A Gold Strategy For All Seasons (GDX, FNV)

Discussion in 'Trading news and analysis (syndicated content)' started by Oakshire Financial, Mar 21, 2013.

  1. Oakshire Financial

    Oakshire Financial syndicated content Official Contributor

    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:

    [​IMG]

    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.

    [​IMG]

    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:

    [​IMG]

    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

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