Buy Gold Mining Stocks
The recent plunge in commodity prices, including gold has set up an interesting buying opportunity - gold mining stocks. First some charts:
The gold price - in both dollars & rupees - peaked in mid-July and has corrected over 10%:
Gold mining stocks (with their inherent leverage) got destroyed over the same period - the chart below plots the Philadelphia’s Gold & Silver Index (XAU):
While I think that even gold is approaching a good entry point, the gold mining stocks seem even more likely to turn around, given:
- Oversold technicals
- Dropping oil & commodity prices
- Historical analysis of gold:XAU relative performance
- Seasonality
Given that we don’t really have any major gold miners that trade on the NSE/BSE, there are only 2 options to play this one:
I found the DSPML-WGF to have a 85%+ correlation with the XAU, so it’s a good enough proxy for this purpose.
- Entry: Scale in, starting today (I got in @ NAV of 11.7077 11.5965)
- Exit (stop loss): If trade not profitable in 2 weeks
- Exit (book profits): When gold:XAU ratio drops below 5
Mind you, this is not based on any sort of valution analysis, but purely on price & relative performance. Also, using funds like these entails high transaction costs (2.25% entry load, 1% exit load).
Warning: This is a ‘pick the bottom’ / ‘catch a falling knife’ / ‘mean reversion’ trade - and the risk is that the downtrend continues further! Moreover, the XAU index is very volatile, and a 20%+ move in either direction can occur in the matter of days.
Update: Bought more of DSP-ML WGF @ 10.8248 on August 11; ‘averaging down’ can be hazardous to your health.
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