Gold Stock Investing: Barrick Gold Threw Investors For A Loop…

| September 29, 2011

Wow…

What a month for gold stocks.

This notoriously volatile sector outperformed the broad markets up through early September as gold prices traded over $1,800 an ounce.

Investors were giddy with excitement as premier gold mining stocks like Barrick Gold (ABX) and Goldcorp (GG) were on the verge of breaking out to new 52-week highs.

Why were investors so excited?

Miners have lagged the price of gold for nearly a year.  But earlier this month, it looked like they were about to start playing catch up to gold by exploding higher.  And that had investors jumping into this undervalued sector with hopes of big gains to come.

But then the unthinkable happened.

The price of gold fell off a cliff last week as the US Dollar kicked off a screaming rally.  A sharp $250 drop in gold quickly squelched investor enthusiasm for mining stocks.  The quickly growing fire under gold stocks was doused in an instant.

Look closely at this chart of ABX.  A big gap down last week trapped anyone who bought at the top of the 52-week trading range near $54.00 (red line).

Can you imagine buying on expectations for a breakout and waking up to see your trade down 11% the very next morning?  It’s probably not a fun experience, as many late to the party investors can attest to.

If you’re in this boat, listen up…

ABX was (and still is) a good value.  It has a low trailing and forward P/E along with hefty profit margins.  Clearly there’s a lot to like about ABX.

But no matter how good a value a particular stock is, be very careful when you’re buying at the top of a trading range.

What does that mean?

Take another look at the chart above and you’ll see the red resistance line.  This is the top of ABX’s 52-week trading range.  It’s also the same area sellers have entered the market multiple times in the past (red circles).

Once a firm resistance area is established, it becomes much more challenging for the market to break above it.  In the chart above, the higher odds trade is to sell ABX at the $54.00 resistance level rather than buy it.

Now I know that can be tough to do if you’re a big gold stock bull.  But you can’t ignore how the market works just because you love a particular stock or industry.

So what should you do now?

If you’re a long-term investor, I think it’s ok to hold ABX from here.  You didn’t get a great entry, but over the long run, it won’t make too much of a difference in your return.

But if you loaded up on ABX for a short-term rally above $54.00, you’d better think twice.

At this point, you’re probably praying for a rally in ABX to help recover some losses.  But wishing for a stock to rally because you’re sitting on losses is no way to manage risk.

Given the current ultra-volatile and uncertain economic environment, gold prices could easily drop to $1,500 an ounce in coming weeks.

And that means ABX likely has some more downside from here…

So swallow your pride and take your loss.  Chalk it up as a valuable learning experience.  And don’t ever buy at the top of a trading range again!

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Category: Currency Trading

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.

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