Trading in Gold Stocks
Thar's gold in that thar gold!
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As you may know, you can trade shares in companies that mine and process precious metals (like gold and silver) or you can trade their products. The stocks are traded in the securities market and the products are traded in the commodities market. The trading techniques are much the same for both classes, but our main concern here is with the securities market.
It is commonly asserted that you should have some gold shares in your portfolio as a bit of diversification. While I can agree with this idea, generally, it doesn't make sense if gold and gold stocks are in a long-term downtrend, as they had been until 2001. Since then, however, they have made a comeback, with gold stocks breaking out of a bullish bottoming pattern. Now, with the US debt climbing to the moon, and the dollar continuing to fade, gold stocks may sit well in your portfolio. I bought some myself a while back as a bit of insurance against a collapsing dollar. If I read the charts correctly (always a big IF), we are now on a long-term up trend, and gold shares are both a hedge against a weak dollar and a great trading vehicle, because of its volatility. The rationale would be to pick up shares on a good price dip. Here are a few gold funds for you information:
Gamco Gold, Fidelity Select Gold, Tocqueville Gold, American Century Global Gold, iShares Comex Gold, StreetTracks Gold.
To help you fill in your background on the subject of gold shares, here are a few authors of books that can be useful in your trading/investing, should you choose to participate.
James Turk
For technical analyses of gold or gold stocks, check out articles on the Internet, using 'technical analysis of gold stocks' as a key.
For information on the use of technical indicators to project market trends, check my Technical Indicators section. You can also find many more references by using the key phrase 'Technical Analysis Indicators' on the Google search engine.
For latest news and articles on gold stocks, you might visit Gold Stock Center.
It's also useful to look at the History of Gold Stocks
For an overview of trading methods for gold, check out Analytical Methods for Successful Speculation, ny James E Schildgen
To put gold in its proper perspective, Schildgen says:
While vehemently denied by socialistically trained monetary economists, such things as crude oil, paper, currencies, interest rates, retail prices, other precious metals, metals, and commodity prices in general, all have some relationship to the price of gold. These relationships may be direct or indirect; leading or lagging. However, in the long run, everything is dependent on gold, though it may be hard to believe.
History has shown that unless there is a store of value to money, no clothing, buildings, machinery, or even food would be produced. Contrary to myopic views of gold as nothing but another commodity, gold explains historic actions, political actions, wars, expansions and contractions of economic activity.
Small wonder we're all interested in gold! Click here if you'd like a trading tip.
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Price charts provide a convenient way to keep track of price movements in gold and are intended to give you a picture of the action. It is argued strongly by some writers (such as Edwards & McGee
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Trend lines are a way of measuring the price change or the direction of movement of prices of shares of a stock. Intuitively it's a matter of drawing straight lines across local "tops" of prices or across local "bottoms" of prices in a price chart for the stock. Unfortunately, intuition can fail us when we try to identify tops or bottoms.
We talk glibly about stock prices trending up or trending down. Gold bullion, for example, was priced around $800 in 1980 and was at about $255 in 2001, so the trend is said to have been down for over two decades -- and rightly so. That's a fairly clear example of a downtrend if you consider where the prices started and where they finished after the (roughly) 21-year interval. But what about other time intervals? What particular significance does a 21-year down interval have as a trading tool? None, I would say, except to let you recognize that a change has occurred and that you could now be trading in a long-term up environment. You might use the expired 21-year down trend as a basis for a buy-and-hold strategy. Alternatively, or in addition, you could employ a buy-on-dips strategy into the expected up trend.
The fact is that prices can go up, down, and sideways at the same time, all depending on the time frame you select for the judgment. (For more details, see here.). The important point to consider is how you intend to deal with gold stock trading. It depends on what kind of a trader you are, whether very short term, medium-term, or very long term, or any of a variety of other terms. And that could depend on the conditions you wish to see met with your trades. For instance, you might buy gold shares as a hedge against a falling dollar, in which case you might hold so long as the dollar is weakening or until you feel that the dollar has reached a significant price bottom (measured against a basket of other currencies). Or you might hold (even through adversity) until you have reached an acceptable profit level. As a day trader, not wanting to hold stocks overnight, you might even be in and out of your stocks in a matter of hours.
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To help you read the market, I'll review events as patterns develop. It's a matter of seeing what to do -- you need ideas that bring essential properties to light. But to avoid repeating myself, I have to assume you're reading everything you can lay your hands on and studying my background material to appreciate what I say.
Elliott Wave Theory is my major investigative tool. But I also use traditional chart patterns like H&S, triangles, channels, and trend lines, though mainly as backdrops for wave theory. Remember that we're looking at group behavior governed by greed and fear. You might find stockcharts helpful in following my suggested patterns.
9-27-09: Three features of the XAU are notable. In the short term, having broken out of a regular triangle upside, there is a natural reaction back toward the breakout level when the up trend resistance line has been reached. On a longer-term basis, the price is pushing up against the zone of the neckline of last year's head and shoulders pattern and is also crowding the downtrend resistance line of the pattern. That could be a double whammy for gold. On the positive side, cautious world money may be moving into precious metals, commodities, and stocks as a hedge against the falling dollar. It's another wait-and-see situation.
10-7-09: If I'm reading it right, a down leg of the XAU from here should be Wave C of a complex corrective Wave 2. Count them for yourself. I take the breakout from the triangle to be a five-wave pattern Wave 1. If I'm right we should see the big Wave 3 starting next week. Keep tuned. Patterns can be tricky and strip your socks off, not to mention the money in your wallet.
10-8-09: If you look at the 2-week XAU chart (stockcharts Gallery View), you will see that the triangle breakout has taken the form of a five-wave pattern. Also, Wave 5 of that pattern is pushing against resistance at the intersection of the two trend lines I mentioned above at 9-27-09. That can be a blow for gold stocks. But it could also be a zone where Wave 2 occurs. Wave 3 would then push thru the resistance. Watch for it.
11-6-09: On the daily XAU chart you can see what is clearly a three-wave correction to form Wave 2 after the triangle breakout Wave 1. We have now started what I believe is Wave 3 of the move upwards. I suspect Wave 3 to be a multiple wave pattern that will break thru the aforementioned (10-8-09) resistance. Meantime, the major indices are all shaping up to be at least an intermediate H&S top. We now have to wait and see.
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