Nice Bounce for Gold – Did I Cover Too Soon?

by JDH on June 2, 2012

After a depressing month of May, where gold dropped from the $1,660 level at the start of the month to below $1,540 (on three occasions) at the end of the month, June 1 brought a new day, a new month, and a new attitude, as gold jumped almost $60, over almost 4%, to close at $1,622.

Does this big bounce mean anything?

Are all of our troubles over?

Is it onward and upward from here?

I have not idea, since I can’t see the future, but as I said last week after rambling on about Facebook in my commentary Facebook – Say Goodbye; Say Hello to My Covered Calls on Gold, I am operating under the assumption that gold has bottomed, and it’s time to act.

The gold chart shows quite clearly that at the end of December, and again at the end of May, gold dropped below the $1,540 range but closed those days slightly above that level.  That would appear to be an important bottom.

As I described last week, in addition to some speculative juniors, I bought some blue chips, and then wrote covered calls against them.  How’s that working out so far?  Let’s review the numbers:

On April 20 I bought 500 shares of AEM.TO – Agnico-Eagle Mines Ltd. for $33. On May 9 I bought 500 more for $38.34.  I then sold 10 contracts (to cover the 1,000 shares I own) of the June 42 calls, which expire on June 16, 2012. I sold them for $1.15 each, so in effect I have lowered my cost per share by $1.15.

At the close on Friday June 1, Agnico-Eagle closed at $42.26, so I’m up $6.59 on my shares, or 18%, which is great.

However, the calls that I sold for $1.15 are now worth $1.81, for a loss of $0.66 per share.

So, overall, I’m still up about $6 per share.  I’m cool with that.

Obviously in hindsight, as of today, the correct answer was to buy the shares and hold, because then I’d be up $6.59, not $6, but I have mitigated my risk by $1.15 per share.  If Agnico-Eagle drops by $0.26 between now and June 16, the options are worthless, and I keep the $1.15.

What’s likely to happen?

Again, I have no idea, but as a two year chart shows, Agnico-Eagle has a long way to go to get back to the $85 level it was trading at back in December, 2010, or even the $65 level of September, 2011.

It is now approaching both it’s 200 day moving average (at $44.12) and it’s nearer term down trend line, so some resistance at those levels is to be expected.

I’m quite confident that some turbulence at those levels will either allow my options to expire worthless, or it will allow me to buy them back for less than I sold them for, so I win either way.

Let me emphasize that this is not a covered call strategy.  This is a “but a good stock and a low price and hold it for a long time, and cash the dividend cheque at the same time” strategy.  The calls are just a way to slightly increase my return, while reducing my cost basis.

I bought another blue chip at the same time: RGL.TO – Royal Gold Inc., and I got “way lucky” on this one.

I paid $59.82 per share, and it closed Friday at $77.71, for a 30% gain in less than a month.


Even sweeter, I didn’t cover this one.  I tried, but when I looked at the options available there was nothing out of the money with a decent premium, so I did nothing.  Of course now, I’m glad I did.

With the Relative Strength Index up into well oversold levels, I will attempt to cover on Monday morning.  The June 76 calls could be sold for $3.10 at the close on Friday, so that may be the level to pull the trigger and lock in some of these gains.

Thanks to the big boost in gold on Friday, my portfolio is now up over 8% for the year.  That’s not great, but it’s better than the alternative.

So I will stay the course, and see where we go from here.

Thanks for reading; see you next week.