Returning Gold to the Earth

Roughly one month ago – the week of October 19th – we at the Residual Income Report issued a missive entitled “The Best Play on Gold ‘Strength’,” wherein we invited our respected readership to engage in a ‘zero premium’ trade using Hecla (NYSE:HL) and the ishares silver trust (NYSE:SLV) call options. The trade, you’ll recall, had an initial cost outlay of precisely nothing (excluding commissions) through the simultaneous purchase and sale of equally priced calls of Hecla and SLV, respectively.

At that time of writing, the Hecla January 5 calls and the SLV January 19 calls each traded for $0.65. The situation today is as follows:

* Hecla’s January 5’s trade for $1.00, and
* SLV’s January 19’s are fetching $0.45.

Closing the trade today means pocketing a spread of $0.55 on each pair opened. Not bad for ‘nothing ventured’ save commissions.

But is now the time to close the trade?

We at the Oakshire Financial claim no crystal ball, but we have reason to suspect that the latest bull run in the precious metals – and gold, specifically – has gored its last banderillero. A resumption of the long term, up-move is certainly in the cards for a later date, but we smell an intermediate trend correction now in the making that may last for months.

Consider the following:

The U.S. Dollar, against which gold is priced and about which all the gold huckster newsletter peddlers have been spewing their vitriol, is making signs of bottoming. Look here:

Your browser may not support display of this image.

What appears to be a double bottom is now forming, and we’ll continue to view it as such until a break below the 75 level is seen. Conversely, any move above the last retracement high at 76.5 should confirm the dollar’s reversal, as the move would also take place above the 50 day moving average.

Now look at gold over the same time frame:

Your browser may not support display of this image.

While the dollar index was forming a double bottom, gold was etching successive new highs, indicating increasing action on the part of the gold bulls – and not just see-saw action vis-à-vis the dollar. The question is thus posed: have the gold bulls gotten overexcited here? Are they banking on a gold future that’s based on reality? Or have those feverish gold hobgoblins who prowl the internet finally managed to loosen the investment public’s moorings and set them a’sail on a similar, hysterical ‘end of all fiat currencies’ sea of dreams?

We’ll soon see. We’ll also see what kind of guts those same gold holders have if and when the dollar reverses and all the dollar shorts run to cover. At that point, the spike in the dollar could be breathtaking. And gold holders will be stripped, whipped and sold for dog food.

Who’s impressed by the gold moonshot?

Silver has also refused to confirm gold’s breakout. There are a number of reasons for this. First and most important is there’s an oversupply of the silvery stuff. Second, is silver already had an explosive move off intermediate lows set in July of this year – a move that garnered roughly 35% in value for that poor cousin of gold. Look here:

Your browser may not support display of this image.

The above is the last six month’s trade in the gold and silver ETFs, imperfect proxies for real bullion to be sure, but good enough for us to make a comparison.

The salient aspect of the chart comes in gold’s rising to new highs and silver failing to confirm. Make no mistake: there’s no rule that says silver has to confirm gold’s highs with new highs of its own. Anyone who claims as much is a liar. Just another arrow in the quiver, though: against the dollar and fellow precious metal, silver (not to mention platinum and palladium et al.), gold has broken from the pack and made a romp of it.

Until now.

If this is a currency story…

Sorry to say, but just like the gold shills we also believe that gold is a currency. And just like all other currencies, it’s subject to its rises and falls, to all the excesses and vicissitudes and arrogance of the traders who play it. And right now, friends, we’d venture to say our golden king of all currencies is looking a bit stretched. Time to back off and take some scratch from the table, as they say. Time to look for a new bus.

For those who executed the ‘zero premium’ trade of one month ago, we have a great new move in the offing. We’d love to be able to boast something as creative as that first trade; sorry to say, though, the need to make money trumps even creativity.

So here it is, folks: we’re simply reversing the trade.

No money down (save commissions), and it looks as follows:

• Buy the January Hecla 5 puts at $0.55, and
• Sell the January SLV 16 puts at $0.54 in equal numbers.

The total trade, net commissions, provides a credit of $1.00 per pair traded.

***We repeat here that the trade should be initiated with no more than 3% of one’s portfolio dedicated to the total value of the short options.***

Can I do the trade with a different miner?

As to why we’ve chosen to work with Hecla, the answer is straightforward. Hecla possesses the highest beta that we’re aware of among the universe of options-eligible gold and silver miners.

Beta is the investment term used to describe a stock’s volatility with respect to the overall market. A beta of ‘1’ indicates a stock that moves up and down line with the broad market. A beta of 0.5 indicates a stock that moves precisely half as much as the market. So, for example, if the S&P 500 were up 4% on a given day, a 0.5 beta stock would be expected to rise by 2%. A 1.5 beta stock would move 6%.

Here’s Hecla compared to a number of widely traded precious metals companies:

Hecla swings.

A breakdown to the $15.50 to $15.75 area for silver could see a floodgate of selling on the silver miners.  If we get there, the profits will be formidable.

The Residual Income Report recommends immediate purchase and sale of equal numbers (pairs) of the January Hecla 5 puts and January SLV 16 puts, respectively.  At no cost to you.

Because money can be created ex nihilo!

Matt McAbby