Subscribe to Oakshire Financial

A Gold Strategy For All Seasons (GDX, FNV)

03/21/13 by  
Filed under Bourbon & Bayonets

 PDF version Leave a comment 

First things first.

Several have written regarding specific calls made by Hugh in our premium letter, Wall Street Elite.  The questions are varied, but the theme is the same – do we provide ongoing advice regarding the trades that we make?

The rule is as follows: we will always advise readers when we would open and close trades according to our best thinking.  We often provide updates at critical junctures along the way, too, in order to explain why we think a trade is worth holding – either when it has already gone against us or is already profitable.  And we’ll continue to do so going forward.

On a separate note, we apologize that we can’t answer every query that comes to us regarding the trades we’ve recommended, or those that you, our dear readers, generously suggest.  Time simply prohibits us from engaging in such an exercise.  But please be assured that we read all your comments, that we appreciate them, and that we encourage you to keep them coming.  The banter is healthy for us.  Keep it civil, of course, but let’s hear it.

Let’s Rouse the Rabble

Moving on.

In the entire precious metals universe, our favourite investment vehicle is a listed gold royalty company called Franco Nevada (NYSE:FNV).  It’s a company we write about often and one that we’ve traded in a number of ways since this august publication first come to light some five years back.

Franco Nevada does not mine gold.  Franco Nevada takes a share of the proceeds that come from the mining of gold.  They pay up front for it – offering financing to companies that require cash to advance their operations.

They have only their offices as overhead – no costly drilling, extracting or leaching equipment.  A falling price of gold presents the greatest danger to the company, as revenues are generally received as a percentage of total ounces mined or barrels extracted (the company also has a stake in several oil and gas properties).

Franco Nevada also has no debt.

What’s always interested us, however, is Franco Nevada’s marked outperformance over the entire class of North American gold mining companies.  Its record in that regard has been predictable enough to score us wins in several long/short initiatives in the recent past using a variety of instruments with Franco Nevada as one of the legs.

We want to suggest something of that nature again today.

Let’s look at the chart:

 

BB03211311

 

We’ll start at the top, with the waterfall decline of just over 30% from FNV’s all time highs back in September of 2012.

The drop brings FNV just below its long term moving average (in yellow) at a time when volume has also picked up significantly.

Average daily trade in the shares is up over 50% from a month ago (red box), while both RSI and MACD appear to be diverging against price (at bottom, in blue).  And while it may be a tad early to call this a genuine divergence (we like to see at least a month’s worth of evidence before deciding), it sure has the trappings of one.

In our view, the evidence, at the very least, points toward a slowing of downside momentum, if not an imminent reversal.

And that’s enough for us.

 

BB03211322

 

Thanks, Lizard.

We want to suggest you consider a long/short play using FNV against the Market Vectors Gold Miners ETF (NYSE:GDX).  Charted together, the two look like this:

 

BB03211333

 

We’ve charted the two for the last 15 months to give you a sense of the aforementioned outperformance.

The way we see it, if the miners are due for a bounce here (and after a damn near 50% loss in eighteen months, it’s their right, no?), FNV will likely outdo the pack.

There are a few ways to play it:

  1. Buy FNV stock and sell GDX.  The transaction will cost you on the order of $650 per 100 shares matched.

  2. Buy long dated CALLS on FNV and sell them on GDX – same expiration and roughly the same price (not strike), in equal numbers.

  3. Buy long dated PUTS on GDX and sell them on FNV – same expiration and roughly the same price (not strike), in equal numbers.

All three trades will profit if, as and when FNV rises faster than GDX – or falls slower.

 

Many happy returns,

Matt McAbby, Senior Analyst, Oakshire Financial

 PDF version Leave a comment 

Comments

5 Comments on "A Gold Strategy For All Seasons (GDX, FNV)"

  1. henry huber on Thu, 21st Mar 2013 8:29 PM 

    Or you could just buy FNV.WT.A (June 16,2017…at $75) trading at $6.95…..or go crazy and buy FNV.WT..B ( July 8,2013 at $64.27 ) trading at $ .01 !!!!!!!!!!….with GDX breaking out it could be interesting .
    OR….buy on TSX……SSL ,cheaper but just as good, also a streaming gold company !

  2. Cuyler Salyer on Thu, 21st Mar 2013 8:39 PM 

    I disagree. I like many have been chopping at the bit to be able to buy back into Jr. Gold/Silver and Royalty Cos. like FNV.

    Technically most of the charts of my prospective buys look like their either in a 5th Wave Down or a little mini IV Wave up before heading back down into the final push down. Great!

    Fundamentally, I’ve read that with decreased earnings, many of the Majors became over bought with too many new mines on the books. Now, they’re almost unanimously selling those Exploration Holdings to shore up their balance sheets and improve earnings for Investors.

    Sum of Above: Not Good, Not Good for Gold/Silver Stocks and Jrs. more so. How do the Juniors raise in price when the Majors are dumping them and I’m sure at NOT very good prices with depressed Bullion Prices and the pressure of the Majors selling when every one else is selling?

    So; I expect an extended 5th Wave that is fairly typical for Commodities in most of these Stocks including FNV until there is a final “wash out” to the down side. Makes sense as we’re in a Depression = prices Depress for everything and Cash becomes King. So, I’m advising my readers in my private Newsletter Jungle Investments to start your Chart and Fundamental Studies for your candidates to buy – but hold tite until there is a wash out to the downside in each of your candidate favorite Gold/Silver Jr. Stocks and Royalty Commodity
    Companies.

    This time reminds me very much during the early 1980′s when REITS were on a great “Fire Sale”, I bought in only to find out later there was a final “Wash Out” to the downside.

    Since Commoidity 5th Waves (Up or Down) are often times extended greatly – I think the odds are in the favor of letting any little “sucker rebound” occur and wait until the Wash Out to the downside is over.

  3. c a amantea on Thu, 21st Mar 2013 8:42 PM 

    Matt:

    You’re a kick-in-the-pants. And your cartoons make me fall over if not out of my chair.

    I see you as a Dear (Mc)Abby, so I send you my problem.

    I run a small portfolio for a non-profit. We are seeking maximum income, so over the past three years we’ve bought a shitload of those wispy financials, like AGNC, DX, PMT, PHK, and PSEC. The rest of our assets are in consumer goods with high dividends (MO, T, VZ) and Oil/Gas/Pipeline (CLMT, NTI, PAA) with a few weird high-paying preferreds (GWSVP, PPL.U, MILL.C, GRH,C).

    Here’s my problem. The financials all have great dividend records even when you look back at 2008 – 2009, but they are all now appearing to me more and more like Ponzis. To meet their huge dividend payments, they keep issuing new stock, diluting the old — or in a few cases, like Gastar — ever increasing different preferrers.issuing

    I don’t mind the preferrers all that much (seem to me they are open-ended bank loans at very high interest rates), but the ever-increasing common seems to be getting a little outlandish, as is the whole market.

    My question: what input do I need to be able to ease off on this tricky situation without losing my ass? In other words, what clues would you look for to indicate that the party is coming to an end (besides reading you — with pleasure — every Thursday).

    CAM

  4. c a amantea on Thu, 21st Mar 2013 8:45 PM 

    Also, I meant to write “preferreds,” not “preferrers.”

    CAM

  5. Lynn Badler on Fri, 22nd Mar 2013 11:06 AM 

    Here is my problem: I can’t buy or sell a call or put
    and then hedge with a different item, it has to be
    the same item. So when you make these kinds of recommendations
    could you also include one that for example buys
    ans sells calls on fnv with different prices or different
    months?
    Thanks, Lynn


Get our Bourbon & Bayonets newsletter, and a two-month trial subscription to our premium Wall Street Elite newsletter (normally $49.99 per month) completely free. That’s $100 of ‘house cash’ you can start off our financial newsletters with.

Absolutely NO credit card or personal information required to get started

Your Email (required)

Our Wall Street Elite trading system had well
over 100% return for the year 2010.

Give it a try today, with zero obligation and zero commitment.