Goldcorp Inc (GG) is one of the world's largest, most cost effective and most active gold miners. It has a direct interest in 17 major gold and silver projects throughout the Americas.
One of the things that I like about Goldcorp is that it presently is the fastest growing and lowest cost gold producer throughout the Americas, and what's more, its operations tend to be in politically stable areas. Its projects are designed to create sustainable growth over the long haul. The first quarter of the year its adjusted net earnings exceeded 2011 with $404 million verse $392 million.
Gold mining stocks have had a dismal 2012; the Market Vectors Gold Miners ETF has plummeted over 24 percent in the last three months. Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital, made the following observation:
Absent new monetary stimulus, gold doesn't make sense. When people are fearful of the fiat currencies eroding their wealth, that's when gold catches its bid.
It is obvious that political uncertainties in Greece and a leadership change in France contribute to the falling commodity prices. Gold will continue to fall. Investors are questioning if Europe would come through with the funding needed to bail out its economy. Considering that not much support for gold exists below 1600, the possibility exists for a further sell off.
So even though we have seen 17% gains in the stock in the last two weeks, it may not be done regressing. But short term, we might see an income opportunity. This can be seen in the markets as the bad Jobs report last week revealed that the Federal Reserve could open up another bond-buying session. The last two times Ben Bernanke and the FOMC launched quantitative easing measures in 2009 and 2010, gold went on massive runs higher.
For this reason we see an opportunity to capitalize on this short term momentum with an income options play. We believe the stock will move higher with momentum for a bit longer. If it will turn down at all, it will not be real soon.
The Options Play
Presently trading at 39.23 we will look at a bull put spread here.
- Buy the July 2012 call with a strike of '40' (priced at $2.19)
- Sell the July 2012 call with a strike of '41' (priced at $1.72)
- Net Debit to Start: $0.47
- Maximum Profit: $0.53
Reasoning behind the Trade:
- Sudden poor economic news may create another government bailout.
- Gold does well during these bailouts.