Growing Cold and Crowing Gold (GLD,HYG)
In the same way that the mind and body can become inured to a constant barrage of negative stimuli – a crucial survival mechanism, no doubt – it can also grow insensitive to the positive.
And you can see this in the widespread American penchant for more, better, juicier and sweeter tasting food, a phenomenon that even manifests itself in a television channel dedicated entirely to eating! There, you’ll learn how to make food, how to serve it, what to spice and spike it with in order to maximize your taste pleasure, and all in the name of moving your tastebuds further out the plank of ‘extreme experience’.
Completely insane when you think of it.
And so it goes with all of life’s other ‘experiential’ aspects; people are ever pushing the edge of the envelope, from skydiving to white water rafting to bunjee jumping, meth experimentation and orgiastic Thai getaways. The movement to experience more, better, thrilling… everything! has become an integral part of 21st century living.
Sadly, the result, in the end, is actually a deadening of the senses. One so beholden to experiencing the latest mind-blowing phenomenon has, in effect, lost his ability to enjoy the taste of a carrot, to experience the contented silence of a walk in the woods, to smell fresh air and enjoy a drink of cool, fresh water. He no longer feels the good that was granted him as a function of simple human living.
And so it is, too, with the stock market.
It goes up. It enriches us. It continues to rise. We’re wealthier. The government ensures its continued advance, and we prosper again. And all the while we’re deadened to the possibility that P/Es are stretched, that dividend yields are approaching zero or that shares are swapping at three to four times book value.
We worry about nothing.
We got smacked by the ludicrousness of the situation just this weekend when we glanced at a chart of metals miner Freeport McMoRan (NYSE:FCX).
We’ll show you the chart in a moment, but first a word on the company.
Freeport is a global copper and gold miner that also possesses some oil and gas interests (though it sold off the greater portion of them in the last two years to offload a weighty debt burden). The stock wields a market cap in excess of $27 billion and pays no dividend.
And as of late, it’s also soaring.
Have a look –
The above (daily) chart for FCX is phenomenal. The shares have gained almost 50% in just six weeks! It’s absolutely ridiculous!
And what’s accounted for it?
In the first place, a very long negotiation with the Indonesian government over the company’s Grasberg mine – easily, Freeport’s most valuable asset – appears to be coming to a close. But more than that, the last couple of months have also seen a heady bounce in the price of both copper and gold, and that’s translated directly into a bubbly overbought gain for FCX equity holders (in green).
Now have a look at a chart of copper for the last two years (below), clearly showing the tremendous gains accrued over that period.
That’s a 65% rise for red metal speculators, and the latest bounce – from the beginning of December – has apparently lit a fire under Freeport stock.
Look now at a chart of gold for the same period.
This is the SPDR Gold Trust (NYSE:GLD), a reasonable proxy for bullion, and right off the bat you can see that she ain’t no copper.
Indeed, the picture for gold is far more complex.
After rising off her bear market lows two years back, gold peaked early and has yet to set new highs for eighteen months. And that’s a long enough time for both bulls and bears to begin scratching their heads regarding which way she’s headed next.
The bulls have an advantage insofar as
- All the moving averages are moving higher, and price is trending above them all,
- RSI is above its waterline and MACD is set to confirm within a day or two (in green), and
- A long term pennant pattern appears to be forming (in red) that would suggest more upside is on the way.
As to the bears, they can point to higher lows on GLD, but a failure to achieve higher highs. Indeed, until GLD cracks above $128 AND $130 (blue arrows), the bullish advance of the last two years will remain in question.
More than that, the action of the last three weeks (from 118 to 124), while impressive, has an ‘exhausted’ look to it, suggesting some near-term profit taking may be on the way.
And with all this in our pockets, we are going to set off on a trade.
But first, we have one open initiative that requires your attention.
It was opened on November 7th in a letter called Sell-Off Lurking in which we urged you to buy the HYG January 18th (2019) 87 PUT for $4.70 and sell the GLD January 18th (2019) 120 PUT for $4.85. Total credit on the trade was $0.15.
And today, the HYG PUT goes for $4.70 while the GLD trades at $3.55. Our advice now is to shut it down. Sell the former and buy back the latter, and you net $1.30 on nothing spent! Adjusted for minimal commissions gives you an 867% profit.
And now the trade.
Because we’re partial to the prospects of a gold advance, we see wisdom in a pairs trade involving bullion and FCX.
And we’re bolstered by the following bits of anecdotal evidence:
- First, recent stats show that between 2009 and 2013, Americans bought between $100 million worth of gold coins and between $75 and $100 million of silver coins EVERY MONTH.
That was directly after the sub-prime meltdown, of course. But today the numbers have fallen to their lowest level since. The average monthly purchase of gold coins is now on the order of $15 million and silver coins are at just $7 million.
Consider also that…
- The latest Google search volume data reveals that queries of “Gold coin” are registering lower than at any time since the series was founded in 2004.
All of which has us leaning thus –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you buy the FCX January 18th (2019) 17 PUT for $1.73 and sell the GLD January 18th (2019) 116 PUT for $2.30 to pay for it. Total credit on the affair is $0.57.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew