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Shattering The Gold Revenge God (FNV)

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Let’s start with a trade that warrants your immediate attention.

This one is still fresh, as it was initiated just two weeks ago in The Precious Metals ‘Influence’ Trade, but it’s also managed a very nice gain in that time, so we’re going to take a minute now to have a closer look.

The trade was a zero premium pairs initiative – we bought PUTS on the leveraged silver ETF, AGQ, and sold PUTS on gold proxy GLD for the same price. Outside of commissions, the trade cost us nothing.

Trades like this make money on the relative outperformance of one stock over another. If we’ve chosen our options correctly, then it doesn’t matter whether the stocks are rising or falling. Again, what’s important is their relative performance to one another.

So, in this case, so long as AGQ falls faster than GLD – or rises more slowly – then our trade gains in value.

And that’s precisely what happened.

Our AGQ September 25 PUTS were last trading at $3.20, while the GLD 125s were selling for $1.95. That’s a profit of $125 per pair, and we feel it’s good enough to warrant us closing. Remember, we paid nothing to launch the trade.

That was fast?!

Yes, we know.

For those who only put on a couple of pairs, we understand your desire to leave the trade run for a while. So be it. There’s lots of time left before expiry. We only warn that there could be periods of days or even weeks when the trade turns against you and the time-clock’s tick starts getting louder. So long as you’re prepared to weather those times with equanimity, we say ‘good luck’.

And for those like reader JonQ2 who went in with ten pairs (or those who dug in even deeper), we say it’s likely in your best interest to unload here. Your profit on the trade varies between a very stout 500% and a whole-hog hefty 733% (considering some of the cheaper options trading programs out there), and we can always load up again should the opportunity present itself.

Congrats to all who went in.

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Allright, then.

A Time for Perspective

We believe our attention these days should be fixed on gold and silver and the events surrounding the latest precious metals sell-off. True, fellow Oakshirean Matt McAbby had words on this theme last week, and for those who read him, we apologize in advance for the overlap that follows. We just don’t think this matter can be taken seriously enough.

Let’s start with a few ‘givens’.

We believe that our purpose at Oakshire is to provide you with the best money-making opportunities of the day/week/month/etc., and to provide as best as we can our rationale for doing so. Sometimes that rationale will take the form of economic analysis, sometimes analysis of a particular industry or stock, and sometimes it will rely more heavily on technical analysis, including an examination of any number of sentiment indicators that we regularly monitor.

Again, every week we come to you with our best thoughts on all of the above and attempt to crystallize the whole into a trade that embodies all relevant factors and deftly exploits the reality on the ground as we see it.

And given the many variables we look at, it could be that this week’s best opportunity resides in a short sale of the copper market. Next week, it may entail the purchase of a company that’s uncovered a Nebraska-sized copper vein in chilliest Tierra del Fuego. In short, whatever it is, we bring it.

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As it turns out, for the last two years one of our best trades was short the precious metals. And outside of a couple of longer lasting retracement rallies – that we also played successfully – the action was all down.

And so it is today.

After the latest precipitous drop in gold and silver, we openly went long, albeit in a hedged manner, and have repeated for several weeks now, that we are short- to mid-term bullish on the precious metals.

What’s your point?

Let’s get straight to it.

What we find dangerous, and what we feel bears warning against today, is a certain cataclysmic mindset that entrenches our financial rationale and shuts down our ability to think openly about investment possibilities.

In short, we want to urge our readers – particularly those hardened goldphiles – to avoid the tendency to become religious devotees of a god we call “Gold Revenge”.

Believers in ‘Gold Revenge’

Some explanation is in order.

We are facing potentially calamitous times. Our nation and the financial system that underpins it have been shown to be much more vulnerable than we once knew them to be, and our confidence in both, to varying degrees, has been shaken.

We have our eyes open, we hope for the best, but we also realize that cold reality will eventually determine final outcomes and not fanciful thinking about what should be or could have been.

With that in mind, we ask ourselves, will it all fall apart in a mad spasm of civil chaos and fearful economic disorder? And if so, will gold and silver be among the only valuable assets in our possession under such a regime?

And again, the realist within us pushes us to prepare for just such an eventuality. Those who have read Oakshire consistently for any length of time are aware of our FOUR G’s investment strategy (Guns, Gold, Gas and Grub), which we’ve annually reviewed for the last five years, that addresses these issues in a straightforward, uncompromising manner.

Anyone who’s never seen them or desires a review should Google “Oakshire G Force Guns Gold Gas Grub McAbby,” or any combination thereof to get some of our thinking on the issue.

The “Gold Revenge” adherent, however, is not like us. He is not looking to maximize his wealth. He is someone whose psychology is disaster-driven. He desires a meltdown. He seeks calamity. He anticipates the worst in order that his gold investment will appreciate and any and all whom he feels may have derided his choices or mocked his predilections will be given a smack-in-the-face “I told you so”, the likes of which they’ll never forget.

This, dear readers, is fine for the aggrieved and the lonely. But it is not the way of anyone who desires to grow his wealth in the face of what may end up being a very trying period in world history.

The Gold Revengers have closed themselves off psychologically to any other potential outcome but the most disastrous. And what’s worse, they have already decided that the worst is already upon us, and that within minutes or days all the doubters will be forever shamed and they will be glorified and given a stature they’ve always coveted, for their foresight, for their wisdom, and their patience.

Would that it were so.

The truth is that most of the Revenge crowd is now sitting on exorbitant losses that sheer embarrassment and admittance of ‘failure’ are preventing them from liquidating. And we say that there is neither shame nor reproach in reallocating resources out of an underperforming asset into one that is growing.

Them have ears, let ‘em hear…

When you see articles, analysis, comments, whatever, that read as follows –

The end game has already begun and my upside targets for silver and gold have actually been raised. Both metals will soar higher than anyone can imagine, and the perma bears along with the bullion banks will lay in ruin!!!!! RIP jp morgan and goldman slacks!

know that you’re dealing with someone who is closed to any possibility but an immediate, historic, financial apocalypse, and who’s “I told you so” mentality has trumped his better judgement.

Your Trade

The best thing going these days is a pairs trade matching industry leader Franco Nevada (NYSE:FNV) against the rest of the gold miners, as represented by the Market Vectors Gold Miners ETF (NYSE:GDX).

Here’s the way the two have performed since the most recent bottom was put in eight trading sessions back.

 

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We added gold bullion proxy GLD for the sake of comparison, but clearly, no comment is necessary. When gold is rising, FNV outperforms dramatically.

 

Wall Street Elite recommends you buy the FNV June 50 CALLS, now trading for $0.50, and sell the GDX June 33.50 CALLS for the same price in equal numbers.

 

The trade costs nothing but commissions and profits if/when FNV outperforms the miners.

 

With kind regards,

Hugh L. O’Haynew, Senior Analyst, Oakshire Financial

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Comments

8 Comments on "Shattering The Gold Revenge God (FNV)"

  1. dave on Mon, 29th Apr 2013 8:33 PM 

    It is always interesting to read what you perma bears have to say. You post my comments up there like i have a one track mind set but i would say you guys have more of a one track mindset than i do.
    Iam not losing any sleep whatsoever over what the pm manipulators are doing to the price of gold & silver. I have not been long physical gold or silver during this downdraft although i am prepared to get long now as i see the end game nearing its terminus. I like your spread trade , thatll work for now but you are just dead wrong about the trend direction for gold and silver and if you insist on wearing out your welcome on the short side of that trade you are going to get burned badly. Iam very closed minded toward the bearish side of gold and silver because i know that my bullish argument is 1000% correct and the bullish stance will be vindicated!!!! Simple as that!!!

  2. Michael C on Tue, 30th Apr 2013 8:02 AM 

    I like the approach of the trade. But, I would want to see the FNV leg close firm above the 4/25 high especially since you’re buying OTM calls. The 4/25 daily bar printed a potential upthrust, and there is a lot of prior selling activity in this area. At the same time you’ve had 2 subsequent supply bars closing low but not much result so this could be absorption, we’ll see. On the GDX side this market has lots of resistance to fight through, and probably will come back to test prior support so I agree that this leg isn’t going up for a while.

  3. Mauro Pasini on Tue, 30th Apr 2013 11:33 AM 

    Please be patient, since I am learning to trade. My broker does not accept the selling of the GDX June calls unless I already own them. Can you help?

  4. Ralph Kehle on Tue, 30th Apr 2013 12:18 PM 

    Tried to do the FNV — GDX trade this morning and Schwab wouldn’t let me go naked on the GDX part.

  5. Michael C on Tue, 30th Apr 2013 1:03 PM 

    Mauro and Ralph, you put on a surrogate naked position by buying the long call far OTM.

  6. Michael C on Tue, 30th Apr 2013 1:43 PM 

    Sorry I didn’t see how I could edit my prior comment. Just to clarify, you can put on a surrogate naked position by selling the call at the desired strike and simultaneously buying the same amount of far OTM calls (for example the GDX June 49 C at .02). Factor this into your limit price to either buy the trade for .02 less or sell it for .02 more than Hugh suggests).

  7. David S on Tue, 30th Apr 2013 2:29 PM 

    I have a question. I have wanted to trade some of your spreads, but the margin exceeds my account size as my account at Optionshouse platform requires two separate orders to complete. Therefore, the naked call has a huge margin associated with it.

    Do you place the orders as a single transaction or is there a way to structure these spreads with a reduced margin requirement?

  8. dwyatt on Tue, 30th Apr 2013 3:06 PM 

    Re FNV-GDX trade can you suggest an etf that will short GDX by buying it.i am fed up paying for margin ,dave

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