The Tycoon Report

Gold and Silver, my Precioussss!

Thursday, March 5, 2009 | Bob De Dea

Today I'm going to do something I normally reserve for readers of my blog, current members of the ETF Master Trader beta program.  But since the new Sector Hunter is coming out tomorrow, I thought I'd take a look at one of the sectors that everybody's talking about in articles and columns and blogs (oh, my!) -- the Precious Metals Sector -- and give you my take on what's happening.

First off, I'm going to show you the Bullish Percent Index chart for this sector.  If you're new to Point & Figure charting, here's a crash course: Look at the last column on the right.  A column of X's means that recent price activity is positive (upward); a column of O's means that recent price activity is negative (downward).  When a column of X's on its upward journey passes the last column of X's, the chart is showing a P&F Buy signal.  When a column of O's on its downward journey passes the last column of O's, the chart is showing a P&F Sell signal.

The most important thing about P&F charts is that they require a three-box change in the price to effect a column change.  This makes them less susceptible to short-term fluctuations in the price, so that the time axis slows down.  This allows us to identify a long-term trend more clearly than with line charts alone.  It also gives us an easier way to determine support and resistance.

The Bullish Percent Index, to make it pretty darn simple, is a chart that tells us what the percentage of stocks in a particular sector are on P&F Buy or Sell signals.  So if the BPI is at 55%, this means that 55% of all stocks in that sector are showing a P&F Buy signal on their individual Point & Figure charts.  It also means 45% of all stocks in that sector are showing a P&F Sell signal.

Why should I care?

Remember, P&F charts require a significant shift to change columns (three boxes, so if a stock is in a column of X's and it trades at $50, it would have to move to $47 to make a column change from X's to O's; if it were in a column of O's at $50, it would have to rise to $53 to make a column change from O's to X's).  On the BPI chart, there has to be a 6% move in the aggregate for there to be a change in columns.  Let's look:


The last "O" in this chart tells us that between 38% and 40% of all stocks in this sector are on P&F Buy signals.  You can see there was recent support in the 26-28% range.  You can also see that the most recent resistance at 38% could possibly turn into current support since the last column of O's has reached that level.  But that didn't happen.  The chart above is from February 25th; in the three trading days after that, the Precious Metals BPI moved down two more boxes, to between 34% and 36%.  The next support level is the green band.  Regardless, on the return up it will either break through the current resistance or bump its head on it.

So in spite of what many gurus and radio ads and TV "stockangelists" are saying, this exact moment may not be the best time to jump into precious metals.

Something else to mention: As Chris is fond of saying, the Dow-Jones only holds 30 stocks and is cap-weighted.  A better indicator of the broad market is the equal-weighted S&P500 or the NYSE, which holds nigh unto 3,000 stocks, and therefore gives us a "bigger-picture" view.  And as I write this, the NYSE BPI is in the 18-20% range:



Last January this indicator dipped to the 16-18% range (the lowest point since 1999, the farthest back the chart goes), but then in dread October collapsed to between 4% and 6% (green circles).  Can this happen again?  Of course.  Will it?  Who knows?

----- Important Insight Follows -----

The only things that matter are what we can see and what we can do.

We cannot predict the movement of the market from moment to moment any more than we can predict the things that love will teach us.

Guessing is a game for those who aren't serious about their money.

You can quote me on these.

----- End of Philosophy Class -----


But back to gold and silver, the rings of power in any economic downturn.

Even though gold recently rallied to almost $1,000 an ounce, it returned to around $931.



The seemingly weird thing about gold's flirting with $1K is that it's not affecting the profit forecasts for the gold miners. For whatever reason, the powers that be (i.e. analysts), in anticipation of low gold prices, have cut full-year earnings estimates. (They probably just want to stick out from the crowd of other analysts ... oh, wait a minute!)

Compare that to the dollar, fairly strong at present:

The chart above shows the U.S. Dollar Index, which measures the performance of the dollar against a basket of currencies: EUR, JPY, GBP, CAD, CHF and SEK.  All at once gold's price fluctuations don't really seem so weird.  Think in the long term: With the influx of massive quantities of greenbacks into the economy, the dollar's days are numbered.  It will again fall.  But not as long as the other country currencies stay weak relative to the dollar.  And predicting when its fall will happen is an analyst's nightmare.

But take a look at the Relative Strength Index (RSI) above.  I've marked twelve times when the RSI hit 30 (there are arguably more; charting is a subjective art).  Ten of those twelve times the dollar moved upward.  The 70-100 percent range is, on the other hand, not an accurate predictor of the dollar's decline (look at the green peaks in 2008).  But when that RSI puppy hits "30" again, I'll at least be preparing to jump on the gold wagon.

Some ways to play the precious metals sector

While it wouldn't be appropriate for me to share specific recommendations, here are a few for you to research: PowerShares DB Precious Metals Fund (DBP), iShares COMEX Gold Trust (IAU), iShares Silver Trust (SLV), PowerShares DB Gold Fund (DGL), PowerShares DB Silver Fund (DBS), and streetTRACKS Gold Shares (GLD).

There are also UltraShort and UltraLong funds, but I'd make sure you know what you're doing before jumping into these.

I hope this excites you about the potential gold mine in ETFs, while keeping your wits about you when it comes to your timing. 

Until next week ...

(P.S. - good luck to those of you trying for a spot in the new Sector Hunter tomorrow!)






Bob De Dea
Guest Contributor
The Tycoon Report