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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, Harry S Dent, Philip Gotthelf, Michael Griffis, Charlotte Hall-Meier, Peter C Cavelti

You might note that both Turk and Dent predict a nasty crash in the markets generally. Dent bases his prediction on a long-term Elliott Wave pattern, the current fifth wave projected to about year 2009-10.

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. I've found no comparable book for gold stocks, but you might look at my own collection of methods for stocks in general, here. Or check: Turk on Gold and Trading Gold Stocks.

To put gold in its proper perspective, Schildgen says:

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) that charts repeatedly present price patterns that can be used to predict future prices and trends. Among the more widely acclaimed patterns are the (bearish) upright Head and Shoulders formation and the (bullish) inverse H&S formations, which can come in various sizes and shapes but are generally seen as having a shoulder of prices on each side of a head of prices. H&S patterns draw their significance from the fact that they are identified as price direction changing patterns. In fact, it is a large size (about five to six year) inverse H & S formation that can be seen in the gold indices, like the XAU and GOX indices, as well as individual stocks, as you would expect. The bottom (or head) of the pattern occurs at the beginning of 2001. The trend has been up since then. If the pattern is to be believed, it portends a significant increase in the price of the gold shares.

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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 I see patterns develop. 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.

6-27-08: The long-term pattern is slow in developing, so let's review: Wave 3 of that pattern started in the spring of 2005 and we are still in it. Staying with W 3, we have gone through sub-Waves 1,2, and are now in sub-Wave 3. More specifically we are just beginning sub-sub-Wave 3 of sub-Wave 3. Interesting that it starts at the moment the Fed chief announces no change in the interest rate.

7-9-08: To understand how I'm reading the dynamics of trading in the gold market, it may be instructive to look at the bear market dynamics of the SPX and the RUT markets, as examples. The tops of these markets occurred last year, as you can see from 2-year charts. In each case, from the top, a five-wave down-wave evolved (Wave 1). This was followed by what I see as the first two waves of a three-wave bear market correction (Wave 2): up and down (to the present time). From here I see another up-wave to complete the correction and from there to begin Wave 3 of the bear market in these stocks.

8-22-08: If I read the charts correctly, we've just completed the zigzag corrective Wave 2 of Wave 3 of the 7-year bull pattern Wave 3. Looking closely at Wave 2, you can see a down/up/down for its first down zig. Then an up/down/up for fhe up zag. Then a five-wave down for the second down zig.

In my code that's 332 (the second wave of the third wave of Wave 3). And we've now begun 333 (the third wave of the third wave of Wave 3).

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