ETF Update: A New Look at Gold

by: Jeff Miller December 01, 2008 | about stocks: DOG / FXI / GDX / GLD / IAU / IDU / IXP / NLR / PSQ / SH    
Jeff Miller

Jeff Miller

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As we noted in last week's update, system trading is not the ideal vehicle for sharp, news-based turning points. The stories about the Obama appointments and plans helped the market to a good rebound from an oversold condition. A system will not anticipate such events nor the reaction.

Our TCA-ETF system does catch some cyclical turning points, and has also kept us out of harm's way during the bulk of the recent decline. The system is designed to get us on the right side of the big market moves, and in the best ETFs to enjoy the benefits. (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

Revisiting the Gold Mining Stocks

The only new buy in our ETF universe (click on chart below to enlarge) is the Market Vectors Gold Miners ETF, (GDX). The concentration is pretty good, with 34 total companies and the top five representing about 37% of the total. Canadian companies make up 65% of the group. There is little correlation to the S&P 500, and a beta relative to gold bullion of 1.57.

We also featured GDX last July, but the sector has been difficult to forecast.

Others recommending GDX include both technical and fundamental analysts. Trends I'm Watching highlights the recent four-week strength, up almost 27%.

Deron Wagner, a colleague at TheStreet.com's RealMoney site (subscription required, free trial available), writes as follows:

On the daily chart below, notice how it's breaking out above the high of its tight consolidation of the past three days.

With the GDX now above its 50-day moving average, it can be bought on any small pullback. Ideally, the $25 to $25.50 area represents an ideal buy point because the prior high from Nov. 5 (marked by the blue horizontal line) should now provide support as well. Since the GDX closed just above the high of its short-term consolidation, it's not even too late to buy near its current price.

Deron includes a nice chart with his analysis.

Mitch Tuchman at Blogging Stocks has an interesting fundamental observation about owning the gold miners versus the metal itself.

There are two reasons to buy GDX instead of the SPDR Gold Trust (GLD) or the iShares Comex Gold Trust (IAU) both of which are pure gold ETFs (you own a share of gold sitting in a safe). First, the ratio between gold and the value of the gold held by miners has been relatively stable for 30 years. But today, the gold miners are selling at 33% of that historical ratio, so bulls say it's better to buy the miners, not the metal. Second, the biggest expense of a mining company is energy. Oil today hit $54 per barrel, down 63% from a peak of $147. This adds to the profits of the Gold Miners.

Earlier this year the miners lagged the metal, so Tuchman's analysis is quite interesting. It may help to explain the recent strength.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Wednesday night, November 26th. The GDX ETF made a big move from 19th last week to the #3 position. Readers should note that we provide these as market information, not trading advice. Please read our disclaimers. If you want to follow the service in real time, please review our free reports on methods and performance. We use some discretion in our own trading programs, knowing when there are news events that may not be reflected in the model.

Based upon the current ratings, we continued our bearish position in the Ticker Sense Blogger Sentiment poll.

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Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETFs and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETFs pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETFs. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box." The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

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This article has 3 comments:

  •  
    Dec 01 03:48 PM
    ...just gotta laugh...I looked at Mr. Miller's "Newarc Investment" website where he brags about using "neural networks and genetic algorithms" to gain a "unique trading advantage"...soun... really keen, huh?...so I look on their "The Result" page and find only little chart labelled wirh this:

    "Great Stocks, Great Performance as of 12/30/05"

    ...2005???????...uh, Jeff, you think maybe somone oughta upadate the website now and then?
    Reply | Link to Comment
  •  
    Dec 01 04:58 PM
    Ray - You may not know it, but we cannot legally advertise performance for a fund limited to accredited investors. That is where we stood as of 2005, when we were encouraging people to get in touch with us for more information.

    In the TCA-ETF series I responded to some individual requests to make this into a program where the average investor could participate. We did a lot of work to cut down on the number of trades and make it work within the TD Ameritrade framework. We took the same model signals we used for the daily program, and the ones I have been reporting in real time, and developed a report, which is available upon request. At that point I always talk with any interested investor about suitability, risk tolerance, etc.

    I'm not quite sure why you call it "bragging." If you read the report, you will understand better. We do take some pride in putting together a good team and using the most advanced methods.

    Thanks for raising some good questions, and for reminding me about the need to update the static site.

    Jeff
    Reply | Link to Comment
  •  
    Dec 03 02:55 AM
    Go buy Superfund gold funds. They're up 17-20% ONLY IN NOVEMBER. Their other funds are up 33-70% YTD.
    The MD said gold is gonna double to $2000 coz of hyperinflation.
    www.youtube.com/watch?...
    Reply | Link to Comment
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