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Gold Forms Bullish Declining Wedge Pattern

By Sam Kirtley      Printer Friendly Version Bookmark and Share
Feb 10 2010 10:49AM

www.skoptionstrading.com

In recent trading, gold prices appear to have made a declining wedge formation, which is good news for gold bulls since a falling wedge formation after an uptrend usually break out to the upside, rather than down and out.

In addition to this, technical indicators such as the MACD, STO and RSI are in oversold territory. So whilst there could still be some sideways action ahead, it appears that the worst of this correction is over and an excellent buying opportunity is upon us.

The question is, how to best play the next leg up in this gold bull market?

For the conservative investor looking for good long term gains, the physical metal is the obviously choice, or a gold ETF if you would rather own the metal that way. However for those chasing a more leveraged position to the gold price, other vehicles that derive their value from gold must be considered.

A popular way to gain this leverage is buy taking long positions in gold stocks. Whilst we see merit in some of the quality mid-large cap gold mining companies, we think there is a more efficient way to gain the required leverage on gold and profit from the next gold rally.

We have been using options with great success, and they have performed better than many of our gold stocks. This is down to a few reasons, but generally it is because the value of the options contract is solely determined by what the gold price does. Whereas a gold stock has other factors that influence its value such as the variance in the profitability of projects, quality of management, resource estimates, geopolitical stability and so on. Whilst this factors can sometimes be a positive force, such as extending a resource base or increasing profitability. However the flip side of this is when your favorite gold stocks are hit by a CEO leaving, or geopolitical instability in their mining region, which cause the share price to drop off even if gold is going up. In fact, if gold is on the rise they often fall harder on bad news since traders who are using gold stocks to ride the underlying rally in gold, instantly dump the stock in favour of other gold stocks.

Therefore we are aiming to minimise our exposure to risks such as those stated above, and in return for a more direct and leveraged return on gold, we are prepared to forgo some of the benefits that come with owning a successful mining company. Our key objective is profiting from a rising gold price, not from a successful miner or explorer. So in anticipation of this coming rally, although we are buying positions on some of our favourite gold miners, we are focusing a lot more on options directly on gold in order to get the biggest bang for our buck!

For those interested in Options Trading please click here.

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Sam Kirtley

 

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