October 9, 2009

Although they're more volatile than Gold, if you can position yourself on the 'right' side of their dominant trend, investments in fundamentally sound Gold mining shares can be even more profitable than investing in physical Gold. Here's a look at the major trend move underway in the Gold Bugs index, one of the most widely regarded indexes that scores of precious metals equity traders and investors rely on.

My, how times do change. Less than a year ago, the share prices of virtually every senior and junior Gold mining company were on the proverbial 'ash heap,' and some market analysts had doubts that the bull run in the precious metals sector would ever regain a solid footing, much less soar to new highs. And yet, that's just what happened - a complete recovery across the entire sector (including Silver and Silver mining companies, too), with Gold now at all-time highs and Silver up more than 100% in less than 12 months. Even better for those who trade Gold mining stocks, the Gold Bugs index (which tracks the performance of some of the biggest and most fundamentally sound Gold miners) is up a mind-jarring 200% since October 2008 -- and the uptrend doesn't appear to be waning yet. Let's have a closer look at the weekly technical chart of the Gold Bugs index and examine the key trend indicators as see what they may be telling us about the future trajectory of prices for this volatile and potentially profitable sector of the market.

Graphic credit: Metastock v.11

Let's start at the top of the chart to focus on recent developments first; note the huge, wide-range weekly candle that just printed, one that took out the prior weekly swing high of 448.31. As you probably know, the very definition of an 'uptrend' is that a stock, commodity or index must have a series of higher highs and higher lows, and that's exactly what we see on this weekly chart of the Gold Bugs index. Now, look just below the recent weekly candle and witness the ever-increasing spread between the 20-week (red line) and the 50-week (blue line) exponential moving averages (EMA's). Note how they are both sloping upward and that the spread between them is also increasing at a steady rate; this is a sign of increasing upward momentum in the index. Moving toward the lower area of the chart, notice that the Aroon (14) trend intensity index is solidly biased toward the bullish side of its range (when the blue line is above the red line and both lines are at opposing extremes, a powerful uptrend is in motion) even as the Relative Strength index (RSI)(14) is also in a powerful uptrend. It's also interesting to note that RSI readings above 60 are usually indicative of a powerful trend move, and with a current reading of 66.94, we can therefore conclude that this latest rally in the Gold Bugs index is no fluke. An interesting sidenote: Gold (cash basis) is up about 48% since making a major low late last year (at about $713), but did you notice that Gold stocks (as represented by the Gold Bugs index) posted gains of about four times as much during the same time period?

Does this mean that the shares of Gold mining companies are on a non-stop ride toward ever-increasing gains? Not necessarily; in fact, there are strong overhead resistance areas near 479.00 and then 520.00 that will likely act as (temporary?) consolidation and/or reversal point for the index. However, with the monthly chart of the Gold Bugs index (not shown) also displaying powerful trend characteristics, there can be little doubt that either of those key resistance areas will eventually be challenged. A solid break above 520.00 puts the Gold Bugs index into an extremely bullish posture, and that's a price level that all Gold equity traders will be monitoring in the weeks and months to come. If the price of Gold also continues to rise (it also featuring many of the same bullish trend characteristics of the Gold Bugs index), that will also be extremely favorable toward those trading the shares of the biggest and most fundamentally attractive Gold mining companies.

This may be the most exciting time to be a Gold/Gold stock trader since at least 1979-1980, and if current trends keep strengthening, we may be on the threshold of an era in the precious metals markets that will be talked about for generations to come. Stay tuned -- it's sure to be a fascinating and potentially profitable time to be involved with the precious metals markets!

For more gold and silver analysis join my free gold newsletter at my website.