NUGT – A Risky but rewarding way to play Gold

by JDH on May 14, 2016

I agree with Onlooker’s comments over on the Buy High Sell Higher Forum: gold is going higher.  Nothing goes up in a straight line, so there will be some bumps along the way, but I believe the direction is up.

Gold66monthsYearsMay13-2016

There is one caveat, and that is that you can make the argument that gold has not yet broken out of it’s correction that began at the peak back in 2011.

If you draw the down trend line off the peaks in 2011 and 2012, we are still in a downtrend.

A close well above $1,400 is needed to break this down trend line.  Until that day happens, we must consider the possibility that the huge bounce we have observed since the start of the year is merely a bear market bounce, a dead cat bounce, indicative of nothing.  It is possible.

I am more interested in seeing a close above the $1,309, the area circled on the above noted chart, which was the peak in 2015.  That would be impressive, and would probably remove any remaining resistance for a run to $1,381, and then over $1,400.  At that point we are in a new bull market, and it’s game on.

So how do you play it?

First, buy blue chips.  Good solid stocks that are less volatile than an exploratory junior, but have great upside, and often pay a dividend.  A like FNV.TO – Franco-Nevada Corp. and RGL.TO – Royal Gold Inc..  They are a good foundation for a portfolio.  I also like SLW.TO – Silver Wheaton Corp., although obviously the exposure is more to silver.

Second, but some speculative stocks, junior explorers or less developed producers that have decent management, a good property, and a good story.  I’ve got lots of suggestions, but I have not filled out my portfolio yet as I wait for weakness, so I will leave that discussion for another day.

Third, use leveraged ETFs for speculation.  My favorite is “Nugget”, NUGT – Direxion Daily Gold Miners Bull 3x Shares, which is an ETF that aims for 3 times leverage on a basket of gold stocks.  (In Canada HGU also works, although it’s “only” two times leverage).  This is a very risky play, because you can win big, or lose big.

With NUGT my goal is to watch the action over a period of a week or two, using the 5 minute or shorter chart, and buy when it is near the bottom of it’s trading range, and sell as it approaches the top.  Sounds simple, but in practice it’s not an exact science.  I should also note that this only works if you believe we are in a bull market.  If the market turns down, you’ll get killed with this strategy.

Allow me to provide an example:

NUGT-May12-2016

At the left is the chart of NUGT taken at 2:30 pm on Thursday May 12: I created it by using a 2 minute chart, over 3 days, with Fibonacci retracement levels drawn off the highs and lows.

I also drew in a blue uptrend line.

My strategy was simple.  If NUGT got down to the uptrend line, and bounced off it, I bought.

It did, and I bough at around $99.20 on Thursday afternoon.

How did the rest of the day play out?

Not exactly as I had hoped:

NUGT-May13-2016

Here’s the same chart, extended through the close on Friday.  As you can see, the uptrend line was broken soon after I made my purchase, and NUGT dropped all the way down to close to the $96.90 Fibonacci retracement level.  On Friday it started lower, bounced higher, dropped, and then finished the day with a kick.

A roller coaster ride, ending up $3 from the previous day’s close, closing at $100.87.  At 2:30 pm I put in a sell order at $103 but it wasn’t filled, so I live to fight another day.

As a general rule I don’t like holding shares like this over the weekend, because you never know what might happen, but I’m slightly in the money, so I’ll ride it and see what happens.

Another important caveat: NUGT is for short term trading only.  This is not a long term hold, because the tracking error may suck up all gains.  I expect to be out of this stock in the next few days, probably on Monday or Tuesday.  I bought at $99.20, so if I can sell for $110 I’m happy.  That’s a 10% gain, and if I can do 10% a week, I’m thrilled.

So far, given the bull market since the start of the year, I’ve been lucky.  When stocks are going up, everyone is a genius, and so far this year I’m a genius.  If gold crashes next week and NUGT corrects back to the $20 level where it was in January, I can easily get wiped out.  That’s why I take profits when I can, and move on.  I don’t want to try to time the top and the bottom, because I can’t.

I previously reported on my trades in NUGT for the months of April and May.   Over two months my profit was $57.91.  When you consider the stock started at $53.71, that’s very good.  It’s not exactly a 100% profit, but it’s not bad.  Most impressively, due to the shear luck of a bull market, every trade was a winning trade.  I bought low and sold high.

So far in May my NUGT transactions are as follows:

  • May 4, purchased at $92.35
  • May 6, sold for $109.50, profit $17.15
  • May 9, buy for $90.75
  • May 11, sold for $100, profit $9.25
  • May 12, buy for $99.20, trade still open.

If I can sell the May 12 purchases for a profit I will keep the winning streak alive.  If not, I’m not too worried, because in the month of May I’m up a further $26.40, for a total profit of $84.31.

Here’s the key point: when I started playing NUGT in April it was trading at $53.71.  Today it closed at just over $100, so if I had bought and held and sold on Friday I would be up $46.29.  I’m up $84.31, which is a far better result, with less risk.  As it gets toppy I sell, and I only buy when it is well below the peaks.

Again, let me emphasize, this is more luck that skill.  In a bull market everyone is a genius.  I get it.  That’s why I sell when there is a profit, so when the inevitable crash happens I will only get killed on that trade.  If NUGT gets cut in half on Monday and I sell at $50, that’s a huge loss, but I’ll still be up $34.

I like those odds.

Thanks for reading.  More next week.