Earlier this week, news hit the wires that billionaire fund manager Georg Soros unloaded 37% of his stock investments in favor of gold...
Soros also bought bullish options contracts on 1.05 million shares in the SPDR Gold Trust, which tracks the price of bullion. What's more, the fund took a stake in the world's biggest producer of the metal, Barrick Gold Corp., worth $264 million at the end of March, the filing showed. Soros acquired 1.7 percent of Barrick, making it the fund's biggest U.S.-listed holding.
Well, first things first. This news comes from a mandatory filing of form 13F. Money managers that oversee more than $100 million have to file the form within 45 days of each quarter's end.
That means this news could be more than four months old. So let's go back in in time a bit and see what was happening four months ago.
Almost four months ago exactly, ABX shares started climbing in value. On January 19, ABX shares traded at $7.59. But by mid-May, they were trading for $19.37, a gain of more than 155%.
That's not a bad haul...
So, what did Soros see?
Maybe he saw a broadening descending wedge pattern forming in the S&P 500. This technical formation, which looks like a down-tilted megaphone with prices trending higher leading up to the formation, tends to act as a reversal of the preceding trend.
In the S&P 500, that means the formation may predict a downturn.
By mid-January, the S&P 500 had hit the bottom of its descending wedge pattern three times... twice in quick succession. Perhaps Soros was anticipating a breakout and a move lower. Take a look:
The black lines represent the broadening descending wedge pattern. The red circle indicates when Soros could've bought ABX. Right in that circle, you'll see the double-touch on the bottom boundary of the wedge pattern.
But what's interesting, is that the markets seem to have read this double-touch as a double bottom formation, and that sent the S&P 500 soaring back up through the top boundary of the wedge pattern.
Does this mean Soros was wrong?
Well, his 155% potential gain would say no... The question really is not whether Soros was wrong. It's whether he's wrong now.
In other words, with as much as four and a half months between today and his decision to buy gold and ABX, are either of these still worth a look?
One of the reasons why gold miners -- because it's not just ABX that has been performing well over the past six months -- are doing well is because of low oil prices. As gold prices have climbed some 20%, oil prices have fallen more than 8.5%.
Check this out:
This clearly shows gold mining companies getting an extra boost from lower oil prices.
As oil prices start to creep higher, though, gold mining gains could become muted.
For investors, it may be that we missed the major pop, and now we're in a bit of a holding pattern.
One key factor to keep an eye on is the S&P 500.
Soros was also holding bearish options on the index, amounting to $431 million. This could be a hedge against an S&P 500 holding... it's not clear.
But what is clear is that the S&P 500 needs to stay above 2,025 in order to stay above its broadening descending wedge formation. If it breaks back into this formation, the S&P 500 could be headed as low as 1,815 -- the bottom of the pattern.
If that happens, it would be in reaction not only to "chart pattern gravity" but to something more uncertain in the markets and the economy at large.
And if that happens -- whatever it may be -- gold will likely shoot higher, bringing gold mining companies with it.
Risks To Consider: While I've talked about a ceiling in oil prices in previous articles, they've been trending steadily higher. As I noted earlier, this may dampen the heat in the gold mining sector. That said, excluding supply issues, oil prices are not expected to shoot to the moon... meaning industries that have high fuel costs may still be feeling some relief down the road.
Action To Take: While Soros bet on a winner with ABX, part of this stock's story has been cost-cutting efforts. And though these efforts have been effective, there's only so much you can cut. I'd take a closer look at Goldcorp, Inc. (NYSE: GG), one of the lowest-cost producers in the major league gold mining sector. This company has been trying to increase its net asset value through acquisitions, and it's doing a fairly good job.
Earnings, which had been negative, are expected to make a turnaround this year, and jump again next year.
Ambitious analysts expect share prices to pop with earnings to as high as $24, for a gain of nearly 30% from current prices.
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