Gold put in a new annual low today. Crude oil bounced higher on the very same session.
Blake Young sees that combination squeezing the metals mining stocks. He’s already lined up the trades to profit from it.
Mining runs on diesel. The machines that pull ore out of the ground burn through enormous amounts of it every day.
Rising oil pushes mining costs higher. Falling gold cuts the price those miners get paid at the same time.
Blake tracks that squeeze with a ratio of gold futures to crude futures. At its peak, it took 110 barrels of oil to buy one ounce of gold.
Today it takes just 40. The ratio has held near that floor for months, and Blake warns that a break lower would hit the miners hard.
Crude could supply that break. Oil found support at a September base and turned higher today after pausing four days in a row.
Blake expects crude to retrace about half its drop from 104 to 84. That puts his target at $94 to $95.
The sector already shows the damage. XME peaked at 134 and has fallen 30% to 40% on a string of lower highs and lower lows.
Blake ran the fundamentals on three miners to find the weakest balance sheets. In tonight’s video, he lays out a trade on each one:
- Freeport’s free cash flow sits at just $1.37 per share after falling 52%. Its quick ratio sits below one, so the company has to keep mining and selling inventory to stay afloat. Blake sees FCX falling to 40, a 33% drop.
- Blake’s FCX trade sells the December 65/67.50 call vertical for about 69 cents and buys the 57.50 put. The net cost is $1.30 and the max risk is $380. The put would sit $17 in the money at his 40 target.
- Newmont sits right on its 200 day moving average near $113. A break opens a move back toward 90. Implied volatility at 15% keeps the puts cheap.
- Nucor still earns a 9% net profit margin, but that margin fell 18% from last year while free cash flow collapses. Blake favors selling call premium as long as the stock doesn’t make new highs.
Blake expects this trend to play out over weeks and months. He sees 10% to 30% corrections in metals mining over the next quarter.
