The Leverage Calculator - Gold - Instructions

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This calculator is designed to help you in choosing the best gold stocks for your portfolio at a given price of gold and even for a specific range of prices. For even better understanding of this tool, you may want to read one of our essays dedicated to leverage and exposure of the precious metals stocks, for example "Is your gold stock truly golden? Part 1: The Gold Stocks". This article explains why and how this tool is useful to precious metals investors. The brief summary is that if you want to invest in a gold/silver company, you want their share price to be highly influenced by the price of gold and you want it to magnify gold’s gains. This tool tells you which stocks, give you biggest bang for the buck and what is their R-square value (how much percentagewise is particular stock’s move determined by the price of gold). If you are interested in buying gold or silver shares this tool is very valuable, not to say – obligatory.

When you open this tool you first need to choose whether you want to use point or range type of leverage.

The point type of leverage

The point type of leverage is perfect if you want to purchase gold or silver shares at a given price, but you don’t want to make specific projections for future price of gold. In other words, you don’t need to know at what price of gold you will sell your stocks – you just want to know which gold stocks will give you most leverage AT given price. For example, you want to buy gold stocks or call options on them and keep them for about week or so, but you don’t know how high the price is going to go, you are waiting for some other signals (besides the price itself) to close your positions. In this case you would be interested in owning stocks which give you best leverage here and now. On the other hand you could be interested in holding some stocks in the long term. Let’s say you don’t know precisely how high will the price of gold be in 3-5 years, but you want to own stocks that will probably give you the biggest leverage right now, or at a given price. The price we are referring to is not your prediction, at which you will sell, but a guesstimation regarding milestone level that gold is supposed to achieve along the way – for example you could see $1500 as such a price. Use point leverage and enter $1500 as the predicted gold price and you’ll get ranking of gold stocks that are likely to suit your investment goals. The answers you’ll get in the “Leverage” column are given in percents. This is exactly the amount that a particular stock’s prices will increase when gold rises by 1%. This is valid for the price of gold that you entered in the “prediction” box.

Click here to see more information about this type of leverage

In order to use this type of prediction check boxes next to gold stocks that you want to be included in the final ranking (if you want to include all of them, simply click “Check all” box), enter gold price for which you want to calculate the leverage and click the “Calculate!” button. If you wish to narrow your selection, click “Check all” and then uncheck those, which you do not like. For example if you don’t want FCX to be included in your list, as so much of its revenue comes from copper operations, uncheck the box next to this stock.

The stocks you selected will be ranked based on their leverage to the price of gold. Other columns that are important here are the “Type of trend” and “R-square”.

The R-square value - this is the coefficient of determination. In other words it tells you how much of the stock’s price is exposed to gold and how much to other factors. Generally, you probably want to invest in a company, whose price depends mainly on the price of gold, not on any other thing. You want a company that uses its resources to produce a profit from its precious metals operations, not from other activities. You might also want the market to agree with you on this matter. The R-square coefficient can be helpful in determining whether that is the case or not. The closer R-square gets to 100%, the more exposure to gold a particular company has.

Type of trend - this is the type of trend line that is used to illustrate the link between gold and a particular gold stock. We’ve checked the R-square values for each type of trend line (linear, logarithmic, exponential and power trend lines) and have chosen those with highest coefficients of determination. Each trend line has its own characteristics (click on each name for more info):

Linear trend line – stock’s price changes at the same pace along with rising gold price, given that the scale on both axis’ is linear. If this trend line is to be sustained, the leverage to the price of gold will ultimately disappear, as the limit of leverage for this function is 1%. If stock gains 1%, when gold gains 1%, we assume there is no leverage involved. Practically speaking – this trend line means that the stocks are going to act more and more like gold as the bull market continues. The scale of this phenomenon is not very dramatic – for example if the leverage is about 1.5% with gold at $1000, it could decrease to about 1.3% at $1500.

Logarithmic trend line – the pace at which the price of stock changes decreases along with rising gold price, given that the scale on both axis’ is linear. Practically speaking - the leverage is going to decrease as the bull market continues.

Power trend line – the pace at which the price of stock changes decreases or increases (depending on the trend line parameters) along with rising gold price, given that the scale on both axis’ is linear. Practically speaking – the leverage for this trend line is constant. No matter what price of gold you enter, the leverage is going to be the same.

Exponential trend line – the pace at which the price of stock changes increases along with rising gold price, given that the scale on both axis’ is linear. Practically speaking – if the leverage is positive then it’s going to increase. If it’s negative, it’s going to get even lower.

Ideally you would want a company with a positive exponential trend line. Second best is the positive power trend line. Linear trend line comes third and the logarithmic one is the least appealing for gold stock investors. Of course the most important factor is the leverage itself, but the longer you wish to hold your position, the more important the shape of the trend line gets.

If you want to change your selection of gold stocks, enter different price of gold or check other type of leverage, click the “Back” button.

The range type of leverage

This type of calculation works great if you know exactly when you are going to close your position. All you need to do is to check all stocks that you are interested in, enter the price of gold at the moment of purchase and at the moment you wish to close your positions and click “Calculate!”. You may enter the purchase price of each stock individually, if you already established them. This tool perfectly suits investors, who are medium-term oriented. This means trying to ride particular upswings, which last several months. If you wish to take some (or all) money off the table when gold reaches ... ($1000, $1200, $1500, you name it), and are looking for stocks that can maximize your profits on this transaction then this type of calculations is just what you need.

Click here to see more information about this type of leverage

In order to use this type of prediction check boxes next to gold stocks that you want to be included in the final ranking (if you want to include all of them, simply click “Check all” box), enter starting and final price of gold for which you want to calculate the leverage and click the “Calculate!” button. If you know exactly at which price of a given stock this transaction will begin, then you may enter it in the appropriate boxes.

If you wish to narrow your selection, click “Check all” and then uncheck those, which you do not like. For example if you don’t want FCX to be included in your list, as so much of its revenue comes from copper operations, uncheck the box next to this stock.

The stocks you selected will be ranked based on their leverage to the price of gold for this particular time frame. The leverage here is calculated in a different way than in the point type of leverage. Here, the leverage is not given in percentage terms. You should interpret it in the following way: how many times is the profit on the stock bigger that the profit on gold itself. Other columns that are important here are the “Type of trend”, “R-square” and “Theoretical value”.

“Type of trend” and “R-square” are covered in the part of this instruction, which is dedicated to point leverage, so we will focus on the “Theoretical value”.

In order to calculate the leverage we need to estimate the future price of a particular stock in the future based on the price of gold. We do it by extrapolating existing trend lines. We checked the R-square values for each trend line and use those who have highest values of this coefficient. Based on this particular trend line and the price of gold you entered as your final price we calculate the theoretical value for the stock at this price. This serves as a “fair value” of a stock with regard to the price of gold. The R-square coefficient tells you how well does the model reflect the correlation between gold and particular gold stock. This model is used to calculate the "Theoretical value", therefore you may think of the R-square coefficient as a simple indication (to be exact, different measures should be used, but we prefer not to complicate this tool right now) of how probable the "Theoretical value" really is. The higher the R-square value, the more probable prediction. At the end of a particular upleg stocks tend to be overvalued, therefore our “theoretical values” might be too conservative.

If you want to change your selection of gold stocks, enter different price of gold or check other type of leverage, click the “Back” button.

The second thing that you need to choose is your investment perspective.

Long term: If you plan to hold these stocks for more than 6 months - for calculations our model uses data that goes back to the beginning of 2006.

Medium term: If you plan to hold these stocks for between 2 and 6 months - for calculations our model uses previous 90 trading days of data.

Short term: If you plan to hold these stocks for less than 2 months (od even engage in daytrading) - for calculations our model uses previous 30 trading days of data.

Below you will find two examples of using our Leverage Calculators.

Long-term investor wants to buy 5 gold stocks, with gold being at $950, that give him the "biggest bang for the buck" and have high exposure to gold. After running the calculator, the investor selects "point" prediction type (they don't know when they wants to sell) and they selects the "long-term" perspective. They then "check all" stocks, enter $950 as the price at the bottom of the page and click the "calculate" button. The result they will get is the ranking of gold stocks that would best suit their needs. Now all they need to do is to check the first 5 stocks on the list and add them to their portfolio.

Speculator wants to profit on rising gold prices, but wants to use mining stocks because of their leverage. They want to buy stocks with gold at $940 and sell them once gold hits $990, which they expect to take place in two weeks. After running the calculator, they select "range" prediction type (they know exactly when they want to sell), they select the "short-term" perspective. Then they "check all" stocks, enter $940 as the initial gold price, and $990 as the final gold price. Next, they click the "calculate" button. The result is the ranking of gold stocks that would best suit their trading needs. The calculator will also tell them how much on average are particular stocks leveraged to gold.

This is just one method of choosing stocks for your portfolio. We recommend looking at fundamental and technical aspects of particular companies before making any investment decision.

This tool was designed for educational purposes only and may only be used as such, you use it at your own responsibility.

Please read the disclaimer on the bottom of our website for further information.

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The Leverage Calculator - Gold - Instructions

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The Leverage Calculator - Gold - Instructions

MetalsIndices

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Recent commentary

Metals Indices