1. GDX is the major index followed for gold stocks. There is also the leveraged HGU which trades on Toronto. My own view is that gold stocks are already leveraged enough to the gold price that the use of additional leverage isn't really required, particularly if you are already down on your existing positions. Leveraged funds have a time decay factor that many investors don't really fully understand.
2. One of the big questions for investors is whether to buy gold bullion or gold stocks. I suggest both, but you need professional tactics to handle both. The concern in regards to stocks is the memory of last year's tumble in the Dow. The GDX index fell from a high of about 56 to a low of near 15, and did so in just 8 months. That is a loss of aprox 80% while bullion only fell 30%.
3. The GDX has since rebounded to about 45, and sits in the 38 area now. To get back to the highs at 56 would require a move of approx 50% upwards. While gold bullion would only have to rise about 10% to get back to its highs.
4. It is important to realize that if a stock falls a certain percentage in price, it must rise by a much larger percentage than it fell by to get back to the original level. Here's an example: Let's say you buy at $30, and the stock falls to $20. That's a 33% decline in price, or $10. To get back to $30, the stock must rise by 50%, from $20 to $30. The dollar rise is the same, but not the percentage. Stocks also fall faster than they rise. So it takes longer for a stock to rise by the same percentage that it fell by.
5. Gold stock investors don't want to get caught in a repeat of last year's situation, especially if you are still down on many of your gold stock positions.
6. Looking at the GDX from a technical perspective, there are many differences between the current picture, and that of last spring. I'll highlight those now. Here is the weekly chart.
7. I have highlighted the period of last spring with red markings. As the GDX rose to the 56 area it created a technical pattern known as a head and shoulders top. The neckline of the pattern is at the 41.61 area. A head and shoulders top is an extremely bearish formation. [Editor's note: Sorry to divert you but, whenever anyone writes about gold head and shoulders patterns I just can NOT RESIST adding this, for our lady readers - click]
8. Here's a look at the weekly chart showing that top.
9. On the weekly chart you can clearly see the head and shoulders top pattern and the neckline at 41.61. The crash that followed was predicted by that technical price pattern.
10. Now here's a look at the current trading on the daily GDX chart. No such top pattern exists. Further, the stochastics, MACD, and TRIX series of oscillators are all in very oversold conditions. Relative strength is approaching the 30 level.
11. There is no top pattern here, just a simple decline down from 45 to 37.
12. I want you to look at the weekly again, this time covering the current period. The gold stock bears see a rising wedge. They also note Stochastics failed to make a new high while price did, and they point out a possible coming sell signal in the MACD. Worse, the main uptrend line has been broken. I've highlighted that break with a red arrow. Here is what the bears see:
13. This is the markets. Nobody knows anything for sure. No chart pattern or picture is a sure thing. The "bear picture" is one possible reality, yes.
14. Here's the bull picture: There is no rising wedge. The picture is instead one of selling caused by weak investors getting out "near breakeven". These investors bought into and around the head and shoulders top pattern area last year. Some bought more as it failed, thinking they had a bargain. The current selling is those weak hands liquidating as price has moved to the point of booking an "acceptable loss". The uptrend has been broken, but the uptrend broke several times before and price consolidated each time. This is the 4th break and this low will set up a much strong uptrend line.
15. The main picture for the bulls is a huge head and shoulders bottom with a confirmed breakout followed by sideways consolidation. When price rises beyond the 45-56 resistance area, GDX will be in strong hands who bought much lower, as the weaker investors get out at or near their 45-56 breakeven point. Here's the weekly chart as the bulls see it. Note the red neckline in the 39 area. Price broke above that and then consolidated since then:
16. I'm not in the bull camp. Nor the bear camp. I'm in the "be prepared" camp. Meaning: be prepared to act at any and all price points, regardless of your outlook. Here's my own view of the weekly GDX chart:
17. Price broke out of a head and shoulders bottom with a down sloping neckline. It then consolidated between 30-39 before breaking higher to the 45 area. Price has been driven back to the 37 area on selling by investors who are taking "acceptable losses" on positions bought last year. Probably in the range of 20-40% losses.
18. Price would have to decline below 30 to destroy the bull picture, technically. Even then, price could pull back to the downsloping head and shoulders neckline, perhaps in the 25 area and keep the bull alive. A move back to the neckline area is quite common with head and shoulders patterns.
19. Regardless of what happens, I buy any and all price weakness. All the way to zero. I was an aggressive buyer yesterday of gold items into price weakness, and have been all the way thru this GDX weakness from 45 to 37. Should price decline further, I will become even more aggressive on the buy, not less!
20. I have mentioned the importance of completing each week with VICTORY. When price is up, your victory is measured by booked profits. If you think weekly victory is measured by your weekly account value, you are dead wrong. Thinking you can increase your account value when you are on the BUY is a clownshow. Don't be a clown. Be a PROFESSIONAL INVESTOR. When price is down, Victory is measured by increased ounces and shares in your possession.
21. This is the eye of the financial hurricane. The smaller front part (subprime resets and blown OTC derivatives on those items) has hammered the financial island. The resets have all but ended. The financial stimulus packages are starting to have some effect. The recession could technically end in the coming months. The numbers ARE improving, that's a fact. Don't get into the mindset of ignoring real facts to create a pretend reality of what you want to be real. You are not a trillionaire banker. When the bankers paint charts, they are doing it with real buys and sells. Gold bugs often paint charts with their imagination, not a good idea.
22. 2009 has a high likelihood of ending on a high note. The recession could REALLY end in the coming months. It could be almost a dance party by the public. All the coconut head investors and fund manager puppets dance around repeating what the banker puppet masters tell them to repeat. "The recession is over, printing $10 trillion and handing it to the bankers saved us all!"
23. And then their dance party comes to a horrific end as in comes the back end of the financial hurricane, as we enter 2010. The public is totally ignoring the tidal wave of insider selling going on right now in the stock market. My own guess is we've experienced about 20% of the total storm. The other 80% will rage thru 2010 and 2011 with no mercy. People will do ANYTHING to get gold as the storm intensifies. As always, there is only one question, and that question is: Are you prepared?
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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am. The newsletter is attractively priced and the format is a unique numbered point form; giving clarity to each point and saving valuable reading time.
Are You Prepared?