Options Trade – Market Vectors Gold Miners ETF (GDX)
Monday, March 18, 2013

Make A Fortune From This Goldmine!

**OPTION TRADE: Buy the GDX Sep 2013 40.000 call (GDX130921C00040000) at or under $2.00, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $4.00.

by Ian Harvey

March 18, 2013

Introduction

Gold possesses unique characteristics that have made it a store of value and effective inflation hedge for thousands of years. The supply of gold is relatively static and it can be stored indefinitely without degrading. These attributes, combined with the metal’s historical significance, continue to make gold a safe-haven asset of choice for many investors today.

Market Vectors Gold Miners ETF (NYSEARCA: GDX) provides indirect exposure to gold prices by investing in the stocks of companies that mine gold. These companies’ revenues are closely tied to gold prices, which gives the fund a high degree of correlation with the underlying metal. The fund is an appropriate satellite holding for investors who want to better diversify their portfolios and hedge against inflation. Gold prices tend to rise during times of economic crisis or uncertainty, offering significant diversification benefits – and at this moment, with the major indexes reaching all time highs, this options play provides us with an adequate stop-gap!

Description of GDX

The Gold Miners ETF seeks to replicate as closely as possible, before fees and expenses, the total return performance of the NYSE Arca Environmental Services Index. The Index provides targeted exposure to 27 companies worldwide involved in mining for gold or silver ore, representing a diversified blend of small-, mid- and large-capitalization stocks. The Fund normally invests at least 80% of its total assets in common stocks and American depositary receipts of companies involved in the environmental services industry.

Data as of 2013-02-05

GDX Top Ten Holdings

  1. Barrick Gold Corporation (ABX): 12.06%
  2. Goldcorp, Inc. (GG): 10.32%
  3. Newmont Mining Corporation (NEM): 7.97%
  4. Anglogold Ashanti Limited ADR (AU): 5.21%
  5. Kinross Gold Corporation (KGC): 4.94%
  6. Yamana Gold Inc (AUY): 4.91%
  7. Silver Wheaton Corporation (SLW): 4.82%
  8. Gold Fields Ltd ADR (GFI): 4.77%
  9. Buenaventura Mining Company Inc. ADR (BVN): 4.61%
  10. Randgold Resources Ltd ADR (GOLD): 4.45%
% Assets In Top 10: 64.05%
Total Holdings: 32

GDX Asset Allocation

Asset Percentage
U.S. Stocks 16.61%
International Stocks 83.33%
U.S. Bonds 0.00%
International Bonds 0.00%
Preferred Stock 0.00%
Convertibles 0.00%
Cash 0.00%
Other 0.06%

Gold’s Standing at Present

Gold has made a series of higher lows over the past few weeks after a visit to key support at $1,550 per ounce. A move above $1,620 could confirm a bottom and resume the overall bull trend.

Gold, as measured by the SPDR Gold Trust (NYSE: GLD), is down 6% over the last year, not catastrophic but certainly disheartening for gold bugs. The Market Vectors Gold Miners ETF has been hit even harder than the metal itself, falling close to 32%. This suggests that the selling of GDX is overdone. In the last three months alone GDX is down more than 20%. That puts it at its lowest valuation versus bullion prices in over three years.

In the chart of GDX below, we can see a drop from its 2011 highs around $65 to its 2013 lows near $35. The bullish divergence with new price lows but no new highs in volatility suggests a push to the five-year pivot at $40 and beyond. A halfway recovery rally of the 2011 highs to recent lows targets $50 per share.

The $50 target is more than 35% higher than current prices, but traders who use a capital-preserving, stock substitution strategy could more than double their money on a move to that level.

Why the Pullback and Reasons for Future Growth

The reason behind this lagging performance is simple: Poor management at many of the miners.

Management did not spend much time looking at projects to see if they made sense economically. That is, if the costs to produce the gold were lower than the market price of gold. Management simply focused on adding ounces of production.

However, change is in the wind -- six CEOs of major North American gold producers have been fired or ‘retired’ in the past year.

This may be the first sign that gold stocks have marked a bottom in their relative performance to the metal itself.

The Annual Gold Stocks Report Supports this Theory

A view expressed by Pricewaterhouse Coopers in its 2013 Global Price Report is that these firms will produce about 35 million ounces of gold this year.

PwC declared that shares of gold miners hit their “breaking point” last year and are poised to rebound in 2013 (if the gold price co-operates) thanks to a change in the management culture at mining companies.

The change seems to be underway. PwC found that 60% of the firms it spoke to are implementing a cost management program.

Most miners are now switching the focus of their efforts from increasing gold production to building their cash piles.

In other words, the focus is now on free cash flow generation per ounce of production.

One positive already in place is the large amount of cash already on the books of many miners. PwC found 26 of the 46 largest gold firms listed on the Toronto Stock Exchange have cash reserves in excess of $500 million.

Of the senior mining companies PwC spoke to, 100% said they will use the cash on hand to pay dividends and 80% of the firms plan to actually increase dividend payments to shareholders.

Gold mining executives now seem, as PwC states, “serious about proving to the market they are once again a good investment – not just for the short-term, but for the long-term.”

PricewaterhouseCoopers sees a “promising 2013” for the gold miners.

Improvement Apparent

Gold futures gained for the first time in four sessions on Monday to close at $1,573.10 per troy ounce. This was after gold prices fell 5% in February, down for the fifth month in a row — the longest monthly losing streak for gold in 16 years.

The GDX and GDXJ are down 29% and 41% , respectively, while the Dow Industrials and S&P 500 are up more than 37% and 38%, respectively.

Although GDX and GDXJ gained in Tuesday’s trading, right now it seems that market sentiment favors at least a test of $1,525 an ounce, and perhaps a deeper breakdown. These gains tell me that letting go of “safe” assets like gold just because the markets are racing higher could be a big mistake.

And on Thursday sentiment increased, as Gold miners (GDX) such as Newmont Mining (NYSE: NEM) and Yamana Gold (NYSE: AUY) jumped 1.35 percent and 2.75 percent, respectively.

Conclusion

In short, today's gold price doesn't reflect reality, or the level of uncertainty in financial markets. While investors pile into stocks (which makes them more risky), central banks around the world continue to engage in a very destructive currency war through relentless money creation.

Money creation distorts markets, decreases purchasing power and eventually impoverishes.

So while uncertainty goes underestimated, gold goes under-appreciated. Gold is no longer the hot commodity it’s been for most of the 2000s … but that's good news for adding this position to our portfolios!

When investors wise up to the reality of the negative consequences of a relentless currency war and the risk embedded in an extended stock market rally, gold will strengthen.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the GDX Sep 2013 40.000 call (GDX130921C00040000) at or under $2.00, good for the day. Place a protective stop limit at $0.80 and a pre-determined sell at $4.00.



”Success is simple. Do what's right, the right way, at the right time.”


Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.



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