Musings on Investing – SELLing time; but maybe BUY Reservoir Minerals

The following article is from Jayant Bhandari and has been approved for publication on ‘Proven & Probable’:

Dear Everyone:

Mining companies have shown tremendous increase in share prices over the last few months. Talk of optionality and leverage is back. People are building into share-price valuations a much higher gold price than the spot price. Even worse, they are just buying for the sake of buying without any valuation. Experience over the last 15 years shows that optionality and leverage is mostly a myth—optionality and leverage work great on my spreadsheet, but not in reality. Moreover, even if they did work, people should invest in equities for value using spot prices or prices lower than spot prices, rather than some fancy commodity prices.

If they like certain metals, they should just buy the metals, or else they end up taking very convoluted, unfavorable risk-reward decisions.

My view is that mining companies have gone up too much too fast and it is, for me, time to SELL, not buy. Can I lose on a big upside? I might, but I have learned over the last few years that anyone who does not follow two crucial rules takes too much risk: First, protect your capital, and second, don’t forget rule-1 (quote attributed to Warren Buffet). I could have given half my net-worth to anyone who could have convinced me in 2011 about the value of these two rules.

Linked is a panel discussion from Zurich in which we discuss similar issues.

I have increasing become very optimistic about the future of gold price. I explain why in the linked speech at the recently held European Gold Forum. Again, when I value equities, I still use spot price of gold, never higher.

On opportunities… I like the recently announced acquisition of Reservoir Minerals (RMC). My view is that it is a good company to buy on any weakness. The upside is likely limited, but at least there is some upside.

Protect your capital.

Warm regards,

Jayant Bhandari

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