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A Strategy to Protect Your Portfolio
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Chart courtesy of Stockcharts
With the HUI having risen from 280 to the 400 level at the beginning of June 2009 we took the view that it was time to take some action that would protect our portfolio. Gold was at $980/oz and the US Dollar was looking extremely oversold with the possibility of a bounce on the cards.
So there are a number of possible strategies that could be utilized such as sitting through a possible downturn in the HUI, taking some profits by selling a few shares across the board etc. Some cash on the side lines is always useful to enable us to take advantage of any dips that may present themselves. However we are in a precious metals bull market and both gold and silver could take off at any time and settle at much higher levels so there is the risk of not being in the market and missing out on those gains. So we examined our portfolio and found that one particular gold producer had been a star performer for us in that it had gained 82.44% in less then a year.
Further examination of this stock revealed that it was it was way ahead of the pack in that there was a yawning gap between the stock price and its 200dma, an aberration that we believe would rectify itself sooner or later. The stock had a relative strength reading of over ‘70′ which suggests that it has gone as far it is going in the short term and its P/E ratio was well above 100, again a far higher reading than many other comparable stocks.
So we made the decision to sell our entire holdings of this stock and lock in the profits and weather the storm with the remainder of the portfolio. Having done that we decided that to utilize the cash with the purchase of PUT options on the very same stock with an expiry date of September 2009. September was chosen in order to allow enough time for this stock to pullback in response to a mini dollar rally and gold prices losing some ground.
The PUT contracts have now improved by 56.90% so this gain has helped to soften the losses registered by the other stocks. A similar strategy could also be applied to the silver sector when you see a similar situation developing it could be worth your while to give it some thought. It is a difficult call for us to make being gold bugs and placing a down bet in a bull market but as they say nothing goes up in a straight line and sometimes its a risk worth taking. If the gold market had continued to rise then this options trade would have lost money.
We can see from the chart below that the USD changed direction at the beginning of June when the technical indicators, particularly the RSI were suggesting that it was oversold.
The chart at the top of the page depicts the HUI peaking at the same time as the USD bottomed. Also note that the technical indicators were at the top of their respective ranges suggesting that stocks were overbought.
The movement that followed again suggests that the US Dollar and gold are still inversely correlated, however the time is coming when gold will move higher regardless of the dollars behaviour.
If this sort of thinking interests you then please drop by and take a look at our site where access to our portfolio is free, our newsletter is free and we publish every trade that we make. We also post our thoughts and analysis leading up to making a purchase or a disposal hopefully allowing our readership the time to understand what we are doing and why and also to make the necessary preparations to make the trade.
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Bob Kirtley
bob@silver-prices.net
19 June 2009
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