Chart courtesy of Stockcharts

On 28th May we decided to lock in profits of over 80% gained on Randgold Resources Limited (GOLD) when we sold all of shares for $68.69. The question now is can we use Randgold as an insurance against a possible fall in the gold stocks sector.

We believe that we are in a strong bull market for precious metals and therefore we want to keep hold of our core position of Agnico-Eagle (AEM) Kinross (KGC) Yamana (AUY) as we expect them to be trading a lot higher by the year end. However gold itself took a hit on Friday and the US Dollar bounced from an oversold position to gain 1.63% in a day as we can see from the chart above.

The dollars rebound has occurred just as gold entered an overbought position and now appears to be in need of a breather as we can see from the chart below.

So there are a number of possible strategies that could be utilized such as sitting through a possible downturn in the HUI, taking some profits by selling a few shares across the board etc. Some cash on the side lines is always useful to enable us to take advantage of any dips that may present themselves.

Some stocks such as Yamana Gold Incorporated are not as oversold as some of the others and still has a comparatively low P/E ratio of 16.57 against Randgold for instance that has a P/E of 143.05.

Our leaning is therefore to look at Randgold as the vehicle to protect our portfolio and consider the purchase of a few PUTS that would increase in value should the gold producing sector take a bit of a plunge. If the sector makes gains then the PUTS will fall but the fall will be compensated for by the gain in the value of the portfolio.

We are thinking short term for this trade as Randgold has moved from $42.00 to $72.00 in just eight weeks so a sharp decline is not out of the question. As we write gold is trading at $855/oz in Hong Kong so no real change from Fridays close. We will monitor the situation and see what the FTSE and the NYSE look like on opening tonight.

A similar situation exists in this silver space so it could be worthy of your consideration to take a closer look as silver has turned and so have a number of silver producing stocks.

Randgold Resources Limited trades on the NASDAQ under the symbol of GOLD and on the London Stock Exchange under the symbol of RRS.

Have a sparkling day.

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