Gold has been getting the brush off, and rightly so – the fundamental picture for the metal hasn’t been pretty but, what’s more, the technical characteristics of the charts have been indicating a pullback.
For weeks now, the scans I’ve developed and tweaked during the 40 years I’ve been trading stocks and options have placed gold and mining stocks as ideal short-term bearish trades. But my system, which scores a stock based on its technical characteristics and also factors in elements like relative strength and volatility, indicates that the sector remains in the ditch. It has rated ASA Gold and Precious Metals Ltd. (ASA), Goldcorp (GG), SPDR Gold Trust (GLD), Barrick Gold Corp. (ABX) and Newmont Mining (NEM) as among the weakest of all stocks in the market.
Gold futures may be getting a temporary boost, but it appears there is more downside ahead for the yellow metal. With nerves high about tapering and another possible government shut down, using any strength to initiate a put position at a discount is my favorite way to buy stocks on the cheap. One of the best of the worst in gold stocks is Randgold Resources (GOLD).
Recommendation: Buy the GOLD Jan 60 Put options (GOLD140118P00060000) at a suggested price of $1.60 ($160 per contract).
My downside target for GOLD stock is $58.60, and I expect the GOLD put option to climb to my target of $4.30 for a 168% profit. If either of those levels are hit, take profits immediately.
However, in case the end-of-year fervor takes over, a stop loss is imperative. Close this position and cut losses if GOLD stock closes above $69.20, when the option price should be about 90 cents.
Now, a word of caution: I simply look for short-term trades, so I can’t recommend making a long-term bet on gold at this time. Gold looks awfully cheap right now, but again, it’s a trade that’s in a down trend, and trying to catch that bottom when you’ve got talk of tapering and a stronger dollar can be bad for your health if it drops another $100 an ounce. There are many who think gold stocks could be an opportunity to play inflation and a devaluation trade of the currencies, but again, it’s been a volatile trade all year long. While Warren Buffett may be squirreling away silver, the outlook for gold is cloudy and this is one of those times where short-term tunnel vision is your friend.
In that vein, I don’t recommend holding a position longer than three weeks. If a target isn’t hit for the GOLD stock within three weeks, the likelihood that it will drops significantly. Cut it loose and redeploy your capital elsewhere. And, of course, while targets are hypothetical, profits are real. Don’t be shy about taking a gain of 50% or more off the table if you get it; you can always consider selling half of your position to keep some contracts in play for further upside. Trading gold stocks can bring swift profits, but those profits can disappear just as quickly as they came.
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