For everyone bullish on gold and silver and related mining companies, the past two and a half years have been extremely painful. Anyone joining the party late in 2010, early 2011 has had only pain, with no joy till this year. And those smiles quickly turned back to tears in March.
Amongst all the cries back then of gold going to $5000 and silver going to $100 and higher, there were a few wise voices saying that there was going to be a big fall. I wish I had listened, but I didn't understand the logic and stuck by my belief that massive money printing had to lead to inflation and would thus continue to fuel the rise in gold and silver prices.
Fast forward to December 2013 and gold was putting in a double bottom and many miners were hitting new lows. Direxion Shares Exchange Traded Fund Trust, NUGT, had crashed much lower because of its triple leverage. When metal prices are falling, this is just about the worst stock to be holding, but when prices turn to the upside, then that triple leverage works in your favor.
There weren't many voices in December shouting, "Buy gold!", and anyone suggesting it wasn't shouting. There was simply growing confidence that the time to buy was near. The fact that NUGT had fallen from a high of $100 in August to just $25 made it very, very compelling. For anyone that made that bet, they had a great run to its high near $58 in March. Now, with the price back down and bouncing off lows of $34 and lower, and gold building strength to the upside, I think it's time to make that bet again.
NUGT data by YCharts
As you can see from the chart, the drops can be scary so you need to have stops in to sell, but once a bottom seems to be in, then you have a decent chance of getting a good run up. And I don't think I need to emphasize the need for caution. The pain felt by those holding SPDR Gold Trust, GLD, or physical gold has been very severe but it looks almost insignificant next to the declines of NUGT. Such are the risks (and potential rewards) of 3x leverage, on top of the leverage that you inherently get from investing in miners rather than physical (or paper) gold.
NUGT gained a whopping 120% since its low in December to its high in March, while GLD, which follows the price of spot gold gained roughly 14%. Since their March highs, NUGT has fallen about -42% while GLD has given up about -7%. In comparison, some miners like Pan American Silver Corp., PAAS, ran up 56% from December lows to March highs, and they've only fallen -15% from those highs. New Gold Inc., NGD, is another miner that I like. It gained a modest 38% and is now down -22%.
NUGT data by YCharts
Hopefully this paints a clear picture of the potential benefits and risks of leveraging the price of gold by investing in miners and then 'supercharging' that leverage 3x by investing in NUGT.
So what are the advantages of buying NUGT versus individual miners? Firstly, it's an ETF so your risk is lower, versus an individual miner that could suddenly go bankrupt. Secondly, when the bottom seems in and the next likely move is up, it will likely give better gains than most any individual miner.
What are the risks? Obviously, if the price of gold drops below $1278, NUGT will sink like a rock. Notice that NUGT was around $24 in December when gold was bottoming around $1180. Now, NUGT is ranging between $33-$38 and gold is ranging between $1280-$1310. If the price of gold returns to $1180, NUGT will go much lower than its previous low of $23. I suspect it would drop to mid-teens or lower. That's the risk of leveraging. It's perhaps a bit like playing with nitroglycerin. Dangerous, but very useful if used wisely.
What are NUGT holdings? It's simply a triple-leveraged play on Market Vectors Gold Miners ETF, (NYSEARCA:GDX), whose top 10 holdings as of 11/26/2013 are Goldcorp Inc. (NYSE:GG), Barrick Gold Corp (NYSE:ABX) Newmont Mining (NYSE:NEM) Randgold Res-Adr (NASDAQ:GOLD), Yamana Gold Inc (NYSE:AUY), Silver Wheaton (NYSE:SLW), Franco-Nevada Corp (NYSE:FNV), Kinross Gold (NYSE:KGC), AngloGold As-Adr (NYSE:AU) and Agnico-Eagle Min (NYSE:AEM).
These are all major companies with very little risk of going bankrupt but are also less likely to give stellar returns in the near and long term if gold and silver prices improve.
NUGT data by YCharts
The remaining question is, "Is gold going to go up from here?" The sentiment from most of what I'm reading is yes, and this chart from MarketClub gives a nice technical view that gold is indeed ready for an up move.
Summary: If you believe that the price for gold and silver is likely to move higher in the near to long term, then a very good option is to buy NUGT. If you have other gold and silver holdings that are still sitting at a loss, it may be wise to sell them, take the loss, and buy NUGT in order to get leveraged gain to the upside, thus recovering your current losses quicker.
And again, a word of caution, NUGT will also explode to the downside if the price of gold drops below the current base of $1278. So play safe! Best of luck to everyone.
Disclosure: I am long NUGT, PAA, NGD, SLW, KGC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.