Thursday, September 3, 2009

Gold Exposure... Gold or Gold Miners?

Gold has been on a tear (though nobody seems to know why... hatred of all currencies has been one answer), up $70 the past two months alone.

Which has brought the opportunity in gold miners to the front section of the paper. WSJ reports:

Gold companies' shares soared Wednesday amid a sharp rally in gold prices, and one analyst said the strong performance of larger companies was a reversal from earlier in the year.

Gold prices reached their highest point in nearly three months as the U.S. dollar weakened and participants bought in a flight-to-quality bid based on economic uncertainty and concerns about the stock market. Most-active December gold gained $22, or more than 2.3%, on Wednesday.

Burchell said his firm is positive on the gold sector and believes the metal has come out of its summer hibernation period. Summer months are traditionally weaker for gold prices. He added gold behaved better than expected this year, but was range-bound throughout the summer. Burchell said Wednesday's increased share prices were in part a reaction to Tuesday's weakness, adding that investors see the "specter of inflation" down the line, leading them to speculate in gold as a hedge against that inflation.

Jefferies & Co.'s Mike Dudas said gold and gold stocks can find some money in the recent weakness in financial stocks as investors look to gold for more stability. Gold prices had been quiet recently and were looking to break one way or the other and certainly did so on Wednesday, he added.

So gold or gold miners? Since 2006, the metal has significantly outperformed the goldmining index (GDX) by 30% and at times by more than 170% over a 12-month period (mining stocks were CRUSHED post Lehman Brothers collapse, while the metal held up).

So do I find value in gold? In the fundamental value of the metal... No. BUT, in the story... YES. As long time readers know, I am Ready to Ride the Golden Bubble.

I am currently playing this through the options market with vertical call spreads (buying in the money calls, offsetting some of the cost by selling out of the money calls) on the metal itself (ETF GLD). BUT, with all the liquidity sloshing through markets, my guess is that miners themselves may have some cheap financing available to lever up their exposures.

Anyone have any thoughts?

Source: Yahoo Finance

Update: To be clear, I am still heavily short oil, thus consider this a hedge (and not an outright position) on my commodity short.


  1. I think this is a s.t. trading opportunity based on mis-perceptions of the inflation outlook. If you listen what's driving all this is shibbolethic ideologies where central bank balance sheet expansion is expected to translate into monetization. A difficult problem but if they did it going in why would anyone think they'd do worse going out? Meantime all the folks who think markets are independent of society are channeling Ayn Rand, despite the fact that CBs and Gov fiscal spending saved us all,to anticipate huge inflation surges. I'd watch the TNX vs TIPs for reality, talking heads for distortions and be 'ware of the blindside from commodity inflation if Chinese demand accelerates over the supply constraints.

  2. gold nutters have made the case for gold in an inflationary AND deflationary environment... i agree it is a short-term opportunity, but it may go a lot further than a lot of people expect (though it may also go straight down, hence the option rather than outright long position).

  3. John Hussman has an excellent piece on the relationship between gold and miners. Check it out at

  4. This is a sensible play. China does not want to buy any more u.s. currency, so they buy gold. India buys gold for jewels. Oil must fall because let's face it: there is no economic growth in the absence of gov't spending.

  5. Gold has to break out of 1000 before I think the world is coming to an end. This is just the IMF setting themselves up for their HUGE selloff soon to arrive.

  6. break out of 1000... we're at 999!

  7. i rkn nat gas is a much better risk/reward proposition - which tends to do well during september (like gold).