As gold and silver prices exit a two-year bear market and
begin to turn higher, we're seeing some great opportunities in
precious metal mining companies.
#-ad_banner-#Chinese demand for gold is a large part of what
is driving the price of the yellow metal higher. According to the
World Gold Council, China surpassed India in gold purchases last
This demand should continue to rise in 2014 as China braces
for what could be a very painful contraction in its economic
growth rate. A recent Bloomberg article noted that Chinese bond
defaults were now "unavoidable," and the country's shadow banking
system has been referred to as a "ticking time bomb."
With a white-hot real estate bubble posing significant risk,
and China's policymakers expanding the allowed trading range for
the yuan, Chinese investors have legitimate reasons to want to
protect their wealth against a potential debasement of their
currency. Buying gold is one way to help protect their purchasing
power, and as long as the country remains on unstable economic
footing, I expect demand for gold to increase.
Not only is this demand good news for precious metal miners as
they will be able to sell production at higher prices, higher
should indirectly benefit equipment makers who supply miners with
the heavy machinery.
Long-term projections for gold prices will have a material
effect on the economic viability for individual gold miners. When
gold prices were steadily trading lower, threatening to move
below the $1,200 per ounce price point, miners cut back on some
specific high-cost operations, as these projects were no longer
profitable at that price point.
However, if gold prices continue to appreciate, many of these
projects could be reopened, and new exploration opportunities
would once again be worth the cost of development. As gold demand
from China builds, I expect miners to adopt a bullish long-term
perspective on gold prices and take on more risk, opening
shuttered operations and expanding development projects. This
increase in operations will require more equipment, which is
great news for companies like
Shares of CAT have been moving steadily higher over the past
few months, climbing from a low of $82 in November to a current
price near $96. As miners start to expand operations, I expect
Caterpillar to receive new orders for equipment, which in turn,
should bolster investor confidence. Since CAT is already in a
strong bullish pattern, it is not a stretch to say that the stock
should hold up well in an environment that features rising demand
for its equipment.
Today, we have a chance to set up an income trade that will
generate 20% a year by
against CAT. The CAT April 95 Puts, which expire in four weeks,
are currently trading near $1.45 per share.
By selling these puts we obligate ourselves to buy 100 shares
of CAT per contract at the $95
. This purchase price represents a slight discount to the current
share price, and when you consider the fact that we received
from selling the puts, our net cost is actually only $93.55.
Given the long-term positive outlook for CAT, and the strong
boost in income it could receive from precious metal mining
companies, I would be happy to buy shares at this price.
If CAT remains above the $95 level, we will get to keep the
$1.45 per share ($145 per contract). Compared with the $93.55 per
share ($9,355 per contract) that we will need to set aside in
case we are
assigned the shares
, this represents a 1.5% return. Since this return can be booked
in just 28 days, the trade represents a 20% per-year
rate of return
One thing to note is that Caterpillar pays a $0.60 quarterly
dividend, which represents a 2.5% yield. The next dividend is
expected to be paid the week these puts expire. As put sellers,
we will not be eligible to receive the dividend payment, but the
stock could drop by $0.60 on the day the stock goes ex-dividend.
This makes our puts just a bit more likely to be exercised. But
with CAT paying an attractive dividend, on top of the strong
business outlook, I would be happy to pick up shares at a net
cost of $93.55.
This article originally appeared on ProfitableTrading.com:
Alternative Gold Play Could Yield Up to 20% a
Year in Income