As the possibility of a federal-government shutdown evolved into a strong probability that resulted in a lot of hand-wringing today, the volatility kept even some of the most-seasoned traders on the sidelines.
Government shutdowns are nothing new. And history suggests, when those take place, that a correction of roughly 7.2% is standard to expect in a bull market.
If markets do drop from here, be careful on the short side — because the downside could be short-lived.
That’s why yesterday I recommended that my subscribers, across a couple different services, grab gains in some of their short-term put option trades in names like Intrepid Potash (IPI), the U.S. Oil Fund (USO) and the SPDR Dow Jones Industrial Average ETF (DIA) (for up to 75%, 20.48% and 38.3%, respectively).
And now that we’re here at the pivotal Oct. 1 date, you may be wondering, "What next?"
In government-inspired market pullbacks, we’ve seen gold shine and oil slip, depending on whatever geopolitical situation is in play.
Long-term gold bulls may suggest that it’s always a good time to add gold. And I favor owning bullion that you have access to at all times.
However, there’s one gold investment that I wouldn’t touch with someone else’s 10-foot pole right now, and that’s junior gold miners.
Here’s why …
Another gain banked … and another!
Amid Washington’s "Shutdown Showdown," James DiGeorgia’s subscribers were able to grab up to 38.3% and 20.48% gains yesterday morning in 2 short-term, long-put option trades.
And before that, he told them to grab gains in a call option that soared 67% thanks to Fed-related news!
In just the last six weeks, James’ breakthrough trading system has posted a remarkable 6 straight winning trades … and a cumulative 208% in gains!
The fact is, he’s consistently racked up 63% a month in average gains each month … for a cumulative total of 4,540%! Get the shocking details now.
Junior Miners Can Grow Quickly, or Not at All
Now, you may ask, "But James, you run a service called Junior Resource Millionaire! How can you say you won’t invest in the junior miners?"
Let me clarify that I love junior resource plays because of their upside potential. And even if gold springboards from here, investing in miners isn’t the strategy I prefer to use in the near term.
Of course, I have some rules that I never violate — i.e., no penny stocks, the stock must be "undervalued" rather than "undiscovered," and the company must focus on building shareholder value by growing its resource base … or doing everything it can to protect it.
Unfortunately, right now, I’m not seeing my strict criteria being met across the board. But I am seeing …
‘The Worst Wave of Failure in Decades’
For example, South Africa’s Blyvooruitzicht Gold Mining Company survived 70 years of commodity booms and busts. However, the streak ended when "Blyvoor" went bankrupt last month.
The combination of lower metals prices and higher production costs left 1,700 workers unemployed. Majority owner Village Main Reef Ltd. had promised to breathe new life into the company. Instead, its investment disappeared.
Blyvoor isn’t unique. Gold, copper and silver mining companies are going bust at a rapid rate. Others stopped mining activity and now live in a kind of corporate hibernation. Many are even returning land options to avoid royalty fees … anything to cut expenses to the bone and conserve cash just to survive!
Wall Street’s best-informed analysts touted some of these miners back when gold was $1,800 and silver was $35. Few predicted this wave of failure — the worst in decades.
Metals prices of all kinds — ranging from gold to copper and everything in between — fell so sharply over the last year, there’s just no way smaller firms can survive.
Rising costs compound the problem, especially the higher salaries top mining specialists can command. Finding capital for new projects is all but impossible.
With the average cost of production higher than ever, even the largest gold producers in the world struggle to make a profit.
Do small investors have a chance? Yes — if we learn the right lessons.
The Gold Lining to this Chaos in the Penny and Junior Mining Sector
Re-starting production at an idle gold mine is not like flipping a switch. Mining companies have to bring in people and equipment, set up and test everything, and often get regulatory inspections. The process can take years.
When gold prices rise enough to make these mines profitable again, we will still have huge shortfalls in worldwide production of gold, silver, platinum and copper. I think it will start in 2014 and could well last until 2020 … long after the price of both precious and base metals climbs back to historic highs.
As a precious metals and stock analyst for more than two decades, the one thing I have come to understand is — it takes years for the mining industry to bounce back from a market disruption like the one taking place right now.
It not only takes prices to climb back, but it takes a few years before investors, banks and mining companies to believe the bounce back in market prices are real before they start considering new projects .
It also takes a few years to bring viable small mines back into production.
Understanding the current condition of the precious and base metals mining sectors gives you some BIG advantages.
How to Avoid a ‘One-Way Ticket to Palooka-ville’!
First, it will keep you from chasing "story stocks." Penny and junior mining companies are now resorting to paid promotions for their businesses to provide liquidity — and, yes, financing.
By using the Internet and direct mail, a growing number of these companies are generating enormous share volume. Venture capital groups use the liquidity to attract large "accredited investors."
Stay away from these offers. In general they’re — to quote Marlon Brando — "A one-way ticket to Palooka-ville!"
Second, you know the best conservative way to play gold, silver and platinum is to buy the physical metals and store them in your safe or safety deposit boxes. Buy only from dealers who deliver quickly and reveal their BUY / SELL spread.
Third, you can play the gold, silver and platinum markets with Exchange-Traded Funds like the iShares Gold ETF (IAU). They allow you to buy and sell gold bullion the same way you trade stocks.
Fourth, look for opportunities in gold mining companies — but not until the bullion price breaks over $1,600 per troy ounce. I think the next equilibrium for gold will be in the $2,100 to $2,250 range.
The Federal Reserve has made it clear: Short-term interest rates will stay near zero through at least 2015. Even if they start tapering the QE3 bond-buying program, the Fed will STILL be printing money.
Tremendous growth in Federal Reserve’s balance sheet will eventually drive gold, silver, platinum and even base metals, energy and oil to historic new highs.
For now, I keep an eye on metals but focus mainly on energy — especially natural gas plays. I’ve found plenty of profit opportunities this year. I share the best ideas with my Global Resource Hunter and Junior Resource Millionaire subscribers.
If gold and silver aren’t moving enough for you, be patient. They’ll come roaring back soon.
Good luck and best wishes,
P.S. My Gold and Energy Options Trader subscribers had the chance to nab up to 20.48% and 38.3% in long put-option gains via two short-term trades yesterday during the "Shutdown Showdown."
And in the trade before that, a call option position in Newmont Mining could have handed them up to 66.7% gains in just 3 days! Click here to see how we’re finding winning trades like these, one after another, regardless of what’s happening in Washington!