Gold miners have been weak for years, but it could be time to
Granted, they have long been a value trap. Many observers,
including myself, have touted the cheapness of miners relative to
the price of bullion. It's been true for a long time and lured
traders into the group early, but now could be a propitious time
to try again because the risk/reward profile seems particularly
favorable at current levels.
The classic comparison is between the Market Vectors Gold Miners
exchange-traded fund (GDX), which tracks the miners, and the SPDR
Gold Shares ETF (GLD), which follows the price of the metal
itself. The GDX has risen less than 3 percent in the last five
years, while the GLD has more than doubled. The disparity is even
greater in a 12-month period, with the GDX losing 15 percent of
its value. Gold has been up slightly in that time, while the
S&P 500 has rallied 16 percent.
Recently, however, we have seen a trend of stocks in the
materials sector bottoming out: U.S. Steel, BHP Billiton, Vale,
Rio Tinto, and Alcoa are among them. Even Freeport-McMoRan is
holding its ground after last week's gut-wrenching drop. And,
when the broader market tanked in mid-November, many of those
stocks came back quickly and proceeded to make new highs.
Now the chart on the GDX looks to have bottomed as well. It
rallied from $40 to $55 between July and September, then retraced
about half that move. The fund it now sitting around the $45
level where it peaked in June, so this is a logical place to
expect support. A stop could be programmed around $44.50, about
$2.10 below yesterday's close, with a price target of $55--more
than $7 to the upside.
Some of the big companies in the industry also look inexpensive
given their growth potential. Barrick Gold, for example, is
expected to earn more than $5 next year, up from $3.91 in 2012,
while Newmont Mining's profit is forecast to climb to $5 from
$3.69. ABX closed at $35.12 and NEM at $45.50 yesterday. Analysts
have raised estimates on both in the last three months even as
most forecasts for the S&P 500 were lowered.
In addition, the options have been turning bullish. Yesterday ABX
saw December 36
had unusual activity in the April 8 in-the-money calls. Upside
, an obscure junior miner based in Canada, lit up our scanners as
One potential trade is a bullish combination strategy in NEM. The
March 45 puts could be sold for $2.65 to earn credit. The March
42 puts could be bought for $1.47 to hedge the downside risk, and
the March 50 calls could be purchased for $1.18. The net cost
would be zero, with a maximum loss of $3 if the stock breaks
long-term support and drops to $42, but those March 50 calls
would stand to generate big profits if the shares rally.
This is just an idea, not an official recommendation of any kind,
and I don't plan to provide any updates or advice on it. But the
risk/reward looks positive, especially with Newmont at a
long-term level near $45.
: I own FCX shares.
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of Dec. 12.)