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Is It Safe to Start Buying Gold Stocks Yet?

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Contrarian investors may do well to begin picking the better names in the sector and "scaling in" over the next short period of time.

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One of the most common questions I field is: Can we buy gold stocks yet? We have seen gold consolidating and correcting following a 34-month Fibonacci rally which I said last fall was going to top out around $1,900 per ounce. This type of rally went from October of 2008 to August of 2011 and we saw gold rally from $680 to $1,900 per ounce during that time.

In order to work off the bullish sentiment that was at parabolic extremes, gold is required to spend a reasonable amount of time in relation to the prior 34-month move to wash out the sentiment and create a strong pivot bottom. While this continues, the gold stock index has taken it on the chin as money rotates out and into other hot areas like technology and the Internet 2.0 social media boom. To wit, the Market Vectors Gold Miners ETF (GDX) peaked out last fall around 67 and currently trades under 47 as of this writing.

However, there may be a silver lining developing in those dark mining-stock clouds very soon. It does appear that we are in the fifth and final wave of this pessimistic decline in gold stocks per my GDX ETF chart below. A typical bottoming pattern ends after five clear waves have taken place, and in this case I have targets between $43-$47 per GDX share for a likely pivot low in gold stocks. Contrarian investors may do well to begin picking the better names in the sector and "scaling in" over the next short period of time.


Click to enlarge

Gold itself has recently corrected from $1,793 per ounce to $1,620 in the last several weeks. This has spooked the crowd out of gold and put further pressure on the gold mining stocks as well. Should gold hold the $1620s area and rebound past $1,691, you will see the gold stocks take off just ahead of that, and from these 43-46 levels on the GDX ETF, provide very strong returns to investors with iron stomachs.

The best way to make money long term in the market and to grow your capital is to develop a method where you can define your risk levels within reason near the apex of a downside move, and then scale into that final apex and catch the rally on the upside. This is difficult to do but my firm developed a strong methodology that takes advantage of "herd behavioral characteristics" and takes advantage of typical panic selling and panic buying to do just the opposite. We have not yet bought into the gold stock sector, but I assume fairly soon we will be dipping our toes in the water while others have all rushed out of the sector right near the apex lows.

Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.

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No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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