Trading Gold Stocks in 2009

The price of gold and the trading of gold stocks are hot topics in recent times. The price of gold is a well-studied area with plenty of information and opinions on the secular bull trend in gold. The correlation of gold stocks to the price of gold is a topic of interest for people trading gold stocks. An item of importance is the HUI Gold Bugs index on the AMEX (American Stock Exchange).

If you tried to buy gold stocks in August or September of 2008, you undoubtedly would have found yourself being stopped out as gold stocks were on a decline searching for a bottom. The HUI was around 300 in September and bottomed around 150 at the end of October. Near the end of January/2009, the HUI was back up to 300.

Supposing you did your due diligence and managed to buy gold stocks in the October/2008 timeframe and held it, you would be confronted with an interesting situation in February/2009. Having seen your investment double, what should you do? Should you take profit on your investment now and wait on the sidelines in anticipation of a correction in the price of gold and gold stocks? Should you continue to hold in anticipation of a further rise in gold? The $1000/ounce mark is on the horizon for gold with predictions abound on how high gold will reach, and when.

Let’s take a particular gold stock as an example for further discussion. Kinross Gold, KGC on the NYSE (New York Stock Exchange) and K on the TSX (Toronto Stock Exchange), is a HUI component. K on the TSX was at a low of $8.96 on October 24, 2008 and a high of $24.66 on January 20, 2009. Taking profit would yield $15.70 per share. An investor may choose not to take profit and continue to hold for long-term investment.

What if the predictions on the price of gold do not turn out? What if there is a correction in the price of gold? What if Kinross Gold diverges from its correlation with the price of gold, and suffers a pullback on its own? Do you take profits now, wait for the correction and then buy back later?

As an alternative, trading K on the basis of stock price trends (rise and drop cycles) can be equally profitable and allows for profits to be realized in real terms with continuing ability to react to the price movement of the stock. It is vitally important to use a good technical analysis method with the capability to react to price trends. Buy at the “valleys” and sell at the “peaks” in the stock chart.

Ctabs analysis indicates a profit of $17.43 per share of K would be possible based on long and short positions traded during the period from October 24, 2008 to January 20, 2009.

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