Best of the Week
Most Popular
1.China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015? - Nadeem_Walayat
2.Gold Price Awaiting Outcome of Greece Crisis - Clive_Maund
3.Gold Price Peculiar 6 Month Cycles - Rambus_Chartology
4.Gold Price Just a Little Bit More - Bob_Loukas
5.8 Unprecedented Extremes Indicate a Stock Market Bubble in Trouble - EWI
6.Gold And Silver – Without Either, You Will Be Greeced - Michael_Noonan
7.Lies, Damned Lies and Statistics - James_Quinn
8.China Crash, Greece Crisis Harbingers of Stocks Bear Market? Video - Nadeem_Walayat
9.Gold and Silver Record Shorting - Zeal_LLC
10.Markets Big Deflationary Downwave Quick Reference Guide... - Clive_Maund
Last 5 days
The Fed Can't Stop the Commodity Bear Market - 1st Aug 15
Meet the Leader Who Turned Google Into a “Buy” - 1st Aug 15
The Greek Coup: Liquidity as a Weapon of Coercion - 1st Aug 15
Gold’s Amazing Resiliency - 31st July 15
Silver – A Century of Prices - 31st July 15
Demand for Gold Bullion Surges – Perth Mint, and U.S. Mint Cannot Meet Demand - 31st July 15
Reasons Why the Greek Crisis Will Only Get Worse - 30th July 15
The War On Cash: Why Now? - 30th July 15
Greece - The IMF Experts Flunk, Again - 30th July 15
Threat Of Cyber Warfare the “Other Reason To Own Physical Gold” Warns Rickards - 30th July 15
The 5 Biggest Myths and Lies about the Middle East - 30th July 15
Greece, Diversion, and the New World Order - 30th July 15
Ibuprofen Warning - The Pain Killer that can Kill You! - 29th July 15
More Ritholtz on Gold, and Another Response - 29th July 15
Crude Oil Price Is Lower – and You’re Richer - 29th July 15
U.S. Home Sales Market Is Dead – This Chart Proves It - 29th July 15
Greece- What Happens When Economists Talk Politics - 29th July 15
The Gold - U.S. House Prices Ratio As A Valuation Indicator - 29th July 15
Will Crude Oil Price Decline Continue? -Video - 28th July 15
Gold & Silver Money Has Devolved Into Debt and Plastic - 28th July 15
Buy and "Own Gold Krugerrands" Says Money Expert Jim Grant, Very Bullish on Gold - 28th July 15
How to Protect Yourself from China's Crashing Stock Market - 28th July 15
Quantum Geopolitics - 28th July 15
Gold Mining Stocks to Weather the Storm - 28th July 15
Stock Market Bulls Beware! - 28th July 15
Will Chinese Stock Market Crash Affect the US? - 27th July 15
Crude Oil Price Under $48! - 27th July 15
Are We Seeing a Trend Reversal with U.S. Interest Rates? - 27th July 15
How to Know When the Gold Bear Market is Over - 27th July 15
Gold Bear Market Phase III - 27th July 15
Silver Bull Hammer Buy Signal - 27th July 15
Gold Cracks Support and Plunges to New Lows - How Low Will Price Go? - 27th July 15
Commodity Markets Breakdown Of 2015 Is Now A Fact - 26th July 15
Gold Price at a Five-Year Low: Here’s What to Do - 26th July 15
Stock Market Primary III Inflection Point - 26th July 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Bubble in Trouble

Gold Stocks: Tread Carefully

Commodities / Gold & Silver Stocks Mar 09, 2012 - 03:07 AM GMT

By: Bob_Kirtley

Commodities

Clarity of vision can be lost in the everyday hustle and bustle of market gyrations, news events, political posturing and the whirlwind of activity that is our daily labor. So, from time to time we need to recap by establishing just what it is that we are trying to attain. It is said that if we can state the problem clearly we are half way to the answer, so here we go:

Question: What is it that we are trying to achieve?


Answer: Exposure to the Gold Bull Market in order to generate a handsome return on our investments.

We are all aware that there are a number of vehicles available to us for this very purpose including the acquisition of physical gold, investment funds, gold mining companies, options and/or futures trades.

We have long held the view that holding physical gold in your very own hands is the first step and you then have the outright ownership of gold and you are not subject to the vagaries of the third party risk that comes with owning paper. If you are comfortable with owning paper and enjoy the ease at which you can move in and out the various funds that are available or the speed at which you can trade stocks then that's fine, as it is your aversion to risk that needs to be satisfied.

Now, if you are keeping up with play you will have noticed the chorus of support for the mining the sector lately. Some miners do indeed have excellent management teams in place with good track records along with interesting prospects in relatively safe mining jurisdictions. They should also be generating a fair amount cash with gold prices trading around the $1700.00/oz level. Lets face it, if they are not making money at these levels you would need to ask why you need to own them at all. Then there is the question of what use will be made of this cash pile, another acquisition, an increase in the exploration budget maybe, or even paying their loyal investors a dividend. Some miners are involved in all of these activities, although it has to be said that the dividends are not yet attractive enough to entice an investor looking for a handsome return for taking such a risk. To get the returns that we would like, we tend to look to those miners who are unhedged, that is as a miner who does not forward sell the gold for today’s gold price, that will be produced later on.

However, having tracked the progress of this sector of the market closely we are not impressed. If you take a quick look at the chart of the unhedged miners, the *HUI, you will note that it has been in consolidation mode for some time now and it did touch 500 in March 2009. Today it stands at 509.42, so unless you are an exceptional stock picker your money hasn't been working for you at all. We would like see a serious breakout above the 600 level before we would be comfortable with acquiring any more stock.

The Juniors are also being trumpeted as the place to be, however, many of the juniors do not have any ounces of gold in the ground as proven reserves, therefore why should they rise with gold prices? Junior explorers tend to rise on whether or not they have found gold, not in lock step with the gold price.

As a suggestion for those of us who do want to maximize their returns from this precious metals bull, then a few carefully thought out options trades could be a possible solution for us. This way we are exposed to any movement in gold prices which in turn is magnified by the effect of the option. Do remember that loses are also magnified in the same way so its not a strategy for those who have an aversion to risk. On the other hand the quality stocks are not performing as anticipated and a non-producing junior stock is a shot in the dark, however, its your hard earned cash and its your call.

Footnotes:

You may be interested to see some of our past posts on this subject as we have wrestled with it and found it worrisome of late.

Are Gold Stocks worth the effort? Posted on Sunday, August 15, 2010

Are stocks the way to play this bull? Posted on Saturday, February 27, 2010

Gold: Are juniors the way to go?  Monday, July 7, 2008

*The HUI is The AMEX Gold BUGS (Basket of Unhedged Gold Stocks) Index represents a portfolio of 15 major gold mining companies. The Index is designed to give investors significant exposure to near term movements in gold prices - by including companies that do not hedge their gold production beyond 1 1/2 years.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

DISCLAIMER : Gold Prices makes no guarantee or warranty on the accuracy or completeness of the data provided on this site. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This website represents our views and nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this website. We may or may not hold a position in these securities at any given time and reserve the right to buy and sell as we think fit.

Bob Kirtley Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History