Gold Stocks: A Fantastic Low Risk Buying Opportunity…

| October 21, 2013 | 0 Comments

mine-helmetsGold mining stocks have been the brunt of a lot of jokes lately.  Ever since the price of gold went down the toilet in April 2013, investors have treated miners like… well… you know. 

As a result, gold miners are currently trading near a 4½-year low.

Take a look…

Market Vectors Gold Miners ETF

Clearly, there’s no love lost for the Market Vectors Gold Miners ETF (GDX) this year. 

As you may know, GDX is an excellent representation of the gold mining industry.  It holds many of the world’s biggest mining companies like Goldcorp (GG), Barrick Gold (ABX), and Newmont Mining (NEM).

While the chart above is undeniably ugly, there’s an outstanding low-risk profit opportunity presenting itself right now.

Take a closer look…

Market Vectors Gold Miners ETF

Notice how gold stocks are forming a double bottom.  In technical analysis circles, this is a highly regarded formation that points to increasing prices in the future.  In other words, when you see this pattern, it’s a great time to start buying the gold mining industry.

But the best part is, you can take this trade with minimal risk… 

The blue line you see in the chart above connects the recent low set in late June to the current low set a few days ago.  If you get long this industry now, you can keep your total investment risk relatively low. 

If GDX turns below the blue line, you can simply close this trade for a small loss.

On the other hand, if gold miners start rallying, you’ll be on board at the lowest price in the past 4½ years.

What kind of profit potential are we looking at with this trade?

Let’s see…

Market Vectors Gold Miners ETF

The last time GDX put in a double bottom pattern was in the summer of 2012.  As you can see, the ETF went on a hefty multi-month run of nearly 35%.  Not bad!

But this time I believe the profit potential is much larger…

At $1,300 an ounce, gold is trading around the all-in cost of production for the average gold miner.  That means the price of the yellow metal can’t go much lower without a large part of the industry shutting in production.

And with the shellacking gold miners have received recently, many are already trading well below book value. 

In other words, miners are the cheapest they’ve been in years…

Add it all up and you’ll find the downside risk in miners is relatively low while the long-term profit potential is high.

So if you’re looking for a low-risk technical entry in an undervalued industry, now’s your chance…

If you’re interested in this trade, I recommend sticking with Market Vectors Gold Miners ETF (GDX) or the Market Vectors Junior Gold Miners ETF (GDXJ).  Doing so allows industry diversification, which further decreases your investment risk. 

Stay tuned to Commodity Trading Research for additional commodity based investing ideas!

Until Next Time,

Justin Bennett

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Category: Gold, Precious Metals

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.