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Gold, GDX, & GDXJ Tactical Update

Stewart Thomson
Nov 8, 2011

  1. What chart currently looks better than gold? You’ll be hard pressed to find one. Click this gold chart now. KISS that chart. Keep it simple, and smart. The gold price has now moved almost $100 away from key HSR (horizontal support & resistance) around $1700, and is chewing at the $1800 round number price area.

  2. Look at the beautiful HSR lines on the chart. Green lines are for buying, and red lines for selling. It doesn’t get much simpler, does it? I use amber for lines that could soon be in play. The gold market traffic light system is really what it is!

  3. Price doesn’t always rise to these key HSR lines, or fall to them. Your most intense buying or selling should come around these key lines, and the more price has moved before touching one of those lines, the more important that line becomes.

  4. Rather than predicting what the holding or failure of these lines means for the future of the gold price, focus on using them to allocate or remove risk capital. I believe virtually all technical analysts make a horrific error when analysing support and resistance, by focusing on where price might be going, rather than professionally responding to what actually happens.

  5. Use support and resistance to place capital systematically. I invented my “PGEN” (pyramid generator) to systematically allocate capital on a portion of the price grid, or even across the entire grid. My suggestion is to fade the focus on where price is going, and increase the focus on professionally allocating capital.

  6. To answer my question, “What chart looks better than gold?”, I think I have the answer you’ll enjoy. Please click this gdx chart now. After falling 25% from the highs hit in early September, GDX has recovered all it lost.

  7. How is that possible? The price is about $63 now, and it was near $67 at the high! How can GDX have recovered all it lost? The marked to “getting you richer” model answer lies in understanding percentages. If you bought GDX into the $50.50 area, you have gained about 25%, as of the GDX $63.50 price point.

  8. GDX fell about 25% from $67 to the lows near $50.50, so the rise is clearly the same percentage move as the fall, regardless of the dollar prices involved.

  9. What I’m trying to get across to you is the enormous size of the rally that has just taken place, and the fact that only those who buy serious weakness will survive, let alone profit in what I believe is the coming “enormous whipsaw zone”.

  10. Gold could easily take a $100 hit here, and one can only wonder about what that would do to GDX. The “I need to get in on gold stocks, now!” emails are starting to appear in my inbox, after this enormous 25% rally and a near $270 “super surge” in the gold bullion price. That’s a warning sign.

  11. Does anyone understand that the near $270 move up in gold bullion from the $1530 area lows in about a month is a 100% gain, but only for those who bought into the lows of the gold bear market at around $250? Don't regret anything if you didn't buy the lows of the bear market, but understand that buying significant corrections like we just had can result in quite large percentage gains over time.

  12. The price chasers are back in “official action” as of this week, and the media is starting to gush gold-positive news, which is basically urging investors to buy. Chinese gold imports from Hong Kong, a proxy for the country's overall overseas buying, leapt to a record high in September, when monthly purchases matched almost half that for the whole of 2010.” –Financial Times, Nov 7, 2011

  13. The news that Chinese gold imports may be up sixfold is a great positive event for the long term bull market, but it is a profit booking signal for traders, not a buy signal! Don’t massage your feelings of greed with this kind of news when price is rising.

  14. Put this excellent article into a folder called “Gold Fundamentals”, and promise to read it only when the gold price is tumbling, and you are afraid. Use gold-bullish news professionally, to stay in the game.

  15. What is a quasi-pro investor? Well, first I’ll describe what they are doing in the market right now, and then I’ll define them for you. The quasi-pros are ringing the cash registers quite aggressively, here and now, on a portion of what they bought on the price decline into gold $1530, silver $26, GDX $50, and GDXJ $25.

  16. The quasi-pros have significant profits from the latest intermediate moves (gold $1530-$1800, silver $26-$35, GDX $50-$63, and GDXJ $25-$33), and they are booking those profits, while amateurs are foolishly deploying hard-earned cash now, “before price gets away”.

  17. The quasi-pro is somebody who buys significant price weakness. They don’t buy the exact bottom, because they don’t know where it is any more than you do. They sell into significant strength, and are doing so now.

  18. I’ve taught many of you to be quasi-pros, and you have done well. At this particular time, I believe the tactics of the quasi pro need tweaking, or things could go awry, in a very big way.

  19. Are you nervous about selling gold stocks here, because price could rocket higher? Are you also wondering how you would handle things if a surprise crisis event sent gold tumbling, and GDX and GDXJ blew out their respective lows?

  20. When you sell a stock for a profit, your next move should be to buy gold with all the proceeds of that transaction. Holding more gold likely keeps you in the game if gold stocks go higher against the dollar, and keeps you from freaking out if the juniors and seniors get smacked by the dollar. Gold is your middle ground.

  21. For most of you, the use of a ETF or tax-advantaged trust (but watch the premiums before buying some of these trusts!) is most practical. You can sell GDXJ and buy SGOL with the proceeds of the transaction, in the same account. Trusts like GTU-nyse and PHYS-nyse could receive better tax treatment than ETFs, but you should only buy them when the NAV shows a low premium, or even a discount.

  22. It will be a lot easier to endure missed opportunity on the upside, and real discomfort on the downside, overall, if you focus on moving from GDXJ to SGOL, rather than moving from GDXJ to dollars. Obviously a huge portion of the gold community owns individual juniors, and can substitute those for GDXJ.

  23. Go back and forth between SGOL and GDXJ (or your individual juniors), rather than back and forth between dollars and GDXJ. The odds of you beating the GDXJ-SGOL trade or the GDX-SGOL trade with a GDXJ-dollars trade are not good for you. Click this key GDXJ chart now. Over the past month, gold has outperformed the dollar. GDXJ has also outperformed the dollar.

  24. There’s a red rising wedge. That’s a warning sign. GDXJ has risen by about 30% from the lows, which is a substantial move. Do you sell now, sit in dollars, and risk missing the move higher? No. You sell a little bit, and put that into your favourite gold bullion vehicle. That’s what I’m doing, without exception, with every trade I make!

Nov 8, 2011
Stewart Thomson
Graceland Updates
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