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Why a Gold Correction Is Great NewsBy Jeff ClarkThursday, January 27, 2011 It's been a rough couple of months for the gold stocks.
The Market Vectors Gold Miners Fund (GDX) is down about 16% since it peaked in early December. That's enough of a move to test the conviction of even the most strident gold stock investors. And it may have some folks wondering if the bull market in gold stocks is over.
It's not.
Yes, gold stocks are suffering a serious correction. And it may get worse over the next couple of weeks. But investors should embrace corrections in bull markets. They give us a chance to add exposure to the sector and increase our profit potential when the uptrend resumes.
Besides, this correction didn't really catch us by surprise. We knew we were headed for a rough patch when the gold stock bullish percent index (BPGDM) flashed a sell signal in mid-November. Here's an updated look at that indicator…
.gif) A bullish percent index is a measure of overbought and oversold conditions for a sector. The BPI is overbought when it reaches above 80, and it generates a sell signal when it turns down from that level.
Buy signals occur when a bullish percent index falls into oversold levels, below 30, and then turns higher. We've only had two buy signals in the past two years. Both are circled on the chart.
As you can tell from the chart, gold stock investors are about to get some good news. We are nearing the first buy signal from this indicator in almost a year. There's still plenty of room for the BPGDM to fall further. So don't be too quick to jump into the sector. But it's a good time to start putting together a list of gold stocks to buy.
After the buy signal in February 2009, gold stocks rallied for several months, and GDX gained nearly 60%. The buy signal last February kicked off a 50% rally in GDX. I expect we'll see something similar when the BPGDM flashes a buy signal this time around as well.
Best regards and good trading,
Jeff Clark
Further Reading:
"Gold could correct all the way down to $1,100 an ounce and remain in the confines of its big bull trend," Brian Hunt wrote last week to DailyWealth readers. That means the precious metal would still be in a long-term uptrend even if it dropped 20%-plus.
But as Brian points out, people who own gold are thinking about it incorrectly. Find out why he says "gold isn't an investment" and learn about gold's long-term prospects here: How to Handle the Coming Gold Correction.
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