Why Individual Junior Gold Miner Stocks Are Better Bets Than JNUG
I see too many bullish gold mining investors and traders who have jumped into the 3x leveraged junior gold miner fund, JNUG.
With JNUG, there is no good entrance and exit strategy that doesn't risk excessive losses on the front end or giving back your gains on the back end.
JNUG is designed only for short-term trades that last one week or less, and is certainly not for 6-month or longer time frames.
It is much easier to manage the entrance and exit for an individual junior gold miner stock than it is for a leveraged index fund like JNUG.
My experience in November-December 2015, January 2016, and the summer of 2016 as an example.
I'm writing this article because I see too many bullish gold mining (GDX, GDXJ) investors and traders in the past couple years who have jumped into the 3x leveraged junior gold miner ETF, JNUG.
I get it: JNUG seems like an extremely convenient way to make a bullish leveraged bet on gold miners, with the potential for high rewards in a bull market such as the one we saw in early 2016.
The problem is, with a highly leveraged sector index fund such as JNUG there is no way to identify a good entrance and exit strategy that isn't vulnerable to a high risk of excessive losses on the front end or giving back your gains on the back end.
A fund like JNUG can go up or down 10-15% in a single day and as much as 30% or more in a week. The fund is designed for very short-term traders who are in and out of the trade in a week or less.
If that's your time frame, then sure, JNUG is fine. You know the risks and rewards, you try to time your entry and exit, and if all goes well, you can make your quick 30% in a week. (Of course, if all does not go well, you can also lose a quick 30% in a week.)
JNUG Doesn't Work For 6-Month Or Longer Time Frames
But I see too many people who are trying to use JNUG as a longer-term trading vehicle to ride out a gold miners bull market for 6 months or longer. This doesn't work.
The problem is, the short-term daily volatility is essentially random, from the perspective of a 6-month trend. But with JNUG, you can give away 10-30% when you enter and another 10% to 30% when you exit, just from this random volatility, for no good reason.
Also, every time the volatile junior gold miners market goes up 10-30%, then down 10-30% - which happens all the time in the middle of a gold miners bull market - a leveraged fund like JNUG loses money, while the individual stocks just break even.
I repeat: JNUG loses money and individual stocks break even in this common scenario.
Even worse, timing the exit will always be fraught with uncertainty and indecision. In a volatile gold miners bull market, JNUG could go up 100% in a short period of time, then back down 30% quickly too, and it could repeat this multiple times.
But there will come a point when the next downturn is not just 30% but continues and snowballs into a 50%, 60% or 70% crash. And you are never going to know exactly which downturn is just the correction before the next leg up and which downturn is the crash that wipes out a large portion of your gains.
Why Individual Junior Gold Miner Stocks Are Better
Sure, individual stocks can be volatile too, and junior gold miners more so, and the micro-caps that are my favorites for massive gains can be extremely volatile. But in my experience, it is much easier to manage the entrance and exit for a junior miner stock than it is for a leveraged index fund like JNUG.
Let's look at the entrance first. Remember, back in late 2015 (November and December), when precious metals were very near their bottom and it was a perfect time to begin to build positions in junior gold miners. But one still had to navigate the ups and downs of the mid-January 2016 mini-crash in gold miners, when precious metals had a brief but sharp decline one last time.
To be honest, I found it easy to ride out that volatility with a selection of individual junior gold miner stocks. I had researched the stocks and the companies and their projects. I understood how they provided leverage to the gold and silver price and how truly undervalued they were. A little surge of sharp downward volatility in January wasn't going to shake me out of my positions that I had carefully built up in December.
But if you just had a JNUG position that you entered in November or December 2015, then mid-January 2016 must have been extremely scary indeed. You had no company fundamentals to back you up or give confidence to your convictions. And JNUG was losing a lot more value in that downturn than many select individual junior gold miner stocks were:
That was a brutal selloff to endure in mid-January 2016 in JNUG. It was a 47% drop in JNUG in just 7 trading days. Even if you got a normal entry point in November or December 2015 around $12.75 or so, you were still looking at a 33% loss on your position as of January 19, 2016.
And this is for an entry timing in December 2015 that most people would look back now and say was excellent timing for entering a precious metal miners position. And still, you would be sitting on a 33% loss at a critical moment, a month after you entered your position.
If you want to speculate in JNUG, ask yourself: could you handle this kind of loss without being shaken out of your position before the big rally to come?
By contrast, let's look at how well a selection of junior gold miner stocks handled this period in the precious metal miner markets:
Can you see how much better International Tower Hill Mines (NYSEMKT:THM) handled the volatility of mid-January 2016 compared to JNUG?
There are plenty more examples:
See? Vista Gold (NYSEMKT:VGZ) handled January 2016 just as well as THM did.
Want more? Let's look at a favorite leveraged silver miner at the time:
Sure, with Alexco Resource Corp. (NYSEMKT:AXU) you did have to endure one very rough day of brutal intraday volatility on January 19. But even then, by the end of that trading day, the worst was over and the stock price had bounced back up to $0.28, not much worse than where it was in December - only a 15% decline from a normal $0.33 entry point.
JNUG, on the other hand, closed that day on January 19 very near its low, as you saw in the first chart above. A much steeper decline, much scarier, and much harder to ride out than AXU.
And with AXU you had the fundamentals of the companies' projects on your side. With JNUG all you have is a leveraged index fund. No company fundamentals at all.
Timing The Exit Strategy
In the end, you can't enjoy your profits unless you have an exit strategy on your trades and, ultimately, on your investments. This is even more critical in junior gold miner investing: they are volatile, they are cyclical, and they are driven by speculation and sentiment extremes on both ends. They are not "buy and hold" positions, to say the least.
One of my favorite things about many junior gold miner stocks is that they have a natural built-in exit strategy: the acquisition by a senior miner at a large premium to the stock price.
My biggest gain ever in a junior gold miner was Goldrock Mines. I bought shares in January 2016, made it my largest junior gold miner position, and I made a 445% profit within 5 months when Fortuna Silver Mines (NYSE:FSM) acquired Goldrock in June 2016. And I didn't even have to worry about my exit strategy or missing out on future gains, because the buyout was clearly the final gain for Goldrock Mines.
I cannot emphasize enough how important this is psychologically to your peace of mind as a speculative junior gold mining investor. Look, this kind of speculation can be stressful. There is no way around that fact. So, anything you can do to reduce the stress without reducing your gains is a godsend that you simply must take advantage of.
There's another example that I wrote about multiple times on Seeking Alpha: Exeter Resource Corp., which was acquired by Goldcorp (NYSE:GG) in March 2017. Readers who bought Exeter when I re-recommended it in October 2016 made a 69% gain in 5 months. And they enjoyed a stress-free exit strategy from the position to lock in their gains at the time of the buyout. Even those of us who bought in July 2016 - a historically bad time to buy a gold miner stock - still made a 27% profit in 8 months, not bad at all considering the timing.
Even when an acquisition doesn't make your exit decision automatic, it is still much easier to manage your exit strategy and profit-taking with a select portfolio of individual junior gold miner stocks than it is with a single leveraged index fund like JNUG. The summer of 2016 is a good example of this.
Look, I will be the first to admit I made some mistakes in junior gold miners in the summer of 2016. I did not "call the top" at that moment. (Credit to Steve Sjuggerud, whom I disagreed with about the melt-up in a recent article; he did call this top in gold miners in summer 2016 perfectly.) I made a big mistake in recommending THM stock in a Seeking Alpha article in July 2016. Bad timing. Very bad timing.
But I didn't lose everything by being wrong then! First of all, I was sitting on plenty of gains from that massive winning bet on Goldrock Mines that paid off in June. But more importantly, even while I was adding to positions like THM that summer, at the same time I was selling and taking profits in other positions. And I wrote about plenty of them on Seeking Alpha, so you can see the proof right here:
July 1, 2016: "Take Profits On Alexco Resource Corp."
When I sold my Alexco position, I locked in another 430% gain in 6 months.
July 4, 2016: "Why Silver Is Not A Sure Thing"
July 8, 2016: "Take Profits On Paramount Gold Nevada"
The point is, because I had a portfolio of various individual junior gold and silver miner stocks, I could pick and choose some to buy, some to sell, some to add shares, and some to take profits. With a single leveraged index fund like JNUG, all you have is one big position in the sector. You can't sell down one part while you buy a little more of another part. With JNUG, all you can do is buy it or sell it, or add to your one position, or sell down the size of your one position. You actually have very little flexibility in managing your junior gold miner position.
With my portfolio of various individual junior gold miner stocks, I was able to sell some positions and take some profits, even during a critical moment when I was wrong about the overall direction of the gold miners market at that time. With JNUG, if you are wrong about the overall direction of the sector at a critical moment, there is nothing that can save you from ruinous losses or even reduce the amount of your losses.
Conclusion
I doubt that I can stop a lot of people from trading JNUG. Some people are just too lazy to bother to learn how to buy a portfolio of individual junior gold miner stocks. Some people are just gambling addicts, and JNUG is just like an online roulette wheel for them. They want more stress in the day-to-day volatility of their trading positions, they just call it "excitement." Some people would rather lose money than break even, because losing money can be more exciting and give them a better story to tell and complain about.
But if you want a more profitable and less stressful way to invest in junior gold miners, I urge you to carefully consider the ideas and arguments that I have presented here. Then you can do the research on your own, or you can take advantage of my subscription service the Stock & Gold Market Report for a large number of my top recommendations and stock picks in the junior gold mining sector.
Best wishes and good investing.
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Disclosure: I am/we are long THM, VGZ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long many junior gold miner stocks. Further details are available to subscribers of the Stock & Gold Market Report.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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