Trading the Trend - three ways to play the rising gold price
This week, I’ll be looking at gold and some producers. Gold has historically been a fantastic asset class, and though many have lamented in the last few years over the lack of volatility, in the long run holding gold has produced fantastic gains.
Whilst Stockopedia does not have commodity charts, we can see the price increase since 2008 from Gold Bullion Securities – an ETF that offers security holders a simple way to access the gold market by providing returns that are equivalent to the movements in the gold spot price.
That may be short term, but looking back over the price of gold the trend is here to stay. In reality, gold is a fairly useless piece of rock. The vast majority of it is used in jewellery and investment, but it’s the value that everyone collectively places on it that gives it its value. Many believe Bitcoin is fundamentally worthless as it has no intrinsic value. But what is the intrinsic value of gold? If I have a big nugget in my house – what can I do with that other than to sell it to someone who sees value in it? So long as people keep believing in gold’s value – which history has shown is likely – the long term of gold will continue to rise.
Producers
I prefer to trade equities rather than gold by itself. This is because it’s a different market and many producers are geared towards the spot price.
There is the argument that you can lever yourself on gold itself, but no thank you. First of all, I don’t want to be levered something silly, and secondly, I like good risk/reward where I can have an edge. I wish someone luck in having an edge on gold itself.
Goldplat
This is a stock that came onto my radar at the back end of last month. The RNS revealed that the business had performed higher than market expectations. This is usually a good sign for a stock to start trending, especially if it can ride an earnings upgrade cycle.
There has also been strong support at the level drawn below with price testing this level several times.
I don’t hold Goldplat, but I’ll be watching closely from now on.
Another thing to note is that the quality and momentum ranks are pointing upwards.
With a StockRank of 83 this doesn’t appear to be typical AIM miner garbage. The market cap is just under £11m too – could this stock be a bagger or two over the coming year? It already has in the last month, but if the metrics continue to improve then buyers may continue to push the price up higher. Especially if gold is going to stay above $1,600.
Serabi Gold
This stock is a Brazilian gold miner that has had big swings in its fortunes.
The stock fell from around 140p in August 2016 to lows of 25p in May 2019. A grim move for shareholders.
However, looking closer, we can also see volumes start trickling in and ramping up in the stock. I believe that volume is a key indicator or a stock either bottoming or topping out – when volume increases it means that there are more buyers and also more sellers. Heavy volume after sustained trends can show resistance to the trend continuing and perhaps even a reversal.
That was the case here in Serabi Gold, where the price began to appreciate on significant volume.
In Q4 2019 the price came off but we can see that volumes were not especially heavy. That’s important – we want to see high volumes on up days in the stock and low volume trickling in if the stock is down.
Right now, we’re at a key level of resistance in the stock’s history.
Serabi Gold also gets the Stockopedia thumbs up in the form of a StockRank of 95. All metrics score highly, so perhaps this is a trend to play rather than a breakout hit-and-run.
Petropavlovsk
For those who prefer the liquidity that SETS affords and a larger company, Petropavlovsk is another company that I believe will be a beneficiary of a rising gold price. We can already see the market has started pricing this in since around December, where the stock started to surge and is well up by over 60% in just a few months.
This is a company that has been brutalised from a share price much higher but the recent price action suggests it is now on the rise. We can see the breakout entry points drawn on the chart too.
The price has now broken out of a range, and so to trade this I would either wait for the stock to consolidate again, as it has done over the course of February, or I would place a limit order to buy in the stop loss liquidity just underneath the breakout zone.
Historically, this has been a strong stock that has broken out of the range and carried on. It’s showing signs of strength. But if the stock does retrace and test the breakout, I bet there will be many like me waiting on the sidelines either to get amongst the action or increase their position.
Remember – if producers have fixed operating and mining costs, then every dollar the gold price rises will see this trickle down into the P&L. But it does work both ways. A savage sell-off in the gold price will also gold producers react accordingly.
It’s likely that you’ve heard of – and possibly even own – Sylvania Platinum. This is the five-year chart.
The trend began with huge volume in 2016, and with rising basked prices the stock has consistently delivered. Since then the stock has gone on to become the stock that everyone dreams of: the ten-bagger. They do exist.
None of the shares mentioned in this article are recommendations to buy or sell. You can download Michael’s free books on the stock market from his website www.shiftingshares.com
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22 comments
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Hello Michael,
Thanks for your post. Many gold bugs are currently suggesting that gold is ready for a run up in price (in say $US) as Governments are borrowing significant funds to keep their countries going and as a result their currencies will decline in value against hard assets. There has been a period of consolidation and many of the larger players are well cashed up and have pared down their portfoilios thus concentrating theri efforts on long life low cost deposits.
My current view is that Canadian and Australian stocks provide a much greater choice of Companies to buy than can be found on the London market. Gold mines are often located in exotic places whose value can be affected considerably by unpleasant political actions. Canada/US/Australia are often viewed as safer jurisdictions.
SM
Yes, some very good points. I would add that, as with investing in any sector, avoiding the losers can be just as important as picking the winners. For anyone considering investing in Gold stocks, applying the same basic metrics to Gold mining as to investing in, say transport, probably makes a lot of sense. Personally, avoiding explorers (Jam tomorrow) has been a very profitable exercise. I am looking for profitable dividend payers. Especially those with low all-in-sustaining-costs. It gives considerable leeway should the price of Gold fall.
In terms of jurisdiction, I would prefer all my Gold mining stocks to be based within the M25 but this appears to be unrealistic. The reality is that Gold is often located in very precarious countries. So I have a spread of Gold miners - not putting all my eggs in one basket has worked well for me. And, just like any other extractive industry, put a hole in the ground and it often gets complex and expensive. Expensive things can go wrong. There is also uncertainty as to what lies just underground. Generally the further underground you go, the riskier it becomes.
Yes, I do like dividends. After all, it’s a depleting asset. I do not want my rewards some way down the line when the enterprise is sold (The management does not want to be rewarded on that basis so why should I?). It also demonstrates to me that it can afford the sustaining capex and still have the cash flow to pay shareholders.
Of the miners I own, my preferred choice is Russia-focused Highland Gold Mining (LON: HGM). A producer rather than an explorer. Lightly geared and a strong dividend payer. It still has, in my view, substantial growth within its current portfolio. With four separate producing assets - open-pit and underground as well as tailings operations - it has a degree of operational stability. At the same time, it has three development projects. The largest is Kekura. The company has already completed phase 1 of the project and is now embarking on the final phase which is due to complete in 2023 with production estimated at 172,000 oz of Gold per annum. Around that, it has a raft of exploration opportunities some near-mine which look set to increase its reserves.
Like any other investment, Highland has its downside. For starters, it’s based in Russia. And so could, in theory, be subject to political interference. Most of its assets are located in the harsh far east of the country (To some degree mitigated by generous incentives, including tax breaks) so there is limited infrastructure. And it’s largely controlled by a consortium that owns some 43% of the company. Unless you are prepared to place your trust in the people in this consortium (Including Roman Abramovich), there is no point in investing. They can do what they like with the company.
Just to cloud matters. For anyone who thinks that the recent Gold price rise augurs in a new era, it’s worth bearing in mind that it seems to be pretty much an open secret that the price of Gold is routinely manipulated. It’s fairly easy for someone to dump a large Comex contract on the markets at the right time to have a huge (Normally downwards) impact on the price of Gold (This could have happened last night). With the world’s monetary system in such a huge mess, who knows how long this can continue? But it’s worth considering. As is the relentless push by China and others to move to a new world reserve currency probably more closely linked to the price of Gold.
As ever, I suggest that you never get over-exposed to any one stock. Too much can go wrong. And Gold mining is inherently risky. It goes with the turf. Incidentally, it also requires a degree of qualitative judgement that may not be available via a Stockopedia ranking. Is there an issue of resource nationalism in the jurisdiction? Are labour relations good - for understandable reasons, mining seems to bond the workforce? Are there issues with artisanal miners working locally? Are there “Community issues”? And the backdrop is the direction of the price of Gold
Simply some final thoughts for those who believe that Bitcoin (Or any other cryptocurrency) will usurp the role of Gold. Firstly, probably the best-informed bankers on the planet are Central Bankers. They appear to have collectively decided to opt for Gold as the core of their reserves. And for anyone who believes that the technology behind cryptocurrencies is foolproof, take a look at the Stuxnet virus. I suspect that Central Banks are fully aware of just how susceptible to an attack by a nation-state these cryptocurrencies really are. In my opinion, Gold will probably move centre stage after the next crash (Presuming that it has not already started).
Why is Goldplat (LON:GDP) down so much today?
3% drop in revenues hitting an already slim NP?
I see thanks, I was expecting a rise along with other Gold miners.
I was expecting a rise too. I actually bought this on the gap up on results, and saw that it was getting sold so I lasted less than two minutes. Took a small loss which could easily have been a much bigger one.
I see Serabi Gold (LON:SRB) is down 7.7% today, can't see any news, seems odd when gold price is still rising. Some others are not behaving as I would expect such as Anglo Asian Mining (LON:AAZ) and Highland Gold Mining (LON:HGM), can you shed any light on this?
Recovered well, great results currently, bad more if you can.
Serabi Gold (LON:SRB) is in the process of commissioning a new sorter. It is predicted to increase production from 40k oz to 50k oz. There is a very interesting video on the company's website.
Thanks Zoiberg.
what sets Sylvania Platinum (LON:SLP) apart from gold shares are the metal prices of the commodities that it mines. The PMG have gone almost vertical with the odd pull backs, but if we are to believe in the future of the EMV then SLP in my opinion has a great future, even better than gold.
Certainly a pullback today, I think EMV will come but will be on the backburner for a while until this virus goes away, car sales have plummeted and manufacturing has been hit due to lack of parts from China.
You could be right Peter - arguably it's still cheap and the chart is fantastic.
Hi Martin, is that a bona fide Cup & Handle 2013-2019?
Another way is to buy an ETC. I recently did so through my ISA and picked up £SGLD
Sylvania Platinum may mine gold but the enormous price increase is due to the need for PGMs for electric car production.
PGMs are used to clean up the exhaust of cars with internal combustion engines. What are they used for on electric vehicles?
Does SLP mine gold? I included it more as a reference as to what can happen with fundamentally good stocks that are plays on rising metal prices.
What do you consider levered silly on spot gold? There are derivatives that are 3x and 5x leveraged and I find these far more reliable than equivalent 3x leveraged funds.
And my experience in buying gold shares is that they are far too volatile and prone to negative news. (Hence the gold funds underperform leveraged gold derivatives).
What do you consider levered silly on spot gold? There are derivatives that are 3x and 5x leveraged and I find these far more reliable than equivalent 3x leveraged funds.
And my experience in buying gold shares is that they are far too volatile and prone to negative news. (Hence the gold funds underperform leveraged gold derivatives).
Hi Martin, my view that levering on gold itself is silly (and that's just my opinion - certainly not a fact) is because of the point you mention below.
Gold shares are more volatile, and so you can get the desired volatility without putting too much capital (though as you point out you can get leveraged instruments) - plus, gold shares move as shares but exposure to something else.
If I wanted to play a rising gold price, my edge is in stocks and trading charts that move by the rules of the LSE. It doesn't make much sense for me to go and try and trade something else if I can profit from a macro trend with micro instruments.
I wouldn't buy gold funds, but I do own gold shares at the moment for a trade.