Is It Time For Gold Again?

It has been a quiet time for Gold since May of 2006 when it traded as high as $712. Since that high, Gold has traded as low as $560, twice, and between those lows was the last high of $666.6. (see chart) I see some indications that things are going to get interesting.

First, the Gold Bugs Index (HUI) looks like its consolidation is over. A point and figure chart of HUI going back to 2002 shows trading sideways under 150 then a breakout to 250 then trading sideways and then a breakout to 400. HUI has traded sideways since May with major support at 280. Three times HUI has tested the 280 level, three times it bounced off that level. (see chart) Just recently, HUI broke out above 308 and looks like it wants to go higher. (see chart)

Second, Gold, is challenging $600 once again (see Jesse)and a breakout over that level would cross the bearish trendline coming from the high of $712 and would give us an initial goal of $666. I don’t want to get ahead of ourselves, but breaking that level puts $800 back on the radar screen.

So now how do we play this scenario?

1. Buy gold coins with the risk that we are wrong and gold breaks $560. The current price of a 1 oz. American Eagle is $620.
2. Buy GLD the ETF that is a stock substitute for the commodity. Current price is about $59 1/2. I would put a stop at $55.
3. Use a gold mutual fund. I use First Eagle SoGen Gold Fund (SGGDX). The advantage of stocks in gold mining companies versus to the ETF GLD is the leverage, the ability to outperform gold.
4. Speculate in a junior gold mining stock. I still use Golden Star (GSS). Use any that you like. Not only will you get leverage, but since many have underperformed GLD and HUI, there will be a catch up. For example, GSS is down 10% for the year HUI is up 3.8% for the year and GLD is up 7.76% for the year. At some point they will all be up the same amount. If GLD goes to +20%, then GSS will go to +20%, but from a -10% level.

Why should you believe me? You shouldn’t! I am not be accountable to you and will not tell you when to reverse the trade. Go do your own homework, exercise risk control and if you want to have Gold as part of a diversified portfolio, pick the means that best fits your risk strategy or tolerance.

Gold Gold Bugs Index HUI SGGDX GSS GLD Mover Mike

Update:


3 Responses to “Is It Time For Gold Again?”

  1. Easy formula:

    Democrats elected

    Interest rates 12-20%

    Taxes up 20-25%

    Home sales dive

    Thousands lose their homes

    Gold over $800

    Based on low home sales. People are scared to enter into any long term ‘non fixed’ rate financial transactions with a possibility of democratic control. Fixed rated loans are hard to come by with the possibility of 12-20% interest in the future and higher taxes a sure thing.

  2. Firefighter, Gold going to $800 is not dependent on Dems gaining control, IMHO. It is more a by product of what politicians in general have done to this country since the FED was established in 1913 and consequences of the 1971 severing of the gold connection with the USD.

  3. Mike,

    You mentioned junior gold mining shares as a way to play a rise in the gold price. Just wanted to add that anyone interested in such a strategy can take a look at the Gold Miner’s ETF (GDX). Its components are visible in the AMEX Gold Miner’s Index, symbol ^GDM.

    Largely weighted towards the bigger companies it seems, but there are a fair amount of smaller mining companies with market caps smaller than GSS, which you had mentioned.

    Also, for anyone wanting to speculate in individual junior mining shares, you might want to learn how their trading is affected by lower levels of liquidity and the financing cycle. See Jim Puplava’s “The Perfect Option – Part 2” for more on this.

    David

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