Widespread unease is driving investors along the risk curve toward the welcoming arms of safe assets. Bonds and gold have kicked off the New Year with a bang while stocks, oil and especially emerging markets have taken it on the chin.
Traders seeking securities somewhat uncorrelated to the broader stock market should take a good look at gold stocks.
The Market Vectors Gold Miners ETF (GDX) is rallying hard today on the heels of a surge in gold prices. At the time of this writing GDX is up about 1.8%, making it a green beacon in a sea of red. The GDX ETF counts Barrick Gold (ABX), Goldcorp (GG) and Newmont Mining (NEM) among its top holdings.
Gold stocks have suffered a bear market for so long now that it’s difficult to imagine these dogs actually rising for more than a nanosecond, but suspend that disbelief and simply focus on the price action. It’s objective, simple and lacks the baggage of sexy-sounding stories.
The message broadcast by the chart of GDX is: I’m carving out a low. Since tagging $13 in July, GDX has spent the past five months building a base.
Sure, the bottoming bid could fail, but for now, neutral-to-mildly-bullish plays in gold stocks look promising. Those looking to shift their bias at the first sign of trouble could always bail if GDX breaks its 52-week low near $12.50
Trade Gold Stocks for Cash
Perhaps the most attractive play on the board for an ETF as cheap as GDX is the naked put. The cost is low and the return is respectable. By selling a put option, you obligate yourself to buy 100 shares of stock at the strike price. And that may not be a bad thing with gold stock prices already so low.
Sell the GDX Feb $13 put for 33 cents or better. The short put play is well positioned to deliver 33 cents of profit if GDX can remain above $13 for the next month.
While $33 may not sound like a lot, the margin requirement for entering the position should only be around $160, making the potential return on investment an impressive 20%.
If you wish to avoid assignment, close the trade if GDX falls below $13 before expiration. Otherwise, ride it out to February, allow the put to expire worthless and bask in the cash.
At the time of this writing Tyler Craig owned short puts in GDX.
