Gold Stocks: Timing Your Next Purchase


"For now, we will hold fast and continue to look for absolute bargains. Try to be patient enough to wait for the real deal."


Gold prices continue to trade in the $1,800/ounce (oz) and $1,550/oz range, exhibiting scant regard for the current state of world. The Arab Spring looks set to run and run as the dethronement of each leader creates a power vacuum and the opportunity for one of the many political factions involved to make its move and gain control. The North Koreans are about to launch a long-range missile, albeit for peaceful purposes; the news of this action as put the Chinese on red alert (please excuse the pun). Turkey is now seeing an increase in the influx of refugees at its border with Syria as the carnage continues there, despite the protestations of many nations.

In Europe, Spain is starting to see its bonds rise, suggesting that a bailout much larger than that of Greece will be required, if only to buy the Eurocrats a little more time. The yield on the Spain's 10-year bond spiked around 0.2% on Thursday, to 5.61% compared to a month ago, when the rate was down below 4.9%. The latest proposed budget cuts are severe and it remains to be seen if the newly appointed premier, Mario Monti, can implement such measures.

Over in the United States the jobs numbers were a disappointment as the March figures saw a lowly 120,000 jobs created. Expectations were for 200,000 new jobs, following on from the 240,000 new jobs created in February. This poor performance will not spur the Federal Reserve chairman into action. However, if these figures are followed by equally poor job numbers in April and May, then Ben Bernanke will be looking to fire the big QE3 bazooka. Once the market gets a hint that QE3 is a starting to look more like a probability than a possibility, then we will see gold commence its next rally to higher ground.

Although gold is range trading at the moment, the true disappointment in its lack of progress can seen in the poor performance of the mining shares, such as those who are constituents of the HUI, the gold bugs index. We have plotted the HUI on the gold chart above so you can see that it is dropping and is a reflection of investors' impatience, as they cash up and move to the sidelines. To a large extent we agree with them and been advocating a "keep your gun powder dry" strategy for some time.

As investors we have skin in this game, in that we have a core position of mining stocks along with our holding of physical gold and silver. Having realized that the stocks were not returning a leveraged return on our capital we steadfastly refused to increase our exposure to them and we are pleased in having done so as many of the stocks that we follow are a whole lot cheaper now than they have been over the last few years.

So, in terms of actionable allocation of our cash, our intention is to hold onto our core positions in both the precious metals and mining stocks. However, we will continue to resist the temptation to increase our exposure to the mining sector, as the risk/reward environment is not yet in our favor. We may indeed miss the beginning of the next rally and we should mention that many of our peers are anticipating a large move north for mining stocks and they may be correct. Again though, timing is a critical component of a good decision and we are of the opinion that the "time" lays ahead of us and not behind us, so don't panic if you are not fully allocated, as stock prices may crumble a tad further from this point. We are aware of just how difficult it is at times like these, but the important thing is to make the "right" decision for your own particular needs and objectives and not be carried along by hoopla.

Jumping back to the chart above we can see that gold prices recently managed to avoid the cross of death, as the 50-day moving average (dma) almost crossed over the 200-dma in a downward movement, but managed to survive. However, the 50-dma has turned south again and we may see it cross over the 200-dma, which would be negative for gold. This is, of course, only one of many indicators and is not 100% accurate; however, some traders are guided by any such event, which to their way of thinking would indicate a sell trade, thus putting even more downward pressure on gold.

Apart from holding the physical metal and our core position in the mining sector, our forays into the options market has generated some good returns for us, but you do need a cast iron stomach and the ability to sleep easily despite the precarious state of the financial markets.

For now we will hold fast and continue to look for absolute bargains and we will try to be patient enough to wait until what’s on offer is the real deal.

Bob Kirtley, SK Options Trading

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Disclaimer: or 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 or guarantee of future success.

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