Last time I wrote an article on Goldcorp (GG), it was early August and the message was to wait and don't invest in the company until 2013. At that point the stock was trading at about $36.50 and from the time of that article to the present it did nothing but go up. Presently it is trading at $46.93. This is some of the news I wrote about that had me sharing my viewpoint that any investment should wait:
"One would prudently assume that at Goldcorp's announcement of inhibited gold production into 2013, the challenges the company is running into extracting the ore this year will continue into the near future."
But that was not the attitude of Chuck Jeannes, CEO. He said weak economic conditions will favor a loose money policy and he thought we could see gold test the $2000 mark within 12 months. His outlook was a bit better than mine. But was it strictly the loose money policy that has made gold go up?
Since QE3 was announced, the bullish influence on commodities, especially gold, has also had a positive affect on gold related stocks like Goldcorp.
What can happen with gold in the short term
There are three big things that could possibly help define bottoms for precious metals through the next three quarters. First of all QE3 really was not a defined program as much as it is an on going government intervention with no end. Secondly, the European fiasco has not been solved and new headlines continue to affect the markets every other week. It may be into spring and summer of 2013 before we find anything substantive to the problems there. And thirdly, the U.S. fiscal cliff as we have heard so much about will need to be addressed. If we fall, away goes gold. It is quite possible that gold could retrace its move and find a nice support to bounce back up on.
As for the fiscal cliff I would be surprised if Congress did not extend the tax credits or the tax breaks for six months to a year ahead of the election, which will give the incoming president the ability to deal with it. Standard & Poor's threatened to lower the U.S. credit rating if something of substance was not done this time around. The markets could get liquid and that means selling for stocks and metals.
The stock has moved up continuously since the last week of July and the move was (and continues to be) very strong. The strength can be seen by observing the Bollinger bands. Notice how the chart has the stock hugging the upper band and not even touching the middle band. The RSI indicator has moved up with the stock and has it seriously over bought. This would be an indication that the stock would move back down, but not necessarily a reversal of position. The key to this is the major resistance at "50" coming up. When it hits here, if it pulls through it may keep going. Or this may be a temporary resting point before it continues up.
The Options Play
The stock is presently trading at 46.93. I would usually trade this one with the trend but I am going to look at a longer trading period and play what I suspect will be a pullback before we get a longer move up in gold itself. I believe the metal will pull back and define a strong bottom before it moves up even higher. I do not know when it will do this but I suspect before year's end.
- Buy the January 2013 put with a strike of '46.00' (priced at $3.20)
- Sell the January 2013 put with a strike of '45.00' (priced at $2.70)
- Net Debit to start: $0.50
- Maximum Profit: $0.50
- Maximum Risk: net debit
- Maximum Length of Play: 4 months
Reasoning behind the trade
I believe gold has risen quickly and will require a pullback before it continues on an extended move up. So we are looking at this stock to go down with the metal price before it is pushed back up.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.