Gold Ratio Guru?
By Brad Zigler | September 03, 2008 | 10:09 AM | 0 Comments
Only two of the nearly three dozen issues comprising the AMEX Gold Miners Index (AMEX: GDM) are trading above their 200-day moving averages. And it's only by the thinnest of margins that these two are still in positive territory.
Denver-based Royal Gold (Nasdaq: RGLD) specializes in the acquisition of low-risk, long-term cash flows through royalty interests in metals mining properties in the United States, Canada, Mexico, Africa, Argentina and Chile. Ever-increasing mining costs and a tight credit environment are forcing producers like Barrick Gold Corp. (NYSE: ABX) and others to sell more royalty interests to obtain the capital needed to pursue their development projects. Barrick recently sold $150 million of royalty assets to Royal Gold.
Royal Gold shares closed Tuesday at $32.91, 4.8% above the stock's 200-day moving average.
The other Gold Miner Index constituent remaining above water is Canadian producer Eldorado Gold Corp. (AMEX: EGO), at $7.83 per share. Eldorado is now trading 4.4% above its 200-day moving average.
Eldorado holdings include Turkish and Chinese properties where low labor rates have helped keep a lid on production costs. The company boasts of an average cash cost for gold at $229 per ounce to date, though that figure's expected to rise to $255 or $260 by year-end.
The remaining 30-odd stocks in the Gold Miners Index are collectively down 28% from their 200-day moving averages.
Little wonder, then, that the price of bullion, while under pressure, is still so expensive relative to mining issues. The SPDR Gold Trust (NYSE Arca: GLD), a bullion proxy, is selling for 2.3 times the price of the Market Vectors Gold Miners ETF (AMEX: GDX), very close to a historic high watermark attained in August.
Gold Vs. Gold Mining Shares (GLD/GDX)
A couple of weeks ago, we reported on option guru Larry McMillan's in-the-money gold spread recommendation ("Options As A Golden Opportunity"). Banking on gold stocks to regain ground against bullion, McMillan proposed buying GDX December $32 calls together with GLD December $86 puts for a combined premium of more than $16 per share ($1,600 per spread).
Calls permit their owners to buy the contract's underlying shares at the stated price any time prior to expiration, while puts permit their owners to sell shares at the strike price.
At last look, the spread was worth $14 per share ($1,400). McMillan's followers, I'm sure, are hoping that the end-of-year holiday season will be studded with gold. Gold stocks, that is.
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