Monday, April 20, 2009

Royal Gold getting ready to explode

to the upside. I bailed on some short-term speculative bullish option plays on the Gold miners Goldcorp (ticker: GG) and Novagold (ticker: NG). This was due to the fact that the chart patterns didn't play out as anticipated and time decay is a bitch when using shorter-dated options. I remain longer-term bullish on Gold miners for sure but intermediate-term I have changed my stance based on new data Mr. Market has given me (as all traders must do to protect capital). I will be back in the Gold mining sector from the long side in the fall.

Royal Gold (ticker: RGLD) is a little different play on Gold, however, as it is a Gold royalty company and doesn't have the same risks miners have. It also marches to the beat of a different drummer and doesn't always track with Gold stocks well. I remain heavily invested in long term January 2010 LEAP call options on RGLD and think it is a perfect time to buy this stock if you are not yet in it. I want to show you two different charts of RGLD. First, a current weekly chart over the past 1.5 years:

Now below is a chart that I think rhymes with the current set-up. I have deleted the date, price and timing information to get you to keep an open mind, as I think this pattern is about to repeat based on both technical and fundamental analysis:

Though there are some differences, it is at least a decent rhyme, no? The pattern in the chart above is actually a daily chart (versus the current weekly chart of RGLD shown first) of RGLD from the beginning of the bull market in RGLD and Gold stocks in the late 2000-2001 time frame. It is important to remember that fractals can repeat on different scales and time frames. I think the fundamentals line up well, only we are in the second and more powerful stage of the bull market in Gold stocks. Institutional investors are aware of Gold and Gold stocks and the public is starting to wake up to these investment vehicles, so the moves will become stronger and more sustained as the bull market continues.

Anyway, what happened next in RGLD back then and what could repeat again on a larger scale is shown below (dates and prices for this daily chart left in this time):

For those who think I am being schizophrenic by being bullish on RGLD and yet getting out of other Gold miners, here is a chart of the Gold Bugs Mining Index ($HUI) from the same time frame in 2000-2001:

For those new to the RGLD story, I have covered the confirmed long-term RGLD stock breakout from a 3 year base before and have talked about an ideal entry point between $36-40/share previously.

The market gods have supplied another gift for those interested with this double dip correction, as RGLD has closed below $37/share for the past two sessions. Since I stuffed myself to the gills the last time we hit the $36-$38/share range (early March), I am already loaded up on RGLD heavily and more interested in using my remaining trading capital to go short on base metal miners (and possibly financial stocks and/or commercial real estate stocks).

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