Gold – The Dollar – Potential Miner Trade

Overview:

Markets are cyclical in nature.  Eventually the bull stock market will end and the bull gold market will resume.  When this will happen is anyone’s guess but it will happen.  With sentiment favoring US stocks the dollar has rallied which often has an inverse reaction with gold.   Longer term we are looking to add more exposure to gold as we enter the final phase of the bull economic cycle. 

Previously we added GDX to our portfolio, and shorted calls against it which expired worthless; reducing our GDX per share cost by 3%.   GDX is not a long term hold Randgold is; GDX is simply a trading vehicle.  You can read the report on why we favor Randgold over GDX here. 

XAUEUR:

The dollar has also found strength and though the dollar and gold are not pegged in correlation they often do correlate.  In Euros, gold has rallied since 2014 and is currently consolidating between 1060 and 1112.  A break of 1112 could signal a longer term rally towards the initial target of 1225.  A break to the downside below 1060 we find support between 950 and 1008.

Europe’s has its own economic and political issues.  Simply follow the money as it flows out of European bonds and into the dollar, at least in the aspect that the dollar has strengthened as Spanish – Italian & Portuguese bond yields increase.  They say bond traders are smarter than stock traders and normally ahead of economic cycles.  Is this a signal that the European economy is nearing the end of a cycle or just political woes?  Either way the charts are telling us that money is flowing into the US market and for all the wrong reasons.

XAUUSD:

The strong dollar has had an affect on gold in US dollars in a negative way with gold falling out of the horizontal channel and hesitating just above the support zone of 1265-1285 at the bottom of our longer term trend channel.  One could make the case for buying gold here; however, there are still some implied risk with the Euro and the US dollar.  There is still a possibility we move lower into the support zone and the formation of multiple pinbars indicates the market is be indecisive here.  Let’s see if the miners provide a better trade opportunity.

GDX Chart:

GDX has reversed just above the higher end of the support zone between 21.4 and 22.0.  Though there may be an early formation of a descending triangle we want to trade out of the support zone not above it.  One could make a case for going long here either with the stock or an options trade, but clearly we are not in a zone that provides a higher probability of success.  This would be a more risky trade and we are looking for better depth into support for a trade.  We will just stay long our current position with GDX. 

Randgold is trading towards the bottom of its multi year horizontal trend channel.  Looking at the chart fair market value for Randgold is between 83.00 and 95.00.  We are well under this and trading slightly above where Randgold was trading when gold was at 1120.  Gold is 15% higher yet Randgold is only 10% higher.

RandGold Weekly Chart
RandGold vs GDX

 

 

 

 

 

 

 

There is also a correlation with GDX and Randgold but recently the correlation has ended.   What has most likely made the pullback deeper is the $2.00 dividend paid in late March.  These once a year dividends (especially when they are around 4%) cause these types of selloffs but also opportunities for us longer term investors.

EURUSD Chart:
EURUSD

As we mentioned the Euro is showing signs of European economic weakness or political unrest.  The US election is this summer and this may cause market uncertainty as the focus has been recently on earnings and trade wars.  The herd is short sighted, reacting to conditions rather than being pro-active.  Currently the US midterm election is not on their minds, only chasing the stock market.  As Marc stated in his S&P article we are headed into the summer rally, fall selloff and then Christmas rally, but this late into a market cycle, and within 10%-15% of our S&P target, we may likely see early money rotate into safe haven trades like gold and bonds.

Fundamentally:

RandGold sold off on a Deutche Bank downgrade, based on a “stable price environment” and “return on equity has been disapointing”?  Didn’t Deutche bank just raise its gold target to 1450? They missed earnings by a whopping 8 cents primarily due to issues at the with Kibali and Tongon mining opertaion.  However in their May 10th earnings report they stated both mines are back in operation.  Simply bad news has already been priced in.  Overall RandGold is the gold standard when it comes to mining.  No debt, a fat dividend (increased 100% this year), and they maintained their mining per oz guidance.  With a total cash cost per ounce of 720 they are positioned nicely for any pullback in gold.  If they can reduce this to their previous years average of 620 this will add nicely to the bottom line especially if gold rallies.  So what are we looking for as a trade.

Currently the 21SEPT18 85/80 vertical PUT spread is trading around 3.55.  This is nearly a 2.3:1 RR on the premium gold miner trading near its 2 year low.  This far out using up a lot of margin can hamper other trading opportunities that come along which is the reason I am using a vertical strategy in lieu of cash covered.  It is only tying up $148 of buying power per contract.  This also allows for a summer rally to happen and some room for Randgold to pull back lower and NOT receive a margin call.  

Break even on the trade is 81.45 which is 1.50 below the lower FMV horizontal trend channel.  If Gold rallies, Randgold will benefit, if it pulls back we can add another trade or if we approach the expiration date and are in the red we can look to roll the order forward.  Keep in mind this is a longer term position trade.  I will post the trade as I take it.

This strategy is a risky strategy and with all options strategies there is the potential for a complete loss even with a vertical spread, which based on the current figures would be around 148 per contract.  It is the responsibility of the individual to understand the risks, and consult a registered broker before buying and selling options.  This is for educational purposes and trades that I personally am making. 

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