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« As Gold Falters, SK OptionTrader Banks Profits of 13%, 17% and 13% | Main | High River Gold Mines Limited Spikes on Good News »
Wednesday
Jan192011

Gold, Silver and Unhedged Producers

HUI Chart 19 Jan 2011.JPG

The run up in gold prices attracted investors to the gold and silver mining sector and for those investors looking for significant exposure, producers who do not forward sell their production provide the vehicle to take advantage of the improvement in gold prices.

However during the recent pull back in both silver and gold prices these stocks naturally experienced some profit taking, particularly by speculators who have recently taken an interest in this small sector of the market.

Taking a quick look at the above chart, which compares the progress of the HUI with that of gold prices we can see the HUI has been tracking gold closely until this recent down turn when the HUI has moved considerably lower. This is a disappointment to us as the stocks appear to head lower faster than the metals but they also appear to move higher slower than the metals.

The HUI is The AMEX Gold BUGS Basket of Unhedged Gold Stocks Index and represents a portfolio of 14 major gold mining companies. The Index is designed to give investors significant exposure to near term movements in gold prices - by including companies that do not hedge their gold production beyond 1 1/2 years.)


The attraction of investing in stocks is that the stocks should offer leverage by as much as 3:1, 4:1 or 5:1 to the metals, otherwise investors cannot see the point in taking the many and varied risks that are inherent in the mining industry, if the returns are mediocre. The phase we are in right shows that the stocks are struggling to manage a 1:1 ratio with the metals.

The chart below compares Gold to the HUI and as we can see since 2006 the stocks have struggled to keep pace with gold and the divergence appears to getting wider. So, is this a buying opportunity or have indeed things changed suggesting that the stocks may not be the best way to play this Golden Bull, after all this is not 1980 and there are other vehicles available which are consuming a fair amount of investors cash. There are a variety of Exchange Traded Funds that specialize in gold itself and everyday now we see the launch of a new vehicle offering a slightly different slant on the way to play this market. These vehicles offer exposure to gold, ease of access and liquidity along with a price that moves almost in lock step with gold.

Gold and HUI 5 Year Comparison chart 20 Jan 2011.JPG

There is no doubt in our minds that the gold producers are in for a good time but this is not a monopolistic environment so they now need to become more creative in order to attract and maintain their customers. A half decent dividend would be a starting point, offering existing share holders the opportunity of participation in the next stock offering, offer the product they mine for purchase by their own the investors, etc. Some companies are in the process of doing some of these things but not all. The businesses that cannot keep up with gold prices need to find an olive branch and come up with something revolutionary that secures their market share, otherwise funds will move to a safer and more profitable place. Miners, You have been warned so get your skates on.

As our readers know we have been and are still firmly ensconced in the inflationary camp and apart from the massive price increases that have hit the commodities market in general there are signs that inflation is pushing through, such as the UK have just announced. Oil prices took the blame as the annual CPI growth moved up in December to an eight-month high of 3.7 percent, well above the 2.0 percent target, giving the Bank of England a new headache. Also note that these figures do not include the latest rise in VAT (Value Added Tax) in the UK which will no doubt boost this figure even higher next time around.

For what its worth our strategy remains unchanged with the purchase and holding of physical gold first, followed by a small number of stocks and then a few options trades to in an attempt to get the leverage that the stocks are not delivering at the moment. In fact we are so confident that gold prices will rise that we have offered to refund the fee paid to our premium options trading service should gold prices not hit $1500/oz this year.




................................................................................

Over in the options trading pit, we now have 59 winners out of 61 trades, or a 96.72% success rate. If you have any questions regarding these trades please address them through their site where they will be handled quickly and I hope efficiently.


sk chart 10 Dec 2010.JPG

The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.

So, the question is: Are you going to make the decision to join us today, before we decide to cap membership.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

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