Friday, October 25, 2013

Why I Bought Junior Gold Miners This Morning -- & Banked Nice Gains

This morning, I took nice half-gains in the Guggenheim Solar ETF (TAN). 
Why? TAN is down while the market is up, always a warning sign.  I'm out on the first half of the trade with 28% gains -- not bad for a trade I entered in September. I've moved up my close-only stop a lot, too. 

Meanwhile, my India position seemed to have stalled. So, I exited all of my WisdomTree India Earnings (CPI) at a nickel-a-share loss, and HALF of my WisdomTree Dreyfus Emerging Currency (CEW) at a decent 5.75% gain. I moved up the stop on CEW, too.

Bottom line: Taking gains before the weekend makes me happy, and I have less to worry about. AND I'll have money to put to work next week, if I want to. I traded more than I wanted to this week, but the opportunities were there. We'll see what happens next week.

I also added a new position this morning. After yesterday's action in gold, I'd made up my mind to buy something in precious metals if we got a pullback. I was leaning more toward an ETF than a single stock, for reasons I'll get to.

First, some news and charts. Specifically, let's start with these charts from Mark O'Byrne at Mark writes ...

A deeper look into China's gold holdings warrants attention (see charts).
Its last reported gold holdings in April 2009 were 1,054 metric tons. After adjusting for net imports from Hong Kong and domestic output, the figure is closer to 5,086 metric tons. If one were to take away gold uses for jewelry, industrial, and other categories and only add implied bar demand to central bank holdings, the figure is likely closer to 2,710 metric tons according to Bloomberg Industries’ Andrew Cosgrove and Kenneth Hoffman.
In just 10 years, China’s gold holdings could catch up to the U.S., based on adjusted Chinese consumption for jewelry, industrial and other uses and using implied bar demand as the primary driver of incremental central bank additions. 

Some other interesting news ...

  • Gold premiums in India, the world's biggest buyer of the metal, stayed at a record high of $120 per ounce. Thailand has now slapped a 15% import tax on gold and jewelry being shipped to India, as India's government cracks down on importation loopholes. I'm sure the gold smugglers applauded.
  • Bloomberg reports that gold holdings in exchange-traded products fell 3 metric tons to 1,886.2 tons yesterday. So far this year, gold assets held by ETPs have dropped 28% reaching the lowest since April 2010 on Oct. 21. This reverses the build we saw on Tuesday. Gold holdings in exchange-traded products rose by 6.5 metric tons on Oct. 22, the most since October 2012, according to data compiled by Bloomberg. So, if fund demand for gold is bottoming, it's a bumpy bottom. 
  • And The U.S. Mint sold 39,000 ounces of American Eagle coins so far this month, triple September’s total, data on its website show. Don't get too excited -- 39,000 ounces is only 1.21 metric tonnes. But this may be indicative of sentiment. In fact, we may be seeing a bottom in sentiment.
Now, let's look at one of the major drivers of the gold price -- the US dollar.  The US dollar index is heading down to test that support I talked about previously ...

(updated chart)

I put #3 on there because someone sent me a note trying to say that was a trend (and potential support). Good luck with that. Maybe you'll luck out.

Anyway, What happens when the US Dollar Index tests support #2 is anybody's guess, but the trend is your friend, and the trend is lower.

And as we know, the recent trend is lower dollar = higher gold + higher miners.

This brings me to my next pick. I was considering adding the Global X Gold Explorers (GLDX), because it popped hard yesterday.

But it worries me that a stock like Pretium (PVG) was one of the big gainers.

You can read Pretium's sad story HERE. Basically, the big deposit they were developing may not turn out to have nearly the gold they thought it did. In fact, a geologist hired to assay it said the Valley of the Kings deposit at the Brucejack Project has "no valid gold mineral resources."

But on Pretium's website, you can read that Valley of the Kings is "comprised of high-grade visible gold stringers within a lower grade gold quartz stockwork system. The Valley of the Kings hosts Probable mineral reserves of 6.6 million ounces of gold (15.1 million tonnes grading 13.6 grams per tonne gold)." 

To paraphrase the great Inigo Montoya, "I do not think the word 'Probable' means what you think it means."

  The scary thing -- for me -- is that Pretium's Brucejack Project was recognized earlier this year with a discovery award from the Prospectors and Developers Association of Canada.

That indicates to me that the single-stock risk -- in explorers anyway -- is higher than average right now, or at least, higher than I had realized.

So I can't see buying any single explorer at this time. The risk is just too great.

I say that, but did you see what happened yesterday? Pretium rallied hard! Sure, many stocks rallied -- miners, developers, explorers. But who's buying Pretium? ...

(Updated chart)

Maybe it was short-covering, maybe we're seeing the Greater Fool theory at work.

Obviously, if Pretium can get a bid, viable explorers should get bids. And sure enough, yesterday, everything went up. But then I ran this next chart, comparing the gains made by the GLDX in the last (June 26 to August 26) rally. I compared the GLDX's performance against junior miners (GDXJ), silver miners (SIL), big gold miners (GDX), silver (SLV) and gold (GLD) ...

(updated chart)

You can see that the explorers did not significantly outperform junior gold miners or silver miners in the last rally.

So why would I buy a basket of explorers when I can buy a basket of producing junior miners? It seems to me that's where a lot of the value is anyway.

Why not buy a single junior miner?  Well, that's what I already did with Silvercrest, Primero and B2Gold. And if my thesis is correct, and precious metals and miners are on the cusp of a big rally, then we're at one of those rare stages in the market where you don't need to be as picky as you might be other times.

So, I bought the GDXJ at $40.72, right after the open.  It wasn't the low of the day, but it seems like a good price. We'll see if I'm crying in my beer come Monday.

So far, buying the dips has turned out to be worthwhile. I'm not your investment adviser -- do your own due diligence, and do what is best for your own investments.

Good luck, good trades, and have a great weekend.

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