How to Know When to Buy Gold Stocks

How to Know When to Buy Gold Stocks
By Jeff Clark
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.

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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

P.S. I expect to add several gold stock positions to the S&A Short Report portfolio when the next signal flashes. You can make sure you receive these alerts with a subscription. Learn more here.

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	Last	Change	52-Wk
S&P 500	1062.98	+1.78%	-12.37%
Oil (USO)	34.51	+1.50%	-59.97%
Gold (GLD)	97.05	+0.05%	+12.02%
Silver (SLV)	15.91	+1.08%	+20.99%
U.S. Dollar	77.11	+0.26%	-0.52%
Euro	1.46	-0.40%	+0.97%
VIX	24.88	-2.85%	-28.38%
HUI	398.09	+0.10%	+20.93%
10-Year Yield	3.30%	-0.03	-0.46

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Company	Sym	Industry
Alcatel-Lucent	ALU	telecom equip
Everest Re Group	RE	insurance
Synopsys	SNPS	systems software
Biovail	BVF	drug delivery
Dril-Quip	DRQ	oil & gas svcs
Pegasystems	PEGA	software
CVR Energy	CVI	oil & gas refining
Par Pharma	PRX	pharma
Westpac	WBK	bank
Mead Johnson	MJN	baby food
Affiliated Computer	ACS	outsourcing
Cellcom Israel	CEL	telecom
Aixtron	AIXG	machinery
Atlas Energy	ATN	oil & gas drilling
Cymer	CYMI	semiconductors
Align Technology	ALGN	medical devices
Taleo	TLEO	software
Wipro	WIT	outsourcing
Computer Sciences	CSC	outsourcing
PartnerRe	PRE	insurance
OGE Energy	OGE	utilities
Endurance Spec	ENH	insurance
Thor Industries	THO	motor homes
HEICO	HEI	defense
Blue Coat	BCSI	network svcs
Financial Federal	FIF	credit svcs
DIRECTV	DTV	satellite TV
Bancolombia	CIB	bank
Cintas	CTAS	uniforms
DPL	DPL	utilities
Allied World	AWH	insurance
Mercadolibre	MELI	online payments
First Advantage	FADV	business svcs
Ulta Salon	ULTA	salon
Interval Leisure	IILG	business svcs
HDFC Bank	HDB	bank
Hospira	HSP	drug delivery
Ctrip	CTRP	China travel agent
James Hardie	JHX	building products
Syntel	SYNT	outsourcing
Cleco	CNL	utilities
Teekay LNG	TGP	shipping
HSN	HSNI	home shopping
Northfield Bancorp	NFBK	bank
McKesson	MCK	medical supplies
Citrix Systems	CTXS	network software
Lender Processing	LPS	mortgage svcs
Green Mountain	GMCR	coffee
3Com	COMS	network services
PSS World Medical	PSSI	medical equip
Unisource Energy	UNS	utilities
MAXIMUS	MMS	training services
Pre-Paid Legal	PPD	legal svcs
Santander-Chile	SAN	bank
Comp Brasileira	CBD	grocery stores
Rovi	ROVI	graphics software
Greenhill	GHL	broker
Sina	SINA	online ads
Medicis Pharma	MRX	biotech
Plexus	PLXS	circuit boards
American Greetings	AM	greeting cards
NIC	EGOV	software

Company	Sym	Industry
Osiris Therapeutics	OSIR	biotech
Medidata Solutions	MDSO	health IT
Raser Tech	RZ	electrical equip

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