Gold Mining Rally or Bear Trap For Investors

Submitted by SK Options Trading as part of our contributors program.

Gold Mining Rally or Bear Trap For Investors

There are numerous precious metals mining companies on various Stock Exchanges around the world vying for our investment funds and it is only with great care and hard work can we expect to select those that will be successful. However, before we get to the point of entry in terms of acquisitions, we need to be sure that this sector in general is heading in the right direction so that our well-chosen stocks benefit from a move to higher ground.

In assessing the current investment environment we need to decide if the current rally has the legs to carry our stocks to new highs or is this rally a false dawn tempting investors to part with their hard earned cash only to disappoint them further down the track. In order to throw some light on the matter we will refer to The AMEX Gold BUGS (Basket of Unhedged Gold Stocks) Index, the HUI.

The chart above gives us a snap shot of the last four years depicting the peak at 630 in September 2011 through to today’s position of 251, registering a loss of 375 points or 60%.

We can also see that the recent low point for the HUI occurred in July at around 210 before rallying to 280. The HUI has tried twice to penetrate the 280 level and failed which is disappointing; maybe it suffered from a minor bout of profit taking. The HUI has since fallen back to 251, which is only 16% above the low point of 210, which does little to boost my confidence in this rally. If we compare this rally to the rally we had at this time last year when the HUI moved from 400 to 520 it pales into insignificance. There are however some mining stocks that have performed better than others giving investors some respite from the prior carnage, but overall this is still a poor show.

On the positive side Labor Day is behind us as we head into the fall season which on a seasonality basis is usually good for gold. We understand that the demand for physical gold remains strong with enthusiastic buying coming from the East.

So what is holding us back? Our biggest single worry is the Federal Reserve in that ?tapering’ has yet to go away. Over recent times QE has given oxygen and impetus to gold prices, but those days could well come to an end shortly. The FOMC is scheduled to meet on the 16/17thSeptember and this meeting is accompanied with a press conference. We don’t know what action they will take but we suspect that an announcement will be forthcoming along the lines of a reduction in the order of $10bln to $25bln from the current $85bln buying programme. Should this happen then we could see the dollar strengthen, gold prices drop, the stock market shudder, etc.

To print money in perpetuity; which has been the order of the day, may be replaced with a plan to reduce the buying down to zero, the beginning of the end of QE, which we see as putting a considerable dent in any rally in the precious metals space.

As tempting as it has been we have not called the bottom for gold or mining stocks and we remain largely in cash awaiting confirmation that this rally is the real deal. If we are wrong then we have missed the start of the next great Bull Run, if we are right then we have preserved a large part of our capital for much cheaper entry levels.

It’s all knife edge stuff at the moment so each and every one of us has to read as widely as possible and do our own due diligence if we are to succeed.

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