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Albert Sung is the author of the Katchum Macro-Economic Blog, monitoring breaking economic news from a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at... More
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  • The Ultimate Tool To Predict Price Swings In Gold And Gold Miners 0 comments
    Jan 11, 2013 3:51 PM | about stocks: GDX, GLD

    Today I present another very reliable tool to predict tops and bottoms in the gold price (NYSEARCA:GLD) and the gold miners (NYSEARCA:GDX).

    The Bernstein Daily Sentiment Index for gold. Apparently, when the index goes below 30, we have a bull alert on gold. Similarly, when the index goes above 70, we have a bear alert on gold.

    The problem is, it isn't free, you have to pay to follow this index here: www.trade-futures.com/.

    (click to enlarge)
    Chart 1: Bernstein Daily Sentiment Index

    Luckily, Bloomberg has something similar which is free and can be accessed here. On Chart 2 we can see that sentiment is at rock bottom for the gold price, that means we will see a surge in gold in the next few months.

    (click to enlarge)
    Chart 2: Bloomberg Commodity Sentiment Gold Bullish Readings

    To confirm that the gold price is nearing a bottom, we can look at the daily sentiment index for gold miners on the site Stockcharts.com. The ticker is $BPGDM (Chart 3). As you can see, the gold mining sentiment is approaching a bottom under 30 and this should be a positive indicator for the gold mining industry.

    (click to enlarge)
    Chart 3: BPGDM (Stockcharts.com)

    To prove that the correlation works I will compare Chart 3 with the gold miners ETF Chart 4. We notice that each time the index goes below 30 on BPGDM, we have a short term bottom in the GDX. Every time the BPGDM index goes above 70, we have a top in the GDX. At this moment you should buy the GDX and GLD with both hands as both have an index at 30.

    (click to enlarge)
    Chart 4: Gold Miners ETF (GDX)

    The conclusion is that we have a very powerful tool here to mark tops and bottoms in both the gold price and the gold mining industry valuation. I would use these tools to execute short term trading. For example, every time the index goes below 30, you buy the respective security (gold or gold miners) and every time the index goes above 70, you sell the respective security. It's as simple as that!

    Disclosure: I am long AGQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: GDX, GLD
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