Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Mining Stocks Could Halve In 2017

Commodities / Gold and Silver Stocks 2017 Jan 30, 2017 - 10:52 AM GMT

By: Bob_Kirtley

Commodities

Fed Hikes and Their Impact on Gold

When the first hike was delivered, along with the intention to deliver 3-4 more, gold prices were hovering above $1000. Gold now sits over $100 higher than it was at the time of the first hike, having rallied to $1375 when hikes were taken off the table. In our view one hike will see gold test $1000, two will see $1000 break, and three hikes would see $720 tested.


A slide in the yellow metal back to $1000 would put significant pressure on the mining stocks, which enjoyed a spectacular bounce over 2016. The HUI index was around 100 when gold was around $1000. Perhaps it was oversold at those levels, but that just proves how oversold miners can become, if they have done that before they can do it again. $1000 gold should certainly pressure the HUI index below 150, and if gold slides further below $1000 then gold miners will likely break the support at 100 on the HUI – therefore halving in value from current levels.

When the first hike was delivered, along with the intention to deliver 3-4 more, gold prices were hovering above $1000. Gold now sits over $100 higher than it was at the time of the first hike, having rallied to $1375 when hikes were taken off the table. In our view one hike will see gold test $1000, two will see $1000 break, and three hikes would see $720 tested.

The Miner’s Relationship with Gold and Equities

A slide in the yellow metal back to $1000 would put significant pressure on the mining stocks, which enjoyed a spectacular bounce over 2016. The HUI index was around 100 when gold was around $1000. Perhaps it was oversold at those levels, but that just proves how oversold miners can become, if they have done that before they can do it again. $1000 gold should certainly pressure the HUI index below 150, and if gold slides further below $1000 then gold miners will likely break the support at 100 on the HUI – therefore halving in value from current levels.

There is an argument that gold mining stocks will outperform gold this year as the stock market in general rallies. However, there are two key points to consider here. Firstly, when the stock market plummeted in January last year, gold miners enjoyed strong gains as gold prices rallied. Therefore, miners are more tied to the price of gold than the level of the S&P 500. Secondly if the Fed delivers multiple hikes this year, this will cap the stock market rally. The better the condition of the economy, the stock market and financial conditions, the more likely more hikes are. Therefore the hikes will cool the stock market rally, and could even reverse it. That would create yet more downside pressure on gold miners.

Our Trading Plan

As with any trade, the most important aspect is timing. Being too early is the same as being wrong. We are not shorting gold miners at this stage. Our plan is to wait out Q1 (just another couple of months) before beginning to layer into a core short position on the sector. As we approach the June FOMC, if multiple hikes are still looking likely, we will be aggressively short the gold mining sector into the second half of 2017. This also coincides with a seasonally weak period for mining stocks, from May through the European summer.

We would express our view and execute our short exposure via options. Even at current levels, the risk reward is attractive. For example, the low in GLD was around $100. One can speculate on gold making new lows by say $50 by the end of the year, by using options on GLD. Buying GLD December $100 puts and selling $95 puts against them costs $0.70 with a maximum upside of $5.00, a potential return of 600%. The risk-reward dynamics on gold miners appeal even more, despite a fall in liquidity for options on GDX. The low in GDX was around $12.50. On can speculate on GDX making new lows by purchasing January 2018 puts with a strike of $13, and selling $11 puts against them, for a net cost of 18 cents. This spread could be worth $2.00 if GDX was $11 or lower by this time next year, a return of over 1000%.

In summary, the gold mining stocks is extremely vulnerable to a wave of selling as a result of multiple Fed hikes this year. Whilst perhaps not a trade for right now, the risk-reward offered in long dated, far out of the money puts both on gold and gold miners is a standout. To see what trades we are making and when, please visit subscribe via either of the buttons below. We intend to pull the trigger on these types of strategies over the coming month or so. Unless one holds the view that the Fed is not going to hike in 2017, then buying downside protection on gold miners, as a standalone trade or as a hedge against existing holdings in the sector, could be the trade of the year.

Go Gently

Take care.
Bob Kirtley

Email:bob@gold-prices.biz
www.gold-prices.biz  
URL: www.skoptionstrading.com

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

© 2005-2022 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