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Alessio Rastani: Why gold mining stocks are in serious trouble

by LLB Editor
7th May 13 10:09 am

Remember the trader who told the BBC that “Goldman Sachs rules the world”? This is his column

Our columnist Alessio Rastani is the self-proclaimed trader who shocked the world by declaring live on BBC News that he goes to bed “every night dreaming of the next recession” and that “Goldman Sachs, not the governments, rule the world”. He’s a controversial figure, not least because he’s a self-taught non-institutional trader with no FSA license. But he certainly isn’t shy about sharing his views. Do you agree with his words? (His words are his own, and in no way endorsed by LondonlovesBusiness.com)

Investing successfully is all about timing: getting in at the right time and getting out at the right time.

This also means that you need to re-evaluate and change your mind as soon as the market “changes”.  Failure to do this will cost you dearly.

In March I was considering buying some quality gold mining stocks as they were “dirt-cheap” and considerably undervalued.

Gold mining stocks have two major advantages over gold: they give you leverage (more bang for your buck) and you get paid dividends.

However, back in March gold was trading above $1600 an ounce. My analysis depended on one major factor: that gold prices remained above $1500 an ounce.

All that changed on the 15th April when gold plunged by a massive 8% in one day to close at $1361.  Gold has managed to recover slightly since then, but it still remains below $1500.

So why does this matter to gold stocks?

Most people are unaware of the cost of producing one ounce of gold and the fact that this cost is rising.

Mining for the precious yellow metal has never been cheap: you’re talking about the costs of drilling, fuel, labour and equipment just to name a few.

According to most gold stock analysts, it takes $1250 (on average) to produce one ounce of gold. The CEO of Iamgold (IAG) is reported to have admitted that it will be very difficult for anybody to produce gold at less than $1200 an ounce.

So unless gold can rally and go back above $1500, it will be extremely difficult for gold mining stocks to remain profitable. 

My personal point of view is that we probably have not seen a bottom in gold yet, and quite probably we shall see lower prices.

Our strategy for gold stocks will be either to short them in the meantime or wait until we can buy them at a major support level or reversal.

Take a look at this chart of the big gold stock fund (GDX):

Gold price

GDX has broken below its 61.8% fibonacci support level (red line).  We really do not have any further support until 28.07 (the 78.6% fib level) or 20.00 which is the all-time lows reached in 2008!

If I was looking to short gold stocks, I would either short GDX or look at Newmont Mining (NEM) as a potential “momentum” play. 

Take a look at this chart:

Gold 2013

Newmont is currently trading just above $33 and really has no major support until $23.82.  That is a potential 28% drop in price. I’d be looking to short NEM either if it breaks below $31.77, or rallies back to $36.59 and $38.67.

Alessio Rastani gained fame and caused controversy last year by stating live on BBC news that he “dreams of another recession” and that “Goldman Sachs, not governments, rule

the world”. The YouTube clip has since been watched over two million times, and Alessio has subsequently been interviewed by figures such as Sir David Frost. His website is LeadingTrader.com.

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