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Published: November 24, 2009
The fundamentals for this week's trade are
excellent, and the technicals are outstanding.
The industry is surging, and prices are hitting fresh all-time
highs.
U.S. economic policies appear to be creating a perfect storm for
producers of this precious metal, and world banks and
governments are stockpiling it.
What is this commodity?
I'm speaking, of course, about gold.
Demand for gold as an investment has jumped in recent years as
investors and governments alike seek a hedge against both
inflation and a falling U.S. dollar. For example, China's gold
reserves have nearly doubled since 2003, and its stockpiles are
now estimated to be worth more than $30 billion. Many other
nations are following suit, including India, which just
purchased 200 tons of gold from the International Monetary Fund
(IMF).
Meanwhile, just last week the World Gold Council said demand for
the precious metal climbed +10% in the third quarter from the
previous three months, thanks in part to a pick-up in jewelry
demand.
As a trader, one of the best ways to take advantage of the
booming gold market is by purchasing gold mining stocks. With
this in mind, I am moving my clients to at least 20% invested in
gold and gold-related equities. The supply/demand fundamentals
look very favorable right now, and tremendous momentum is
building behind this precious metal.
I just uncovered three gold mining stocks that could deliver
gains of up to +55.3% in a short period of time. These three
stocks are my absolute favorite ways to seek to profit from the
gold market right now, and the names and ticker symbols of these
securities are available exclusively in my premium service --
Mastering the Markets.
Another way an investor could profit from rising gold prices is
by purchasing a broad-based gold mining exchange-traded fund (ETF).
With this in mind, I've chosen the Market Vectors Gold Miners
ETF (NYSE: GDX) as this week's "Trade
of the Week." Although it's not likely to rise as
quickly as my favorite individual gold stocks, this broad-based
fund could deliver a solid gain if it hits my $65.00 price
target in the coming weeks.
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The Market Vectors Gold Miners ETF follows
the price and yield performance of the NYSE Arca Gold Miners
Index. The fund holds a basket of 31 different stocks in the
gold mining industry -- all the way from giant industry leaders
like Barrick Gold (NYSE: ABX) and Newmont Mining
(NYSE: NEM) down to smaller niche players like Seabridge
Gold (AMEX: SA).
Here's why shares of GDX should continue their recent bullish
run...
Existing gold supplies are being horded, and any new supply
produced by gold miners is likely to command high prices.
Production costs for most miners have remained stable in recent
months. Meanwhile, the result of production, gold, is selling
for nearly twice the price it was a little more than a year ago.
This should drive huge profits to the bottom line of some, but
not all, gold miners. If gold mining stocks move higher, shares
of GDX should follow suit. (However, the three gold stocks I
highlight in my Mastering the Markets premium service this week
could outperform shares of GDX.)
From a technical perspective, GDX has been moving from lower
left to upper right on the chart since October 2008. Although
this fund can be volatile, it tends to recover from a sell-off
by moving higher.
GDX's shares have gained strength on rapidly increasing volume
over the past five weeks -- another sign that investors are
jumping into this ETF. The industry (Mining) is in a strong
Bull-Mode and moving higher, as is its Global Markets focus.
This ETF looks poised to move a lot higher in both the near term
and the longer term. There are two big emotional drivers for
gold... fear and greed. Fear comes from investor worries over
the decreasing value of paper money, so investors buy gold for
safety. Greed comes into play when investors see gold prices
skyrocket and they don't want to be left behind. Investors have
seen gold nearly double in price over the past year, and many
analysts believe it could double yet again.
All of these factors point to gold going higher and this ETF,
which represents many of the world's leading gold producers,
moving higher in lock-step.
Action to Take: Here's how I plan
to trade shares of GDX:
Buy GDX with a limit order at $51.75 (Good for the Week)
Set an initial stop loss at $43.94
Target price = $65.00
Potential Profit = +25.6%
--
Mike Turner
Editor
Mastering the Markets
Trade of the Week |
