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NUGT - A Reliable Way To Leverage Mining Sector Gains

Technical Analyst & Author
August 22, 2013

Direxion Daily Gold Miners Bull 3X Shares is listed on the NYSE – and its symbol is NUGT.  If we get it wrong on timing this won’t go bust, unlike many juniors, it will just grind lower still. If we get are right, however, the gains are likely to be truly spectacular, particularly if we see a short squeeze in gold, which is looking very likely in the near future.

Looking at its 3-year arithmetic chart it is safe to say that even the most skeptical reader would grudgingly concede that it makes a lot more sense to buy this here at about $84, than buying it about 2 years ago at $2000 (adjusted for reverse splits). This devastating decline is a stark illustration of what can happen if you get the timing wrong with these highly leveraged ETFs. We can see on this chart also how the decline has decelerated steadily in recent months – as it jolly well should as it is approaching zero. What is astounding to observe, however, perhaps even more than the huge percentage loss is the incredible ramping of volume as the price has fallen into single figures. There has been an extraordinary rotation of ownership, and one thing is for sure, the buyers are not half as dumb as the sellers, who are booking massive losses.

If gold begins a new uptrend soon that is exacerbated by panic short selling, then this will take off like a rocket and could easily make it to, say, the $700 area in a matter of a few months, or even less. It is therefore viewed as an interesting play for those looking to leverage gains on gold’s next uptrend, and regarded as a much more reliable vehicle for this purpose than any dodgy junior. Buyers should remain aware, however, that the leverage works both ways, and so it is not without considerable risk, but as we all know, you don’t get something for nothing in this world, unless you are a big American bank or defense company, so that is perfectly acceptable.

The 6-month chart shows the downside deceleration of recent months in more detail. Note the huge volume on the rise out of the low in late June, and again on the breakout rally through the 50-day moving average last week, and the resulting higher low. These are all strongly bullish indications. It looks like it is readying for a major uptrend.

NUGT is preferred to UGLD at this juncture as the latter has not fallen so much in percentage terms and does not offer such high leverage.

Please note that this is a highly speculative investment only suitable to experienced investors and traders who understand its risk/reward profile, and even then one should not “bet the farm” on it. Having said that, it certainly does look exceptionally attractive at this time.

NUGT had a 1 for 10 reverse split a few days back. The reason for reverse splits is to make the price more “respectable” after it has dropped to a very low level. In a bear market situation it also creates the potential for the ETF to drop more, especially when the issuing body has a plan for further dilution tucked up its sleeve, but traditionally reverse splits were bullish, because they reduced the amount of stock or units in issue, which remains true apart from the dilution incentive. In the case of NUGT any negative influence should be more than cancelled out by the positive influence of a rising sector, and the new price resulting from the reverse split will make it more attractive for institutional investors.

Direxion Daily Gold Miners Bull 3X Shares, NUGT on NYSE, closed at $84.37 on 21st August 13.

http://www.direxionfunds.com/products/direxion-daily-gold-miners-bull-3x-etf

 

Clive Maund, Diploma Technical Analysis

[email protected]

www.clivemaund.com

Clive Maund

Clive P. Maund’s interest in markets started when, as an aimless youth searching for direction in his mid-20’s, he inherited some money. Unfortunately it was not enough to live a utopian lifestyle as a playboy or retire very young. Therefore on the advice of his brother, he bought a load of British Petroleum stock, which promptly went up 20% in the space of a few weeks. Clive sold them at the top…which really fired his imagination. The prospect of being able to buy securities and sell them later at a higher price, and make money for doing little or no work was most attractive – and so the quest began, especially as he had been further stoked up by watching from the sidelines with a mixture of fascination and envy as fortunes were made in the roaring gold and silver bull market of the late 70’s.

Clive furthered his education in Technical Analysis or charting by ordering various good books from the US and by applying what he learned at work on an everyday basis. He also obtained the UK Society of Technical Analysts’ Diploma.

The years following 2005 saw the boom phase of the Gold and Silver bull market, until they peaked in late 2011. While there is ongoing debate about whether that was the final high, it is not believed to be because of the continuing global debasement of fiat currency. The bear market since 2011 is viewed as being very similar to the 2-year reaction in the mid-70’s, which was preceded by a powerful advance and was followed by a gigantic parabolic price ramp. Moreover, Precious Metals should come back into their own when the various asset bubbles elsewhere burst, which looks set to happen anytime soon.

Visit Clive at his website: CliveMaund.com


Nearly 40 percent of all gold ever mined was recovered from South African rocks.
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