 | COMMODITIES CORNER We suspected it a couple weeks ago when we bought into Kinross Gold (KGC). We became more confident of it last week when we tried to get into Hecla Mining (HL) and Eldorado Gold (EGO). Now, with the continued strength in the Market Vectors Gold Miners Fund (GDX), I'm convinced gold stocks have started a new uptrend – one that should last for several months. |
It won't be a straight shot and there will be plenty of bumps along the way. Many of those bumps will be severe enough to shake folks out of their positions and keep the depressing memories of the past six months alive. However, I do believe gold stocks have started a new uptrend. Traders should now take advantage of any weakness in the sector to add exposure. Take a look at this chart of the Market Vectors Gold Miners Fund plotted against several moving averages.
Traders use moving average lines to help spot short-term support and resistance levels and to determine the overall trend of a move. Two of the most popular measures are the 50- and 200-day moving averages (DMAs). I like to use the nine- and 20-day exponential moving averages (EMAs) as well.
As you can see from the chart, the nine- and 20-day EMAs provided solid resistance for GDX since the stock dropped below these averages last November. For the past six months, each time GDX attempted to rally, it hit the nine- or 20-day EMA and turned back. You can see that last week, GDX rallied above both its 9 and 20-day EMAs. That signals a new uptrend is in place and the averages should now serve as support for any pullbacks in the stock.
The next resistance level is the 50-DMA, which is at about $31 and declining. GDX should be able to overcome that resistance level this week or next. Once that happens, GDX should work its way higher toward the 200-DMA near $42. So even though GDX has rallied more than 10% off the bottom it hit two weeks ago, there's still plenty of room for it to run higher. And there are plenty of opportunities to profit in the mining sector.
The trade setup I like best is Allied Nevada Gold Corp. (NYSE MKT: ANV).
ANV is a former high-flying gold stock. But it has become one of the worst-performing mining stocks in 2013. The stock started the year above $30 per share. It's now trading below $8. That's a 73% loss in a sector that's down 33%. The problem with ANV has more to do with "hype" than with anything fundamentally wrong with the company. At the highs in the stock, investor expectations were overly optimistic. Today, we've reached the opposite extreme. And that's what makes ANV such a tremendous opportunity. Let me explain...
Allied Nevada operates the Hycroft mine in Nevada. With over 20 million ounces of gold and nearly 700 million ounces of silver, Hycroft is one of the largest resource deposits in North America. But prior to 2007, virtually nobody even knew about it. The Hycroft mine was previously owned by Vista Gold (VGZ). In 2006, VGZ decided to spin off the Hycroft mine and several other Nevada properties to shareholders in the form of a new company – Allied Nevada. This spin-off gave investors a chance to evaluate the Hycroft mine resources separately from Vista's other properties, and that's when the boom began.
Since 2007, Hycroft's gold reserves have increased 1,200%. And its silver reserves have increased by more than 500 million ounces. By 2011, ANV was sitting on $25 billion worth of gold and silver. Investors took notice, and the stock rallied from $5 per share in 2006 to over $45 per share at its peak in 2011. Like many gold stocks in 2011, though, the price was ahead of the fundamentals. The company still had to get the gold and silver out of the ground. As the cost of mining the precious metals increased, profit margins decreased and the stock prices came tumbling down.
Today, ANV is a tremendous bargain. At less than $8 per share, the stock trades at just four times this year's expected earnings. The company has more than $25 billion worth of proven and probable resources. Yet the entire market capitalization of ANV is just $700 million. In other words, buying ANV right here below $8 per share is like buying gold at less than $40 per ounce. Seabridge Gold (SA) is the only gold stock that is cheaper than ANV relative to the value of its resources. But Seabridge doesn't operate any mines yet. The Hycroft mine is currently operating. Production is expected to increase 40% this year and triple by 2015.
Shares of ANV fell hard last month when the company priced a secondary offering of stock at $10.75 per share. The company raised $150 million to fund expansion plans at the Hycroft mine. Today, the stock is 30% cheaper. Think about that for a moment. Today, we can buy the stock 30% below where a secondary offering was priced just three weeks ago. We can buy the stock at less than four times 2013 earnings estimates and at a fraction of the value of ANV's resources. The chart below shows the stock is just starting to develop a bullish pattern.
As you can see from the chart, the nine- and 20-day EMAs provided solid resistance for GDX since the stock dropped below these averages last November. For the past six months, each time GDX attempted to rally, it hit the nine- or 20-day EMA and turned back. You can see that last week, GDX rallied above both its 9 and 20-day EMAs. That signals a new uptrend is in place and the averages should now serve as support for any pullbacks in the stock.
The next resistance level is the 50-DMA, which is at about $31 and declining. GDX should be able to overcome that resistance level this week or next. Once that happens, GDX should work its way higher toward the 200-DMA near $42. So even though GDX has rallied more than 10% off the bottom it hit two weeks ago, there's still plenty of room for it to run higher. And there are plenty of opportunities to profit in the mining sector.
The trade setup I like best is Allied Nevada Gold Corp. (NYSE MKT: ANV).
ANV is a former high-flying gold stock. But it has become one of the worst-performing mining stocks in 2013. The stock started the year above $30 per share. It's now trading below $8. That's a 73% loss in a sector that's down 33%. The problem with ANV has more to do with "hype" than with anything fundamentally wrong with the company. At the highs in the stock, investor expectations were overly optimistic. Today, we've reached the opposite extreme. And that's what makes ANV such a tremendous opportunity. Let me explain...
Allied Nevada operates the Hycroft mine in Nevada. With over 20 million ounces of gold and nearly 700 million ounces of silver, Hycroft is one of the largest resource deposits in North America. But prior to 2007, virtually nobody even knew about it. The Hycroft mine was previously owned by Vista Gold (VGZ). In 2006, VGZ decided to spin off the Hycroft mine and several other Nevada properties to shareholders in the form of a new company – Allied Nevada. This spin-off gave investors a chance to evaluate the Hycroft mine resources separately from Vista's other properties, and that's when the boom began.
Since 2007, Hycroft's gold reserves have increased 1,200%. And its silver reserves have increased by more than 500 million ounces. By 2011, ANV was sitting on $25 billion worth of gold and silver. Investors took notice, and the stock rallied from $5 per share in 2006 to over $45 per share at its peak in 2011. Like many gold stocks in 2011, though, the price was ahead of the fundamentals. The company still had to get the gold and silver out of the ground. As the cost of mining the precious metals increased, profit margins decreased and the stock prices came tumbling down.
Today, ANV is a tremendous bargain. At less than $8 per share, the stock trades at just four times this year's expected earnings. The company has more than $25 billion worth of proven and probable resources. Yet the entire market capitalization of ANV is just $700 million. In other words, buying ANV right here below $8 per share is like buying gold at less than $40 per ounce. Seabridge Gold (SA) is the only gold stock that is cheaper than ANV relative to the value of its resources. But Seabridge doesn't operate any mines yet. The Hycroft mine is currently operating. Production is expected to increase 40% this year and triple by 2015.
Shares of ANV fell hard last month when the company priced a secondary offering of stock at $10.75 per share. The company raised $150 million to fund expansion plans at the Hycroft mine. Today, the stock is 30% cheaper. Think about that for a moment. Today, we can buy the stock 30% below where a secondary offering was priced just three weeks ago. We can buy the stock at less than four times 2013 earnings estimates and at a fraction of the value of ANV's resources. The chart below shows the stock is just starting to develop a bullish pattern.
ANV bottomed out along with the rest of the gold sector three weeks ago. The stock has since formed a higher low and closed yesterday above the resistance of its nine-day EMA. If it can get above $8 per share, the next resistance is the 50-DMA up around $11.
Ultimately, though, I expect ANV could easily double from here and challenge its April high of $15 per share. Even at that price, the stock will still only be trading at eight times this year's earnings estimates. It would still be like buying gold for less than $80 per ounce. This is a cheap stock. It's unloved. And it has enormous upside potential. Here's the option trade I like best:
Buy the Allied Nevada December $7.50 calls (ANV131221C00007500) up to $2.25.
These options closed yesterday at $1.80 when ANV closed at $7.90. You should be able to get into this trade as long as ANV is trading below $8.30 by the time you enter your order. Don't chase this trade higher. We're already giving it plenty of room. If the options run up as a result of this recommendation, give the trade a few days to come back down into range. This is a speculative position. So don't overleverage the trade, and don't put up more money than you can comfortably afford to lose. As much as I like this setup in the gold sector and in ANV, you can still lose 100% of the funds you commit to this trade.
ANV has lots of options available to trade. So if the ANV December $7.50 call options move out of range, consider an alternative strike price or a different expiration month. For example, the ANV December $10 call options look like a good purchase up to $1.25. And the ANV September $7.50 calls look good up to $1.80. This trade has tremendous upside potential. If ANV can merely rally back up to where it started April – at about $15 per share – the ANV December $7.50 call options will be worth at least $7.50. That's a 329% gain over yesterday's closing price, or a 223% gain on the maximum recommended purchase price.
Let's set a closing stop on this position at $1. In other words, if the ANV December $7.50 calls close at $1 or below, sell the position the next trading day. On the upside, be sure to sell at least half the position once you've made 100% on the trade, if we're fortunate enough to get there.
Eldorado Gold (EGO) got away from us and we weren't able to take the appropriate position. Keep an I on it. I suspect we'll have a little hiccup between now and next week which may drop the stop around $7.50 or below. When that happens jump on-board the gravy train and hedge the option chain with both a call and put.
Hecla Mining (HL) reached our first target price last week.
Ultimately, though, I expect ANV could easily double from here and challenge its April high of $15 per share. Even at that price, the stock will still only be trading at eight times this year's earnings estimates. It would still be like buying gold for less than $80 per ounce. This is a cheap stock. It's unloved. And it has enormous upside potential. Here's the option trade I like best:
Buy the Allied Nevada December $7.50 calls (ANV131221C00007500) up to $2.25.
These options closed yesterday at $1.80 when ANV closed at $7.90. You should be able to get into this trade as long as ANV is trading below $8.30 by the time you enter your order. Don't chase this trade higher. We're already giving it plenty of room. If the options run up as a result of this recommendation, give the trade a few days to come back down into range. This is a speculative position. So don't overleverage the trade, and don't put up more money than you can comfortably afford to lose. As much as I like this setup in the gold sector and in ANV, you can still lose 100% of the funds you commit to this trade.
ANV has lots of options available to trade. So if the ANV December $7.50 call options move out of range, consider an alternative strike price or a different expiration month. For example, the ANV December $10 call options look like a good purchase up to $1.25. And the ANV September $7.50 calls look good up to $1.80. This trade has tremendous upside potential. If ANV can merely rally back up to where it started April – at about $15 per share – the ANV December $7.50 call options will be worth at least $7.50. That's a 329% gain over yesterday's closing price, or a 223% gain on the maximum recommended purchase price.
Let's set a closing stop on this position at $1. In other words, if the ANV December $7.50 calls close at $1 or below, sell the position the next trading day. On the upside, be sure to sell at least half the position once you've made 100% on the trade, if we're fortunate enough to get there.
Eldorado Gold (EGO) got away from us and we weren't able to take the appropriate position. Keep an I on it. I suspect we'll have a little hiccup between now and next week which may drop the stop around $7.50 or below. When that happens jump on-board the gravy train and hedge the option chain with both a call and put.
Hecla Mining (HL) reached our first target price last week.
The stock pulled back a bit and now looks ready to make another run higher. A move up toward the $4.30 resistance line should be enough to double the value of the HL December $3.50 calls.
If you were able to get into this trade, look to take profits on the next move higher. If you weren't able to get into this trade, forget about it for now. HL has already made a solid move off the bottom, and traders should now be looking for an exit. Today's ANV recommendation has a better risk/reward setup. And there will be even more to choose from as the gold-stock uptrend develops.
We sold half our Kinross Gold November $5 calls for a 100% gain yesterday. Here's an updated look at the chart.
If you were able to get into this trade, look to take profits on the next move higher. If you weren't able to get into this trade, forget about it for now. HL has already made a solid move off the bottom, and traders should now be looking for an exit. Today's ANV recommendation has a better risk/reward setup. And there will be even more to choose from as the gold-stock uptrend develops.
We sold half our Kinross Gold November $5 calls for a 100% gain yesterday. Here's an updated look at the chart.
Resistance at $7.20 still looks like a good short-term upside target. We'll continue to hold the balance of the trade with a stop at $1.35.
The broad stock market looks like it's preparing to make a strong turn to the downside. But Friday's selling pressure pushed a few of the short-term technical indicators I follow into "oversold" territory. So I'm expecting stocks to bounce a bit and relieve the oversold conditions before I recommend any more trades from the short side. Yesterday's bounce was a good start. But we probably need to work a bit higher still.
Aggressive Trades
The broad stock market looks like it's preparing to make a strong turn to the downside. But Friday's selling pressure pushed a few of the short-term technical indicators I follow into "oversold" territory. So I'm expecting stocks to bounce a bit and relieve the oversold conditions before I recommend any more trades from the short side. Yesterday's bounce was a good start. But we probably need to work a bit higher still.
Aggressive Trades
- Silver Standard Resources June $10 calls (SSRI130622C00010000)
- Eldorado Gold July $10 calls (EGO130720C00010000)
- Seabridge Gold January 2014 $13 calls (SA140118C00013000)
- Hecla Mining December $3.50 calls (HL131221C00003500)
- Eldorado Gold October $7 calls (EGO131019C00007000)
- Allied Nevada December $7.50 calls (ANV131221C00007500)
- Pacific Rim Mining (TSX: PMU)
- GigaMedia (Nasdaq: GIGM)
- Barrick Gold (NYSE: ABX)
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