Investing successfully is all about timing: getting in at the right time, and getting out at the right time.
This also means you need to re-evaluate and change your mind as soon as the market “changes”. Failure to do this will cost you dearly.
In March I was considering buying some quality gold mining stocks as they were “dirt-cheap” and considerably undervalued.
Gold mining stocks have 2 major advantages over gold: they give you leverage (more bang for your buck) and you get paid dividends.
However, back in March Gold was trading above $1600 an ounce. My analysis depended on one major factor: that gold prices remained above $1500 an ounce.
All that changed on the 15th April when gold plunged by a massive 8% in one day to close at $1361. Gold has managed to recover slightly since then, but it still remains below $1500.
So why does this matter to gold stocks?
Most people are unaware of the cost of producing one ounce of gold and the fact that this cost is rising.
Mining for the precious yellow metal has never been cheap: you’re talking about the costs of drilling, fuel, labour and equipment just to name a few.
According to most gold stock analysts, it takes $1250 (on average) to produce one ounce of gold. The CEO of Iamgold (IAG) is reported to have admitted that it will be very difficult for anybody to produce gold at less than $1200 an ounce.
So unless gold can rally and go back above $1500, it will be extremely difficult for gold mining companies to remain profitable.
My personal point of view is that we probably have not seen a bottom in gold yet, and quite probably we shall see lower prices.
Our strategy for gold stocks will be either to short them in the meantime or wait until we can buy them at a major support level or reversal.
Take a look at this chart of the big gold stock fund (GDX):
GDX has broken below its 61.8% fibonacci support level (red line). We really do not have any further support until 28.07 (the 78.6% fib level) or 20.00 which is the all-time lows reached in 2008!
If I was looking to short gold stocks, I would either short GDX or look at Newmont Mining (NEM) as a potential “momentum” play.
Take a look at this chart:
Newmont is currently trading just above $33 and really has no major support until $23.82. That is a potential 28% drop in price. I’d be looking to short NEM either if it breaks below $31.77, or at rallies back to $36.59 and $38.67.
Alessio Rastani is a stock and forex trader at www.leadingtrader.com