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Is GDX On A Trampoline?

Stewart Thomson
May 22, 2012
  1. Horizontal support & resistance (HSR) is a very powerful tool. Most technicians use it to try to figure out if a given price is holding or falling. I use HSR lines to define zones where I want to accumulate great assets, because great assets are wealth itself.

  2. To view one of the world’s greatest assets, please click here now. Gold stocks explore for and produce the world’s greatest asset, gold bullion. The nature of what they do makes them a great asset to own.

  3. I realize that a lot of gold stock investors are very concerned about this market, but it’s important not to jump out of the frying pan into the fire. In the case of exiting gold stocks here, you could be jumping off a trampoline just when it is about to bounce you high in the air.

  4. A lot of investors sold their general equity holdings during the 2008 financial crisis in a panic. They bought US Treasury bonds after booking enormous losses on their stocks. That move into bonds was termed “growth with safety”.

  5. In late 2008 the T-bond was about 142. Today it is about 147. Investor losses have never been recovered, and likely never will be recovered.

  6. During the same period of time the Dow has risen from about 6,500 to 13,000, a move of approximately 100%.

  7. Currently, the sell-off in GDX, GDXJ, and individual gold stocks has convinced many investors in the gold community to ask if they should sell gold stocks and buy gold and silver bullion, in a similar “growth with safety” play.

  8. At the end of the 1970s bull market, investors sold their gold stocks when bullion began falling. Bullion kept falling, but gold stocks soared. I think that even if gold bullion fell to $1300-$1400 now, it’s very possible that GDX and GDXJ could rise to new highs, particularly if oil were to fall and the Dow jumped higher.

  9. I’ve highlighted an accumulation pyramid on the GDX chart, based on the support zone between $30.83 and $42.09. I think that gold stocks are bottoming here, regardless of what happens to bullion.

  10. If you can’t take the pain of holding gold stocks, sell them and buy the Dow. Is the government likely to ban shorting of gold stocks in a meltdown? No. Are they likely to ban shorting of Dow stocks? Yes. The government could allow the Fed to buy the Dow with printed money, as part of an “innovative quantitative easing” program. In a quasi-hyperinflationary situation, established money managers are likely to pour liquidity into the general equity market.

  11. I don’t think anyone should sell their gold stocks at losses, but each investor has a pain threshold that must be respected. I’m a buyer of GDX & GDXJ all the way to zero. I have no interest in selling gold stocks here; I’m buying them in increasing size.

  12. Rather than try to avoid price declines by liquidating assets, I like to carry some short positions. Please click here now. Natural gas has done very well recently, rising by about 30% from the lows. You can see that the price has now lost momentum after entering a resistance zone. That zone is defined by the orange HSR lines.

  13. The price of natural gas is very low, so I don’t want to get rid of core positions in this superb asset to “avoid a correction”. Still, I want to be sure that I’m emotionally strong enough to continue accumulating natural gas if the price were to decline through the lows.

  14. To manage the myriad of price scenarios that could occur at any point in time, short positions are my chosen tool. Please click here now. You are looking at the daily chart of KOLD-nyse, a double leveraged fund that shorts natural gas.

  15. Note the green HSR box I’ve highlighted in the $25.02 to $37.58 price zone. Many technical indicators are also flashing buy signals.

  16. By accumulating a bit of KOLD-nyse here, you’re ready for your magnificent natural gas long position to move higher or lower, with a smile!

  17. Please click here now. You are viewing the wheat chart. There is a near-vertical move to the upside taking place. Kansas is a major wheat-growing area, and rainfall has been questionable.

  18. When a vertical move occurs, it’s possible for a technical flag pattern to form. There’s a flagpole in place now, but no flag. What if the weather changes, and wheat prices sink to a new low?

  19. There’s a reason that the biggest commercial traders always carry both long and short positions. It’s to manage the unexpected and the unknown.

  20. Carry some short positions on wheat, but understand that wheat is one of the strongest assets in the world, because it is a key food for human beings. This winter was very mild, and if the summer turns out to be dry, the price of wheat could soar.

  21. My largest holding is physical gold bullion. If India’s major gold traders are not concerned about a decline in price, I don’t think the gold community should have any concerns either. In a super-crisis, large drawdowns are the rule, not the exception. They can’t be avoided, but they can be endured.

  22. Please click here now. There is a loose head & shoulders bottom pattern apparent on the gold chart. That’s not a guarantee of higher prices, but it is an indication that you could get a move towards $1670.

  23. The right shoulder hasn’t really formed. Please click here now. This chart covers only a week of time, and there is a small head & shoulders top in play.

  24. If the head & shoulders bottom pattern fails, and the gold price declines below the lows at $1525, what happens then? I’d suggest you join the Indian gold dealers and laugh, while buying a little. If it all plays out in textbook fashion, the shorter term chart will assist in creating the right shoulder on the longer term chart. Gold could quickly begin a move towards $1670!

May 22, 2012
Stewart Thomson
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