A Big Buyer Scooped Up Gold Stocks Friday, Should You?
You need to buy gold stocks if you don't already have a position. I bought near the October lows and added on to my position last week. I think now is the optimal time to buy or add on.
Because it appears that we saw signs of a gold stock bottom Friday and if Friday wasn't the bottom then the downside is very limited. You participate in bull markets by buying the dips and that's what we've gotten in gold stocks over the past week and a half. You might not get the exact bottom of this dip, but you can get within a few percentage points of it by buying now and that's all you need to do.
First of all, the big picture is very bullish for gold stocks:
The XAU and HUI appear to be in similar position as they were in 2003 and 2005 after they put in major bottoms. During these times the XAU hit its lower 200-day bollinger band then rallied back up to its upper 200-day bollinger band, after which it paused for a few weeks and then rallied sharply for the next six months. I believe that we are going to see something very similar unfold over the next eight months. Right now the XAU appears poised to go to its upper 200-day bollinger band by the middle of January. It should then consolidate and break out again to launch the next leg up in this bull market.
Another way to think of it is that, since May, the XAU has been trading in a very wide range and digesting the gains of the 2005. It should break out of this range next year and make another step up.
After bottoming in October, the XAU has rallied up to the 150 area, which was the resistance zone of the summer and is the 61.8% fibonacci retracement of the May high and October bottom. The XAU has pulled back from this level and appears ready to break it by the end of this month or early January. Next resistance is the 200-day bollinger band at 159.44, but a breakout from 150 would be a confirmation of the overall bullish trend of the gold market.
I believe it is best to just position yourself now in gold stocks. There are some signs that they bottomed last week:
During the past two weeks the XAU and HUI appear to have repeated the same type of short-term pullback in a larger uptrend that they completed in November before going higher. After the FOMC announcement last week the price of gold slid over 15 points by the end of the week, but gold stocks held their December lows to create a positive divergence. The HUI and gold stock ETF GDX both hit their support trendline lines on Friday and then bounced to create a potential candlestick reversal.
In the last half hour of trading on Friday while gold floundered into the close a big buyer stepped in and bought at least $750 million dollars worth of gold stocks. I know this, because I was watching the gold stocks on the close. Huge block trades went off in MNG, GOLD, EGO, SLW, SA, NEM, ABX, AU, GG, and GFI in the last few minutes of trading on Friday. A block of over one million shares went off in GFI alone.
What is more gold commercial traders actually bought 5,819 contracts while shorting 1,933 contracts to increase their long exposure to the metal as it fell in week ending December 12 while speculators sold 2,017 contracts. This is important because normally the commercial traders are on the right side of the market while the speculators are on the wrong side.
These are signs that the gold stocks put in a bottom on Friday. However, nothing is certain and if they haven't bottomed then we have to consider they could fall more to test their next support level. That is the XAU's 50-day moving average, which is currently sitting at 136.95 and slowly moving up everyday. So if you were to buy here then you would have to make room for a 5% drop in your position. I think that is a risk worth taking when you have potential gains of twenty times that over the next eight months. It's tough to get in on the exact final downtick of a correction so you should just pinch your nose and jump in.
That's what I did last week. Members of my WSW Power Investor service have full 24-hour access to my portfolio and are notified whenever I make a trade. That means whenever I buy a stock they find out about. If I sell they know and if I add on by buying more shares of a stock that I already own they find out about that too. There is no one else in this business that does that.
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