Loading ...Aurizon, Eldorado in elite group
Jun 20, 2008 04:30 AM
Bill Carrigan
Ever notice that whenever there is worry, panic or crisis, investors and some of their advisers will consider loading up on gold stocks, “just in case.”
Just in case of what? When I look back at 30 years of market watching, I can’t recall when one year passed without worry, panic or crisis somewhere on the globe. When has the ownership of gold and the gold stocks ever saved an equity portfolio from a meltdown?
One could argue that gold would be the only currency in the event of a global economic collapse that rendered all currencies worthless. The banks would close and there would be mobs of unemployed and angry workers stampeding though the streets rioting and looting. The police, unable to cope, would hide in fear and you are the only one in town with gold.
Under those conditions, your odds of using it or even retaining it are about zero.
In reality, gold and the related gold stocks are simply great traders and investors should direct a portion of their assets for trading in and out of the gold’s annual window of opportunity in order to enhance their overall returns.
The last golden window of opportunity occurred last summer as the sector began to awake from a 12 month slumber. I entered the group in August with the plan to trade out in about 12 weeks or one intermediate up cycle. By November, I had traded out of the last of my gold stocks and have kept a casual eye on the precious metals complex ever since with a view to re-enter the group during the next sleepy period.
It turns out I was a little early on the sell side, as the price of gold went on to spike at more than $1,000 per ounce in March 2008. This in turn excited the gold bugs who quickly jumped on the $2,000 gold bandwagon.
Their hopes were dashed as the gold complex entered a steep corrective period with bullion giving back $150 an ounce in just seven weeks.
Many disappointed gold investors entered the booming energy complex and the gold stocks were once again under-loved.
Investors who are considering entering the group during this “quiet” time have to overcome the technical problem of the $1,000 price spike of only 14 weeks ago. That is because a price spike will sometimes take months or years to subside. I am sure we all recall the technology stock spike of 2000 and the housing stock spike of early 2006.
The other technical problem is that the gold complex has been in a secular up trend since the lows of 2001. The easy money has been made because the advance is now quite mature in terms of time and price magnitude.
The best strategy to use this late in the game is to be very selective because not all gold stocks will respond equally to a rally in bullion prices.
Our chart this week plots the weekly closes of TSX-listed Aurizon Mines Ltd. above those of the TSX-listed Eldorado Gold Corp. Both issuers are mid-tier gold producers and components of the S&P/TSX global gold index.
I have placed a horizontal line at the 2007 price peaks on both plots and extended to the right to illustrate the recent price advances to recent 52-week highs.
The price breakout of Aurizon occurred in March 2008, which was followed by the price break out of Eldorado in May 2008.
This places Aurizon and Eldorado in an elite group of gold stocks because of their recent 52-week highs.
Before you jump through that golden window, make sure you’re not on the top floor looking down. Extend those horizontal lines to the right because they will also serve as support levels. The rule here is, if support is broken, admit the error and get out.
I estimate the key support level for Aurizon to be $4.50 and for Eldorado $7.60.
When it comes to gold, we’re here for a good time, not a long time.
