Franco-Nevada and Royal Gold: Two Gold Charts That Aren’t Quite the Same

by JDH on October 10, 2015

Anyone who tells you they know what’s next are either delusional, lying, or a fool.  No-one knows the future.  With that preamble, here’s what’s next for gold:

Gold will go up.

Yeah, I know, I’ve been saying that for years, but that’s only because I’m delusional.  Or perhaps a fool.  Take your pick.

To the charts, Batman:

FNV-Oct-9-2015

I have two favourite blue chip gold stocks.  Let’s start with FNV.TO – Franco-Nevada Corp.  You can click on the chart to make it bigger, but allow me to give you my delusional interpretations:

The horizontal black line shows the floor around $50, which was the base in November 2014, and was only breached, slightly, on one day in July, 2015.  The trend since then is up, as evidenced by the blue uptrend lines, and the fact that the red down trend line was broken in August.

Also encouraging is the fact that, at $63.28, Franco-Nevada is trading at above both the 50 and 200 day moving average, and that’s good.

Final bit of good news: the stock yields 1.78%, although that changes daily with price fluctuations.

That’s the good news. The bad news is that on September 24 I did a covered write, selling the October 62 calls for $1.20.  Franco-Nevada was trading around $59 at the time, so it looked like a good deal.  For the next few days FNV dropped, so it looked like a prudent move, but since bottoming at $56 on September 30, FNV has shot up 14%, and now the options I sold are in the money.  I have two choices:

  1. Do nothing: If FNV drops below $62 by the end of the day on Friday October 16, the options expire worthless, and I keep my shares.  If it closes above $62, my shares get called, and I’m forced to sell them for $62.
  2. Buy back the options.  At the moment that would cost me around $2.10, but the time premium will erode as we approach expiration.  Under that scenario I lose around a dollar, but since the shares have increased by more than that I haven’t lost money, I’ve just capped my upside.

I will make the decision on Thursday or Friday, once I see where the shares are trading.  Based on the chart it would appear that a pullback is likely, so I suspect I will do nothing and let the options expire.

RGL-Oct9-2015

My other top gold blue chip pick is RGL.TO – Royal Gold Inc. and it’s chart is slightly different than Franco-Nevada’s.  The low from November 2014 was decisively breached in September, and the down trend line is intact, so it’s not clear if the correction is over.

The options strategy is working slightly better on this one, because the stock is not up so much.  I sold the October 68 calls on September 24 for $1.35, and since RGL is below $68 at the moment the chances are greater that they will expire worthless on Friday and I’ll keep the premium.  We shall see.

What’s interesting is that these two blue chip gold stocks have slightly different chart patterns, so it’s too early to conclude that all is good in the gold market.  Further confirmation is necessary.

However, I don’t plan to sell, and if there is further weakness I will add to my positions.  For now, holding the blue chips, collecting the dividends, and increasing the returns with a covered writing strategy appears to be the prudent course of action.

Last week I discussed TLT – iShares 20+ Year Treasury Bond ETF extensively, and since it was down most of the week I didn’t have the opportunity for a covered write, so nothing new to report there.

I have a few other toes in the water, but we’ll discuss that in due course.

For now, happy Thanksgiving weekend to my fellow Canadians, and my condolences on the disappointing first two playoff games in 22 years for the Blue Jays.  You can’t win them all.

Thanks for reading.  See you next week.