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Wednesday, November 27, 2013

Christmas is early, Gold Miner Gift is here

  I got out of miners in September 2011, waiting for what I thought was a good time to re-enter, I was mistaken in July 2012.  I have had several mis-starts, each time with cutting losses before the next leg down.
It has gotten so ugly, that people who I know are very pro gold can't even think of buying into miners.

Is this time different? Lets go over the facts.
1) India citizens are paying about 20% higher on the black market for gold.  This is in reaction to India trying to cut off gold sales in India.   Basically pent up demand waiting to hit the world market.
2) China has kicked up buying gold in India's absence, otherwise gold would have fallen much farther...
3) CME has altered the rules on margin requirements for Gold this past Monday, lowering gold by 9% and Silver 11%.  Basically allowing higher leverage to buy these materials.  A nod and a wink from central authority OK to go into these sectors with more leverage.
4) Buying gold shot up today (lifting this from Gary's blog, click here to purchase, best there is)
$123 million in the ETN for gold GLD, yesterday it wasn't even in the top 100.

Not a fact, but I consider it one. :)
My thesis still stands, 2.5 Billion people (China/India) are getting wealthier by the day. Both cultures purchase gold, this will drive gold higher.  Anything to do with gold and financial stability concerns is just extra value for gold/silver.

So I pulled out the stops and started buying again last two days.  Today just solidified the gut feeling I had with the buying on weakness report above.

If  you wish to invest in this sector, consult a professional, see my disclaimer, I am a hack.
There are easy ways to buy.  The top two ETF's are GDX and GDXJ.  GDX is a mix of gold miners, with GDXJ a mix of silver and gold miners.  
If you wish, but I don't do this myself, GLD is for gold and SLV for silver.  I prefer to buy companies not price of gold, but it is valid if you wish.

See chart at bottom for GDX, how we got here.  GDX is $21.66, GDXJ is 31.50, GLD 119.82, SLV 19.13

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I do NOT advise doing the next thing I am going to explain. I took some capital for high risk 'investing'.  Its really legalized betting when you take away the spin.

Aside from buying GDX, gold miners ETF directly, you can buy stock options with a brokerage account.

I bought options that expire in January 2016, at strike price of $23.  GDX as of today is 21.66.  IF GDX is every higher than 23 dollars on January 2016 expiration day, all profits are kept.  if it is lower, i lose only what I paid for this option.   I paid $4 per share for this right.  So, to make money, need to be over $27 to make any money.
Example: if you buy 10 options (each option is 100 shares, for total of 1000 shares) for Jan 2016 strike $23 for $4 dollars, and the price of GDX is at 30, you will make $3,000.  If for some bizzarre reason GDX is at a new high, say $73, you will make $50,000.  If GDX is at $23 or lower, you lose the $4,000.

If at any time between now and then the option is worth more, say $5, you can sell and pocket the money.The option is a combination of the price of the stock and the strike price of the option ($23),  the time remaining (2 years vs 2 days, etc), and overall market volatility. (more volatile, more premium)
UPDATE EXAMPLE 11/29/2013, the option that I bought for 4 dollars is now $4.35, even though GDX rose to only 22.28 today.

If you buy the same option for Jan 2016 for $35, it costs about $1   So for the same $4,000, you could buy 40 options (4,000 share rights).  With the price so far away, its prudent to follow the stock and sell if/or you are up quite a bit before the option expires.

There is an entire science around options, and tons of strategies.   Buying straight up like I did is considered by the pro's a novice move.  But I did want to document for you ways to LIMIT your risk, capital while maintaining the possible gains.    Options of course can only be done in a trading account.

To the charts!


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