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Gold Stocks Dominate Bullion

Stewart Thomson
Oct 23, 2012
  1. “The U.S. Congressional Budget Office and the IMF have said that if the fiscal tightening that is due to take place goes ahead without action from Congress, the U.S. economy will probably fall into recession.” – CNBC News, Oct 23, 2012.

  2. Surveys show that most money managers are focusing less on the euro crisis, and more on the US fiscal cliff. They are also worried that China’s housing market could implode.

  3. While housing and unemployment statistics improved a bit since QE3 was unveiled, many analysts have questioned the significance of that improvement.

  4. In the current environment, it’s very difficult to envision Ben Bernanke doing anything that is fundamentally negative for gold.

  5. The next FOMC meeting begins today, and a statement will be made tomorrow. Some governors may make statements to the press before the meeting is adjourned, which could affect the price of gold.

  6. Please click here now. On this daily gold chart, there’s a small head & shoulders top in play. The mathematical target of the pattern is about $1630.

  7. It’s very difficult to pinpoint entry and exit points, with an asset like gold, particularly in a “super-crisis”. Holding a modest portfolio of short positions allows you to manage what I call, “the personal surprise zone”.

  8. I like to approach major markets with an emphasis on what the underlying asset is. Gold is an asset of the highest quality, so I restrict all shorting I do, to 30% of my long position.

  9. If gold declines towards the mathematical target of $1630, I would book some profits on short positions, on the way down. I suggest you focus on minor trend support areas to do scale out of your short positions.

  10. Some days are emotionally tougher than others, and gold can get into a situation where it just doesn’t seem to want to rally at all. If you hold only long positions, a period of time like that can be extremely frustrating.

  11. In contrast, if you hold some short positions, but are overwhelmingly long the asset in play, you may find that you are able to deal with falling prices with much less stress.

  12. Please click here now. I want you to look carefully at the 3 blue lines that I’ve highlighted on this gold chart. They represent HSR (horizontal support & resistance) at approximately $1700, $1680, and $1650.

  13. I plan to cover short positions at each of those price areas, if gold goes down there. It’s important to understand that if you book profit on a short position, the exercise of doing so can make you more net long the asset.

  14. For example, if you have $100,000 invested in gold, and you are carrying a short position with a market value of $10,000, that means you are “net long” $90,000 of gold.

  15. If you then booked profit on $3000 of your short position, you would be increasing you “net long” gold position to $93,000.

  16. The long-only investor is arguably at a disadvantage, when compared to somebody who is net long, but carrying some strategic short positions. The reason I say that is because it can be quite stressful to keep buying gold, as the price declines. with no apparent bottom in sight.

  17. If you are “ringing the cash register” somewhat regularly, whether it is on the long or short side of the market, it’s much easier to face the market with a smile.

  18. Shorting the market isn’t for everybody. If you are uncomfortable doing it, then it’s very important to trade “smaller than you know is rational”. On the rally from $1530 to the $1800 area, if you never booked any profits on long positions, then I would not be buying anything on this decline.

  19. Instead, I would wait for gold to rise over $1800. A substantial move over $1800 will turn that area into a major platform of price support.

  20. Please click like now. Note the thick blue HSR line in the $1800 area. Gold has touched that price zone 3 times, and sold off strongly each time.

  21. Many institutional money have expressed a willingness to buy gold above $1800, and I believe they are sincere about doing so. If gold trades above that “HSR platform”, you will be in the company of some very powerful investors, as you buy.

  22. Please click here now. That’s the daily chart of the HUI gold stocks index. Gold stocks are trading in a much more bullish pattern than gold itself, and I believe the HUI can move higher, even if gold declines to $1630.

  23. Please note the horizontal green line that I’ve highlighted on the chart. There is massive price support on the HUI in the 460-465 area.

  24. There is also a bullish wedge pattern, and I’ve highlighted that in blue. The wedge pattern implies that regardless of what gold bullion may do, your gold stocks might be set to blast higher. That would be a major morale boost for gold stock investors, and it could really happen!

Oct 23, 2012
Stewart Thomson
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