Time to go long the gold miners again? (UPDATED) (AGAIN)

[UPDATE: For a major update to this post, please click here.]

Well, Jeanne's feeling very bullish today.

This may be because of Screwtape's fortunate escape from its obligations to pay Brian O'Flanagan a golden parachute on leaving the blog - an escape from financial ruin engineered solely through our having the wit of forethought to get photographic proof of some of his less salubrious peccadilloes (it's always the rich and powerful that end up in the basest of situations, you know...) Or perhaps it's because of my successful coup d'├ętat which has left me the de facto sole contributor for a few weeks.

But whatever the reason, I've spent the last week or so picking up mining stocks. And here's the real reason why.

The HUI is probably the most popular of the various indices that seek to track gold miners' performance. It consists of a basket of 15 miners, which have limited hedging strategies (but are not entirely 'unhedged' as is often claimed). Along with the more general (in PM terms) XAU, it is as good a tool as any to track the progress - or, sadly, lack of it - of the gold miners. As is well documented elsewhere, the HUI has been trading in a range since November 2010. It flitters and flutters between around 500 and 600, as can be seen clearly on this simplified weekly chart:

Essentially, the bulls keep getting frisky at 500, and the bears get fruity at 600. As with all TA, this kind of situation often becomes self-perpetuating. In other words, everyone has the same charts, and everyone starts to wait for key levels to be hit before making their respective ursine or taurine moves. And who can blame them? Why short at 560, when (recent) history suggests it will go to 600 before the buyers disappear? And would you want to be the brave buyer who makes a purchase at 595, or would you decide to sit it out and wait for either (a) a correction, to get your miner more cheaply, or (b) a strong crossing of the 600 line to prove that a new paradigm has been entered? And vice versa.

Anyway, the eagle-eyed readers amongst you will notice that the chart is again at around 500. Now, these moves obviously don't fire exactly off of 500 (or 600), and the bottom could have been at 520 or could still be at 480. But we are definitively in a historically established buy zone for gold miners. I've been picking up a few each day for the past week, since I thought the bottom was in at just under 500. And I'll keep buying down to about 480. If the HUI breaks 480 with any force, then obviously I'll have to rethink my strategy and either sell for a (hopefully) smallish loss, or use more cash to buy at lower levels to eventually sell the whole bunch for a wash, when there's a bounce.

[UPDATE: At the time of writing (14 March, 12:53 EDT) the HUI has hit a low of 477.57, which is a fraction lower than its all-time low for the last 52 weeks of 477.93. It is currently at 479.93. We're therefore right at the bottom end of the scale here. This is either the perfect buy-point, or a break down of the paradigm that's held for the last 16 months.

I picked up a few more miners, as I think it's the former. Gold may fall further, but I doubt if it will fall much more. However, catching a falling knife is always dangerous, so more cautious traders will probably be rewarded by waiting for a more substantial rebound.]

But history (at least since November 2010) is on my side, and today the tide appeared to start to turn, as I had hoped it might. Here's the daily chart, and note the white candlestick for today, far right:

Now I should stress that I'm not saying with any certainty that we have a bottom here. This could be another false breakout, like we saw one week ago. But there are a few factors that make me think this will not be the case, and we're ready for a good run in the gold miners:

1. The last week looks like a classic dip back down to test resistance, from which it bounced today. This is a bullish sign.

2. The last week has seen nervousness in all stocks (focussed largely on a few more Greece wobbles, which appear to have been resolved, at least for the time being). When the miners trade down with non-PM stocks, I don't feel at all nervous. It's when they're down when everything else is up that it's time to hit the sell button.

3. Metal prices are holding firm [despite the fact that the second I typed that sentence gold plunged $15 - freaky]. Anyway, key support levels (i.e. $33.25 in silver and $1680 in gold) are holding well, and this is exactly the sort of vital support that is needed if these kind-of unhedged miners are to go higher.

4. The overall strength in stocks in general. Today the S&P made a high not seen since the collapse of Lehman Brothers. It feels like 'risk on' is coming back in vogue, and the miners traditionally do well in such circumstances.

5. Sentiment is changing, even in the mainstream financial press, towards gold miners. The first green shoots of optimism are coming back, and I think we're overdue for an injection of some hot money. But the thing about hot money is that although it moves quickly, it frequently moves late. The smart money could well be better off buying now, and waiting for the tardy hot money to arrive in a week or two.

So there we have it. Could the miners crash through the 480 - 500 support level? Absolutely. They could go to zero in theory too. But the fundamentals are very strong (high metal prices = good profits), the technicals are very bullish, and the events are looking good as well (the Greece bail swap has been successfully executed with the general equity markets responding well, and there is talk of increased dividends for miner investors, which is always attractive in a zero interest rate environment).

Of course, deciding when to sell is another matter. But even if one bails at an HUI of 550, then that's still a 10% return, which ain't bad. But the time to sell will of course be governed by the fundamentals, TA and events at the time. So I'll return to this topic in due course.

Finally, which prospectors have good prospects? Well, the HUI covers 15 of them, so have a look and take your pick (and shovel). But there are many more, and many of these seem to track the HUI and/or the XAU quite well too. If I get time, I'll try to write about some of my personal favourites later this week or over the weekend. I'd really like it if readers could chip in with some of their own, so please do pass by to comment, or email me in private if you prefer.

Happy trading, do your own diligence, this is not a recommendation to buy, etc., etc., and GLTA.

FULL DISCLOSURE: Jeanne d'Arc has recently initiated long positions in the following companies associated with gold, silver and base metal mining: RRS.L, ABG.L, CDE.NYSE, AGQ.L, TPJ.L and RIO.L, and is long physical gold. New positions (either long or short) in these or other mining companies may be initiated without notice.


Victor The Cleaner said...

Apart from the fact that gold is down to about $1665 as I am typing this, I should remark that gold miners may be a good investment only if we are getting a period of higher inflation without the system breaking down (similar to the 1970s). So a trade, yes, but an investment, I am not sure.

Somehow the gold miners are the ones that get screwed the worst of all. As long as gold trades at present 'commodity' prices, they are forced to sell at these ridiculous prices. Should gold ever trade as pure 'store of value', they will not be allowed to cash in. Poor chaps.

Still, exploration companies might work to some degree, but then that's a serious minefield for company specific reasons.

PS: There is some typo in the article - I suppose you want to say that the HUI has been range bound since Nov 2010 (!)

Jeanne d'Arc said...

OK, talk about Sod's Law... Whilst writing this, gold fell $15, but I thought, "what the heck, I'll publish anyway".

It's since gone on to fall $35 in total, and may yet fall further. I accept full responsibility for this flash crash, as I should know better than to be bullish, ever...

It should be said that the white candle on the daily HUI chart will almost certainly be followed by a red one on tomorrow's chart because of this fall in the gold price. How big a red candle remains to be seen.

However, I stand by the thrust of what I have written here: we are in the buy zone for gold miners, and tomorrow or Thursday may well represent the perfect buying opportunity - even better than the one I was presenting in this article. I for one will be snapping a few more up.

But DYOD, GLTA, etc., etc.

Jeanne d'Arc said...

@VTC - we posted at exactly the same time - weird! Anyway, I've addressed the fall in the gold price in my comment which appeared at the same time as yours.

Indeed, I'm touting miners as a trade rather than an investment here (hence the reference to making 10%). That said, I think that these stocks are remarkably oversold, and cheap at twice the price, so do represent a good solid long term investment. Not least because the dividends for some companies can be pretty good.

And thanks for pointing out the typo - now corrected.