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Why Gold Stocks Are Ready for a Big Rally

By Jeff Clark
Friday, July 1, 2011

After suffering for months, gold stocks are finally ready to rally.
 
For the past several weeks, I've told my S&A Short Report readers about the terrific relative values in gold stocks. The metal itself is trading around $1,500 per ounce, but most gold stocks are priced the same as they were two years ago... when gold was $1,000.
 
Gold stocks are cheap. Many of them trade at 12 times earnings or less – a big discount to the S&P 500's earnings multiple. And many of the big-name gold companies pay decent dividends. With global economic conditions around the world being what they are, it's easy to make a strong fundamental argument for owning gold and gold stocks.
 
But I've been waiting for the technicals to line up before getting aggressive with the sector. I've been waiting for the gold sector to get oversold and then bounce higher, thereby generating a "buy signal" on the bullish percent index (BPI).
 
A BPI illustrates the percentage of stocks in a sector trading with bullish chart patterns. It's a measure of overbought and oversold conditions. In most cases, a sector is overbought – and subject to a correction – when the BPI rallies above 80 (meaning 80% of the stocks in the sector are trading in bullish technical patterns). A sector is oversold when the BPI dips below 30. And the BPI generates a buy signal when it turns higher from oversold conditions.
 
Here's how the gold sector's bullish percent index (BPGDM) looks now...
 
 
 
Earlier this week, the BPGDM closed at 26.67. But in the past few days, it has inched higher... which should lead to higher gold stock prices in the next few weeks and months. The last real buy signal we got from this indicator was in February 2010. Gold stocks (as measured by the GDX) rallied 30% in just three months back then.
 
Gold stocks are notoriously volatile. They tend to get horrendously oversold and then bounce back without warning. Now is one of those times... which makes owning them right now one of the best risk/reward trades in the market.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

"There's still room for everything to fall," Jeff cautions. "But on a relative basis, buying into the gold sector looks like a good deal." See why here: Don't Buy Gold. Buy This Instead...
 
"The last time gold stocks were this cheap, they soared 145%," Matt wrote recently. And if gold prices go higher from here, we could see another triple-digit rally. Don't miss Matt's favorite way to trade this looming uptrend.

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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1320.64 +1.0% +28.1%
Oil (USO) 37.24 +0.0% +9.7%
Gold (GLD) 146.00 -0.8% +20.0%
Silver (SLV) 33.84 -0.5% +85.8%
U.S. Dollar 74.63 -0.6% -13.3%
Euro 1.45 +0.5% +18.6%
Volatility (^VIX) 16.52 -4.3% -52.2%
Gold Stocks (^HUI) 521.56 +0.4% +9.8%
10-Year Yield 3.16 +1.6% +7.1%

World ETFs
Symbol Price
Change
52-Wk
S. Korea (EWY) 65.00 +1.1% +46.6%
S. Africa (EZA) 71.07 +1.6% +39.6%
Taiwan (EWT) 15.18 +1.5% +38.2%
Russia (TRF) 21.53 +0.8% +30.8%
Israel (ISL) 17.28 +1.4% +30.7%
USA (SPY) 131.97 +1.0% +30.4%
Canada (EWC) 31.67 +1.3% +29.6%
Lat.America (ILF) 51.62 +0.7% +27.4%
Singapore (EWS) 13.73 +1.3% +26.8%
Japan (EWJ) 10.43 +0.8% +15.1%
China (FXI) 42.95 +1.2% +12.0%
India (IFN) 30.30 +1.1% +11.2%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service (OIH) 152.00 +1.8% +62.5%
Internet (HHH) 76.86 +1.4% +57.5%
Basic Mat (IYM) 79.14 +1.1% +50.0%
Industrials (IYJ) 70.15 +1.6% +39.0%
Retail (PMR) 21.22 +0.5% +38.6%
Semis (PSI) 16.86 +2.2% +38.4%
Consumer Svcs (IYC) 72.95 +0.8% +37.6%
Telecom (IYZ) 24.90 +0.4% +37.1%
Transportation (IYT) 97.96 +1.2% +37.0%
Media (PBS) 15.15 +1.5% +35.4%
Big Tech (QQQQ) 57.05 +1.3% +34.6%
Real Estate (IYR) 60.30 +0.1% +32.6%
Software (PSJ) 26.56 +0.8% +32.5%
Biotech (PBE) 22.42 +0.4% +29.9%
Water (PHO) 19.36 +1.4% +29.6%
Health Care (IYH) 73.78 +0.4% +28.7%
Defense (PPA) 20.38 +1.3% +27.6%
Construction (PKB) 13.17 +1.2% +25.7%
Big Pharma (PPH) 70.92 +0.1% +24.4%
Utilities (XLU) 33.48 +0.2% +23.6%
Insurance (PIC) 16.40 +2.7% +19.0%
Financials (IYF) 56.34 +0.2% +15.2%
Alt. Energy (PBW) 9.00 +1.5% +9.0%
Nanotech (PXN) 8.62 +0.6% +2.7%

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