Ascending Triangle in the GDX could net you as much as 26%

Here is the link to my August 10th article recommending the GLD at $117.73 (now trading $124+)

The two major gold ETF’s (exchange traded funds) are the SPDR Gold Shares (GLD) and the Market Vectors Gold Miners (GDX). The GLD actually holds physical gold in a vault in London and the GDX is like a mutual fund of companies, all of which have mining for gold as their primary business line.  As the price of gold goes higher, the GLD will track that price move at roughly a 10 to 1 ratio but more leverage to the price of gold can be found in the GDX.  New York spot gold is trading at $1,268.50 right now (11:17 e.s.t.) with a move of 1.89% or $23.50 today while the GLD is up $2.42 or 1.98%.  The GDX is up $2.43 or 4.58% which is more than double the gold or GLD move in percentage terms.  Why?

Gold miners pull this shiny yellow metal out of the ground at a much lower cost than where gold is trading right now.  The difference between the trading price and the cost of mining is the miner’s profit margins.  When a gold miner that has a cost of $400 to mine an ounce of gold has the price of gold increase by $23.50, this increases their profit margin by 2.78% while the move in gold price is only 1.89%.  This is how buying a miner, as opposed to the actual metal can leverage your investment to the price of gold (in this case a 47% greater return).

The downside to buying a miner as opposed to the metal as a pure play is that with the GLD you eliminate the potential problems that come with buying an operating company.  There are any number of risks most of you already know of that are involved with the buying any operating company stock.  When buying a gold mining company other risks are encountered including the collapse of a mining tunnel, flooding, the local political big shot either raising taxes on gold mining or nationalizing the mine (as has happened in Indonesia and Venezuela), environmental permits and impacts, etc…

By buying the GDX you get a portfolio of gold mining companies, and this portfolio diversification method lowers your exposure to the operating company risks.

Today, the GDX traded to its highest level in 2 ½ years.  The GDX has been in a nice uptrend since January of 2009 and has traded to, and backed off from the $54 level three times since December of 2009.  This activity has resulted in the GDX forming a nice ascending triangle.  An ascending triangle is a decently reliable measuring pattern with various volume and price characteristics.  If you would like to know how to identify, and trade an ascending triangle go to www.StockTradingCards.com.

The current GDX ascending triangle is targeting a move higher to between $65 and $70 a share.  The GDX is trading $55.44 making a move to $65 a 17.2% gain and a move to $70 a 26% gain.

I have been a gold bug for quite some time (since 2006) and looking at the disaster that is now the world economy, I think that governments worldwide will begin to monetize their deficits and economic problems by printing currency thereby spurring inflation.  When this happens, $2,000 to $3,000 gold would not be out of the question.  Get your money into gold – whether it be the GLD or the GDX.

NOTE: The Market Vectors Junior Gold Miners ETF (GDXJ) is more volatile than the GDX to the upside and downside. This ETF is more risky than the GDX, but it has been on fire lately rising from $25.38 on July 19th to over $33 in the last two months (+30%)

Tuesday, September 14, 2010 - 12:30 p.m.