Submitted by
SK
Options Trading
as part of our
contributors program
.
As investors looking for leveraged exposure to gold prices we
tend to favor unhedged gold mining companies such as those listed
on the HUI, which is the AMEX Gold BUGS (Basket of Unhedged Gold
Stocks) Index. At the start of 2011 this Index stood at 575, at the
start of 2012 it stood at 500 and this year it started at 440. So
we can see that the last two years have been negative in terms of
returns on an investment in this sector. There are always
exceptions to the rule but in the main gold stock prices have been
heading south as demonstrated on the chart below:
During this torrid period for the stocks we remained on the
sidelines preferring the accumulation of the physical metal and the
occasional foray into the
options
market, a strategy that has served us well. However, after two
years in the doldrums we must now wrestle with the possibility that
the mining stocks could be on the launch pad and ready to break
out.
There are a myriad of factors that have a bearing on the
fortunes of the mining sector with one of the most important being
the global increase in paper money. Every time the printing presses
produce more paper money they dilute the value of the existing
currency which in turn usually adds to inflationary pressures. As
inflation rises the need to own gold increases exerting upward
pressure on gold prices, supposedly benefiting the producers along
the way. However, inflationary pressures have remained relatively
subdued, if the official stats are to be believed, capping gold's
progress and taking the shine off the mining sector. Gold's inverse
relationship with US$ remains intact, but the dollar is having
difficulty going lower as governments around the world dilute their
own currencies in this on-going race to bottom.
Among the other factors affecting this sector are the US Debt
ceiling debacle which will no doubt have the talking heads
dramatizing the situation all they can, but as we saw with the
fiscal cliff not much will change. The news that Germany wishes to
repatriate gold reserves from France and USA is also causing alarm
bells to ring, but we suspect that this transition will be managed
for mutual benefit of those involved.
Investors are usually seeking a capital gain on their investment
and occasionally when a capital gain is not on the cards, some
investors will invest on the basis of a good stock dividend.
Unfortunately dividends from mining companies vary from low to
nonexistent which only serves to deter many investors. It gets
worse when we see the management of profitable companies
continually reinvesting their profits into the acquisition of the
juniors. We all appreciate the need to fill the pipeline in terms
of future supply, but if this process is endless then our
investment serves only to keep those companies in full employment,
so we hope that this article serves as a wakeup call for them to do
more for their embattled supporters.
In conclusion we are of the opinion that both gold and silver
prices will rise this year and finish a lot higher than they are
now. For gold producers it will be a different story with the
quality stocks making substantial progress. However, this is not a
situation whereby all the boats rise on a rising tide, for the
majority of the companies in this sector there will be very little
support. Investors are choosey and will need to be more so and do
their due diligence more than ever before, if they are to turn a
profit in this market. The low hanging fruit has indeed been
harvested so we are entering the 'hard work' phase of investing in
this sector.
Take heed, this is not a time for a nonchalant approach to
investing, that hot stock today could well be tomorrows dog and not
one that you want in your portfolio. Find the time, do the work,
choose your stocks very carefully and then layer into them
gently.
For us it is slightly different as we already have a core
position and now our strategy will be to identify those stocks that
have been severely oversold and are due to bounce back. Within our
small team, just the four of us, we refer to this as the 'catch the
wave' philosophy whereby a number of good quality stocks will be
bought and sold during 2013 hopefully generating decent profits for
our portfolio.
We wish you all a successful and profitable year ahead.
Disclaimer: www.gold-prices.biz or
www.skoptionstrading.com
makes no guarantee or warranty on the accuracy or completeness of
the data provided. Nothing contained herein is intended or shall be
deemed to be investment advice, implied or otherwise. This letter
represents our views and replicates trades that we are making but
nothing more than that. Always consult your registered adviser to
assist you with your investments. We accept no liability for any
loss arising from the use of the data contained on this letter.
Options contain a high level or risk that may result in the loss of
part or all invested capital and therefore are suitable for
experienced and professional investors and traders only. Past
performance is not a guide nor guarantee of future success.