Customer Service 1 (888) 261-2693
Advanced Search

How to Know When to Buy Gold Stocks

By Jeff Clark
Tuesday, September 29, 2009

Everyone loves gold. And everyone seems to know the best way to get leveraged exposure to gold is through owning gold stocks.
But there's a good time and a bad time to buy gold stocks. Right now is a bad time. Soon, however, it'll be a good time. Stay with me for a moment and I'll show you how to tell the difference...
Gold stocks move around a lot. They fluctuate with the price of gold and they also fluctuate with the overall stock market. This double dose of schizophrenia makes it extraordinarily difficult to trade gold stocks over the short term with any degree of accuracy.
Part of the difficulty has to do with the volatility of the sector. Another part has to do with the fact that gold trades around the clock. And since gold stocks move in relation to price changes in the metal, the stocks often gap up or down a large percentage from the previous day's closing price.
So bullish percent indexes (BPIs) – which are the basis for a lot of short-term trading systems – don't work so well with the gold sector. A bullish percent index is a measure of overbought and oversold conditions. A sector is overbought when the BPI rallies above 70 and is oversold when it declines below 20. For most sectors, a buy signal occurs when the BPI gets oversold and then turns higher. A sell signal occurs when a BPI reaches overbought levels and then turns lower.
That's not the case with the gold sector, though. Gold stocks whip around so much, normal BPI signals trigger too late to be of much use. But there's an interesting correlation between the gold stock bullish percent index and its eight-day moving average.
Take a look at the correlation over the past few months...
The red circles indicate when the eight-day moving average crossed below the bullish percent indicator and generated a sell signal. The green circles show where the eight-day moving average crossed above the BPI and created a buy signal.
Here's how the signals played out on the AMEX Gold Stock Index...
The short-term performance of the buy and sell signals looks pretty good.
This is still a "work in progress." And I'll probably tweak the system a bit as we get more signals over the next few months. But if you're anxious to buy into the gold sector, the next buy signal will happen when the eight-day moving average crosses back over the bullish percent index.
That looks like as good a spot as any to dip a toe into the gold sector.
Best regards and good trading,
Jeff Clark

In The Daily Crux
Market Notes
Municipal bonds surge higher... Bond fund NUV makes fresh 52-week highs.
Xerox buys Affiliated Computer, drives other outsourcers Wipro, Computer Sciences, and Syntel to new highs.
Foreign mega banks gain... Westpac (Australia), HDFC (India), Banco Santander-Chile, and Bancolombia hit new highs.
Yen at eight-month high vs. U.S. dollar.
Market Watch
Symbol Price
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%