General Outlook for Gold and the Miners

It is our firm belief that the precious metals sector has bottomed out and the downside is very limited from here on out.  While there doesn’t seem to be an immediate rush back into the sector, now is a great time to be acquiring physical metals, but more importantly producers with growth profiles. That’s where we really see the value and upside potential.  Now would be a good time to start adding and scaling into any new positions you plan on taking.

If we would have to make a speculative/educated guess/evaluation, by looking at the charts and fundamentals for precious metals and the miners, we believe that the worst is over.  We are fairly certain that we have seen the bottom over this past summer and building a good position in the physical, ETFs, and select miners right now is looking very promising.

Support has pretty much held throughout the summer and it’s looking good going into the fall.  While we still may see one more down wave, it would be more of a fake breakdown below support just to scare the remaining weak hands.  If that happens, I would think backing up the truck is a good idea, and start getting aggressive in adding exposure to the sector.  Buying at support around $1570 is a good place to start adding to positions.  Over the next few weeks we expect gold to trade around $1600 (+ or – $30) in a sideways trading range.

The HUI is still lagging gold, but a solid base under 400 has been building and it looks like a good time to add at support around 390.  If you look at the chart below, it started a major correction back at the beginning of March (when we suggested selling) and made a bottom in the middle of May.  Since then the index has traded sideways between 390 and 460.  A particular item to note on the chart is a 3 fan formation that seems to be developing since March.  If the summer lows and support holds at 390, then a re-test of 420 and the 50 dma should come soon, this happens to be the top of 2nd fan line.  If it crosses above the 2nd fan line and holds above the 50 dma, it could trigger a move to 460 and overhead resistance, with a possible move to the 200 dma at 485.  This is something we will watch for and take one day at a time.

Juicing Profits with Covered Calls on the Senior Producers

If you are interested in options strategies for a flat market, you may want to consider writing calls against the shares you currently own or if you plan on take a position in the senior producers over the next few weeks.   This is great way to squeeze some extra money out of the market by writing covered calls while still maintaining a position in your favourite seniors.

If you own or are buying shares in major producers (which is a good idea as long as PM stay flat), make some extra money by selling call options slightly higher than market price (up to 20% higher is a good price) with a covered call option strategy.  This way you get to own the stock, collect dividends if the producer pays them and then collect the premiums by selling the calls.  If the stock breaks above the call strike price, you have the shares to deliver, and can still buy back your position at spot or wait for a slight pull back.

If you are unfamiliar with the covered call strategy, you can learn more about it by a simple google search or by visiting the Investopedia site discussing covered calls, below is a brief description from their site.

Definition of ‘Covered Call’

An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

Summary of Strategy

Our subscribers have been provided some good ideas for buying several senior producers.  There are many small to mid size producers which we also like and a few great exploration plays that are also on our radar.  Over the next few weeks, we will provide some additional companies which also merit owning a position in.  While it may not be feasible to buy shares in all these companies, you should create a basket of producers and exploration companies in your own portfolio.  At the moment, all the producers have great value (even if you bought at today’s prices) and most will do very well in the next few years.  You could literally throw a dart and pick anyone of the majors and they will all raise in share price once gold starts rising.  Our goal is to help find the ones that have greater upside potential and organic growth.

If you are familiar with options trading, you should consider buying some call options in many of the majors.  If you are very knowledgeable about options, consider the covered call strategy we just suggested with several of the majors that don’t have a great growth profile in the next year.  With a covered call, you want the stock to sit sideways while you collect the premiums for selling the calls.  If you don’t understand covered calls, we suggest you stay away from them or ask before you initiate this strategy.

For the moment, we suggest slowly picking away at the junior and explorers as they are usually the last to rise in price in a normal cyclical move higher in precious metals.  Could this time be any different?  Absolutely, they have become so cheap that many are trading for cash value and very little value is given to proven reserves.  This could change at any time and this is something we will watch for when all boats start rising with the coming tide into gold and the miners.  We feel that tide is coming soon and you want to be positioned to ride the wave once it does arrive, and looking out on the horizon all we can say is: SURF’S UP.

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Cheers,