Steve Sjuggerud helped design a computer model we use to determine the most effective trailing-stop price. Trailing stops work off the high price. So, we base our percentage on the highest price that the equity achieved at the close of the day's trade. For example, an investment in one of the big oil companies would use a 25% trailing stop.

TGR: Because that's not a volatile stock.

MB: Exactly. For juniors, we use 50%. Really, it's about protecting yourself against major losses. We believe 50% is as much of a loss as we want to take on any position. To me, the trailing stop is a great way to take profits. If you start with a 50% trailing stop on your volatile stocks, you can tighten it to 25, then to 15 and 10 as you make money.

TGR: How do you determine how much to tighten?

MB: This is when the strategy has to go beyond the company. So, say we bought a junior miner operating in the Yukon. We made a big gain during the field season and in September we're sitting on 60% or 70%. This is a great time to ratchet down your trailing stop because news flow is the life blood of junior miners. You can take a profit and plan to get back in the next summer.

TGR: What's your approach to evaluating a management group?

MB: Doing your homework really pays off in this industry and not doing your homework will ruin you. There's an old saw that says the best way to make a million investing in junior miners is to start with two million. That's true.

I do the homework—and the legwork—for Stansberry. I make the phone calls. I go to Vancouver and attend the conferences. Meeting management is crucial; I go to their offices. I go out to the projects and kick the rocks. I keep a contact list of industry experts from geologists to brokers to successful speculators to retired geologists that aren't in the field anymore. I vet projects and companies as thoroughly as I can before we ever invest in them.

TGR: Matt, thanks for helping our readers get a start on their homework.

Matt Badiali is the editor of the S&A Resource Report, a monthly investment advisory that focuses on natural resources—from small exploration outfits, to equipment companies, to the biggest commodity companies in the world. As a geologist, Matt focuses on all natural resources including silver, uranium, copper, natural gas, oil, water and gold. He's also a regular contributor to Growth Stock Wire, a free pre-market briefing on the day's most profitable trading opportunities. Matt has real-world experience as a hydrologist, geologist, and a consultant to the oil industry and he holds a master's in geology from Florida Atlantic University.

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-- Posted Monday, 18 July 2011 | Digg This Article | Source: GoldSeek.com

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