Despite putting in a respectable performance in 2009, traders have yet to fully jump on precious metals miners. The price of gold has skyrocketed recently, soaring more than 3% last week and retaking the $1,000-per-ounce level on Tuesday, Sept. 8. However, gold has challenged this millennium mark five times since March 2008, and has been soundly rejected on each instance. Furthermore, gold's 14-day Relative Strength Index (RSI) is trading in overbought territory that preceded each of the metal's previous confrontations with the $1,000 an ounce region.
Meanwhile, the SPDR Gold Trust (NYSE: GLD) has soared nearly 13% higher since the beginning of the year, surpassing the S&P 500 Index's (SPX) gain of about 12.5%. Still, the trust is once again faced with staunch overhead resistance in the 99-100 region. In fact, GLD has never closed a session above this area, indicating that the sector may be in for a bumpy ride over the short term.
Despite lingering concerns that the gold rally may have come too far, too fast, there are a number of companies that have attracted some excessive optimistic sentiment. One company that looks particularly vulnerable to a reversal of fortune for the gold sector is Yamana Gold Inc. (NYSE: AUY). The Canadian gold producer's operating and development-stage mines contain some 19 million ounces of proved and probable gold reserves and produce nearly one million ounces annually, according to Hoover's. The firm also mines for copper and silver, with mines located in Argentina, Brazil, Chile, Honduras, and Mexico.
Technically speaking, the security has rallied more than 37% since the beginning of 2009, staging a solid comeback from its October low of $3.31. However, the shares' momentum has slowed in recent weeks, as AUY confronts potentially stiff overhead resistance in the 11.50-12 region. The 12 level provided key support for the equity from December 2007, through July 2008, and could now switch roles to act as resistance. In fact, AUY was rejected near $12 per share in May and June.
Furthermore, the security is also staring up at resistance from its declining 32-month moving average. This trendline provided a floor for AUY from January 2004, through May 2005, and acted as a springboard for the equity in August 2007. However, since the shares broke below this long-term trendline in August 2008, AUY has been rejected following every encounter.
Options players, meanwhile, have flocked to the stock's calls in anticipation of a continued rally in the shares. The Schaeffer's put/call open interest ratio comes in at 0.32, as calls outnumber puts by more than three to one among options slated to expire in three months. Furthermore, the International Securities Exchange (ISE) has seen an uptick in call trading. During the past 10 trading sessions, more than seven calls have been purchased to open for every one put purchased to open. This ratio of calls to puts ranks in the upper half of the readings taken during the past 52 weeks, pointing to a growing optimism.
The Chicago Board Options Exchange (CBOE) has also seen brisk call trading. Specifically, AUY's ISE/CBOE 10-day call/put volume ratio arrives at an impressive 10.33, with calls bought to open outnumbering puts purchased by more than 10 to one during the past two weeks. This ratio also ranks higher than 68% of all those taken during the past year.
Short sellers, meanwhile, are beginning to have their doubts about AUY. While less than 1% of the stock's float is currently sold short, the number of AUY shares shorted spiked by more than 24% during the most recent reporting period. A continuation of this short-selling trend could apply additional downward pressure on AUY shares. What's more, since call buying has climbed in tandem with short selling, it's possible that some of the recent option volume has been linked to hedging strategies, and not outright bullish bets on the shares.
Finally, Wall Street is also firmly in AUY's corner. For instance, 10 of the 15 analysts following the shares rate them a "buy" or better, compared to five "holds," and no "sells." Additionally, Thomson Reuters reports that the average 12-month price target for AUY rests at $11.80 per share, a premium to the stock's close of $10.63 per share on Friday, Sept. 4. Any downgrades or price-target cuts could have quite a negative impact on AUY shares.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column.
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