Gold stock holders here who see gold breaking up or down hard in the next 6 months, but aren't entirely confident in which direction, may want to consider taking the higher risk side of option trades--i.e., buying, not selling. Even so, the risk isn't open-ended, just loss of premium. I've hedged my long gold stock position with puts on the riskiest major I could identify in this macro/political environment. That is FCX, for several reasons:
1. Its entire asset base sits on an island whose inhabitants want out of Indonesia. Throughout the archipelago the natives get violent in making their point. Sure, it's spears against machine guns, but the market has priced in risk when hostilities have flared up before;
2. Indonesia and Papua New Guinea tie for 4rth place on the list of the world's worst countries in which to mine. See dolbear.com
3. Grasberg (FCX's giant money-maker of a mine) is a copper mine with huge gold and silver credits. The net cost of copper was down to zero in the latest quarterly (after some significant smelting/refining credits for which I don't know the audit trail). The price of copper isn't too robust now, and if you think the world will be in recession, it isn't going to look better;
4. The company has a mountain of debt to offset its mountain of copper and gold, and must run flat out at present prices to pay it off. Lower prices would really hurt; and
5. It appears from FCX's reports that it may be high-grading the mine. I'm not sure why else the grade went up significantly. I haven't investigated that further.
The long I'm hedging is Francisco Gold (FGX.V). If gold goes up much my cost to buy the FCX put is dirt compared to my FGX gain. If gold goes down much I'll pocket some nice cash off FCX but won't get hurt much on pre-production, cash-rich, debt-free FGX. The put will pay off if gold and/or copper move down much more by next January.
Gold majors look too expensive to me right now, and most juniors are pricing in a lot more future than I see in their properties. I see nearly all pre-production juniors today as speculative calls on both the gold price and drilling outcomes. I'll pay for one but not both! |
