How to buy gold stocks now?

Since early 2000, gold has started a gigantic bull run. It has recorded a 13 consecutive years of annual gains, for which none of any other assets have done so. After such a long run, it needed to take a break and it did so after it reached all time high of $1900. In the past 3+ years, gold has entered into a substantial correction, declining almost 50% of its value. Since end of last year, gold has likely bottomed and started its next leg up. Again, gold has done something amazing, recording a quarterly gain of over 20% that has never occurred in the past. Believe me, this is just a beginning for its next bull run, which will last for years. As always the case, when gold shows its strength, gold stocks will perform much better and strongly. The gold stock ETF, GDX, has gained over 60% in the past 3 months already. I’m pretty sure many people who haven’t got up the train are very itching to buy gold stocks now. I don’t think it is a bad idea to do so now as long as your timeframe is long and you can stomach a potentially very volatile fluctuations. You see, GDX is currently sitting on its 9 DMA at around $24.5. Its 15 DMA is quite far away at around $21.5, a 15% difference. Technically a stock rarely stays too far away from its 15 DMA and when that happens, it tends to come down towards its 15 DMA. In addition, its momentum index, MACD, is also trending down at the moment. Barring a black swan showing off to shake the world, I doubt gold and stocks have sufficient energy to immediately break out its recent high ($26 for GDX). Most likely, two things may happen: either GDX will just chop around this level in the next few weeks to allow its 15 DMA to catch up moving towards it or it may go down by 10-15%  to meet its 15 DMA. It is very hard to say which one will pan out but given how messy the world is, a sideway fluctuations may be more likely to allow it to accumulate enough energy for another strong upward move. In this kind of situation, simply buying and holding is not bad but there is a better alternative: writing covered calls. This will allow you to set up a position now but may also reduce your downside risk if indeed GDX simply going side way or correcting by a few points.

 

Personally I don’t feel comfortable to simply buy something when it has some technical weakness. Rather I’d like to buy with some hedge. The covered call strategy is the one I’m using to trade gold stocks at the moment.