The Illiquidity of Junior Gold Mining Stocks

I had a first hand experience in the thin liquidity that can occur in the junior Gold mining patch. I hold the junior Gold miner Rainy River Resources (ticker: RR.V) via a pink sheet OTC listing (ticker: RRFFF). This is done to get around having to deal directly with a foreign exchange. It's not something I recommend, it's just something I did.

Here's the 6 month daily chart for RR.V thru today's close:



I put my order in to sell my pink sheet OTC version of Rainy River stock (i.e. RRFFF) at a limit order of 3.50 after the close on 12/14/09 (Monday night). Within the first hour after the open on 12/16/09 (Wednesday), RR.V on the Venture Exchange popped to $4 a share, more than enough to trigger my order. Remember that the pink sheet OTC shares for Rainy River trade at a different price than the RR.V stock listing on the Toronto Venture Exchange due to currency differences between Canada and the U.S., as well as the "skim" of the market maker. However, at a $4 RR.V, the shares of RRFFF were up in the 3.70-3.75 range - far above my limit sell order of $3.50. I was kicking myself for setting the sale price so low and then chuckling at how ungrateful I was being for making a 60% profit in one month.

A few hours later, I logged into my brokerage account to check my new cash balance. I wanted to plan my next speculation using my newly earned winnings from the Rainy River trade. When I logged in, I found out that my Rainy River trade never executed. I made sure that my sell order was still active and was entered into the system correctly - it was on both counts. I saw that the volume was light in the RRFFF pink sheet listing for Rainy River that morning, but some sales in RRFFF had occurred well after the opening in the 3.60 to 3.75 level! I gave it another half hour. Still no sale. I had to go to work in a rush and didn't get a chance to check back until well after the market had closed for the day.

My order never executed that day even though it appeared as though every sale after the opening bell in RRFFF occurred above my 3.50 limit price. I was bummed. I called the broker the next day and they informed me of liquidity issues and being at the mercy of the market maker. I figured the stock was still strong and left my order alone. Today, it did not fill until several hours after the price again jumped above 3.50 for RRFFF and it only partially filled (90%) despite at least 20,000 shares in RRFFF trading today above my asking price.

This is a total racket and is just one of the many risks associated with investing in small cap stocks, especially pink sheet OTC listings. The same phenomenon occurs in thinly traded options and futures contracts. Bid-ask spreads get abnormally wide for illiquid issues and orders can take a long time to fill even when the listed price is at your asking price (whether buying or selling).

Speculating is hard enough without taking it on the chin because of such issues. I just wanted to let everyone know who doesn't that these are some of the extra risks in the small cap and/or illiquid share arenas (not unique to Gold miners by any stretch). Though I was aware of such issues before I committed a portion of my speculative capital to this trade, today was a harsh reminder of how the risks are not theoretical.

This execution fiasco was also made worse by the fact that Rainy River was my main positive holding today as a Gold investor other than the idle cash in my account rising in value relative to Gold stocks so that I can buy more. "Sea of red candlesticks" would be an apt description of a composite view of all my Gold stock holdings today. Unless a dramatic upward reversal in Gold and Gold stocks happens before the market opens, tomorrow will likely be another buying day for me. If GDXJ dips a little further tomorrow, I will be buying in volume. If not, I'll wait until next week.

I remain rabidly bullish on Gold and Gold stocks and may well be back to 100% invested by next week.