Gold exploded higher yesterday morning.
The shiny yellow metal started the session trading at $1,867 per ounce – well above the neckline of the inverse head and shoulders pattern one of my analysts Imre Gams pointed out in yesterday’s essay.
And, all of a sudden, everybody wanted in on the trade.
Many of the financial television talking heads – who had previously sneered at the thought of owning such a “barbaric” relic as gold – looked at the “hotter than expected” Consumer Price Index (CPI) and admitted, “maybe gold can rally from here.”
The price of gold then peaked for the day and drifted lower the rest of the session.
By the close of trading, gold was back down to $1,842 per ounce. And, that action has lots of traders wondering if we have a breakout or a fakeout in the gold market.
Folks… it’s a breakout. This is just the beginning of a major rally in gold.
But, that doesn’t make it an easy trade. Gold is notoriously volatile, and the folks who trade it tend to be a bit high strung. So, gold is subject to wildly emotional moves.
Yesterday’s action was a good reminder that we shouldn’t chase gold and gold stocks higher. Rather, have successful gold traders buy the dips and then sell the rips.
Yesterday morning was a rip… Yesterday afternoon was a dip.
Make no mistake, though. Gold and gold stocks are headed higher in the weeks and months ahead. Traders should be using any weakness in the coming days as a chance to add exposure to the sector.
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The Bullish Percent Index for the gold sector (BPGDM) generated a buy signal in October. Since then, gold is up roughly $80 an ounce. And, the Gold Bugs Index (HUI) is up about 12%.
It hasn’t been a straight shot higher. Heck, the metal and the stocks sold off pretty hard at the end of October.
That action had a lot of folks doubting the validity of the BPGDM buy signal. But, I argued prior to the decline in late October, that any weakness in the gold sector was a time to buy – not sell – the gold stocks.
I’m going to make that same argument today. BPGDM buy signals typically last about three months. We’re less than one month into the current signal.
So, gold and gold stocks will likely be much higher two months from now than where they are today.
Traders should be buying any dips in the sector.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Will you be buying into gold now that the “talking heads” are once again taking an interest? How do you feel about the sector as a whole?
Let us know your thoughts – and any questions you have – at [email protected].