If I can twist an old joke here, the way to take a small fortune out of the market with precious metals stocks is to invest a large fortune in precious metals stocks; then wait for the summer bloodbath and sell.

But this post isn’t just about a bad, even painful, joke. I think a person can make a small fortune in precious metals stocks and here’s how:

• Identify a mix of gold and silver stocks that cover these bases:
  • Large capitalization majors with smart management and no hedge book (easier now since many of the large hedges have finally been unwound). These companies will be the first to move up as institutions allocate money into precious metals stocks. They are also likely to fall less in times of trouble for the sector. Get the needed research and picks from publications like Big Gold.
  • Junior explorers who actually have metal in the ground and adequate cash in the bank. Some of these companies will actually get bought up by the larger companies in the group above. Here you must pay particular attention to which companies you buy and what geographic & political locations they operate in. Ideas for this category are likely to come from the International Speculator. Make sure this is money you can afford to lose as there will be more risk here than with the majors.
  • an optional third category could be exploration companies that do not have proven reserves but appear to have all of the right components in place, including top notch management. Stocks in this category will be volatile, risky, but potentially explosive. Tread here only if you dare and definitely only with money you can afford to lose.
• You have to buy right. It’s the same here as anywhere else, you make money when you buy, not when you sell. This can be particularly tough because during the good times for precious metals shares there will be profits rising before your eyes that you don’t want to miss out on and every company has a great story. In reality, though, you want to buy in times like right now when blood is running in the streets and your stomach tells you to sell and get as far away from the sector as you can. It helps if you can identify the gold and silver stocks you want to own and then place “stink bids” for them at the prices you want to pay – then be patient. You will miss some, no doubt, but you will get the most of them at the right price eventually.
• Don’t forget to SELL. Casey Research has what they call a “Free Ride Formula”. This is where a stock you buy doubles in value and you then take your initial investment off the table by selling half of your position. If the other half then goes to the moon, you can kick yourself all the way to the bank. If the other half falls to zero, you can laugh yourself all the way to the bank. Win – win.

How about “Sell in May and go away”? We all know the Canadians, whose stock exchanges house most of the juniors and many of the larger cap gold and silver stocks, take the summer off for vacation which is part of the cause of the summer doldrums in resource stock prices. Why not sell in May and come back in late August?

Good question, and one there is no certain answer for. Definitely that was the thing to do this year, in fact Paul van Eeden sold everything early this year – a phenomenal call in hindsight. But will oil prices soaring, threat of war with Iran, an unforeseen war in Georgia (the country, not the state), there was risk in not being in the market this summer.

Additionally, summer is when you want to be around to shop for bargains during what Doug Casey calls the summer “shopping season”. And if you are at all pessimistic at heart I will tell you that the first year you decide to sell in May and go away will the be off year when gold and silver stocks soar to the moon. As soon as you count on some pattern repeating itself in the stock market you are sure to get burned by it.

So there you have it, how to make a fortune in precious metals stocks. Yes it requires capital, patience and sometimes a cast iron stomach.

But remember, if it was easy, everyone would be doing it.