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Finally! An ETF for Gold Stocks
Chart Spotlight
by Carl Swenlin
DecisionPoint.com
May 25, 2006
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This week the Market
Vectors Gold Miners ETF (GDX) began trading on the AMEX. Traders and
investors have been waiting many years for this ETF because it is the
first ETF to focus on gold mining stocks. Heretofore, mutual funds were
the only practical way to invest in a basket of gold stocks, but most
will agree that ETFs are better vehicles because they can be traded
intraday, and they can be sold short. I expect that GDX will become very
popular very quickly, while at the same time gold stock mutual funds
will lose a lot of business.
GDX is designed to track the AMEX Gold Miners Index ($GDM), the chart of which looks very similar to the well-known XAU (Philadelphia Gold Mining Index), but I think the GDM is a better index because it contains over two-and-a-half times as many stocks as the XAU and, therefore, has a heavier weighting toward small-cap stocks. This means that most of the time it can perform stronger with less volatility. For example, during the rally from the October 2005 low to the May 2006 high GDM was up 84% compared to only 70% for the XAU, and the GDM pullbacks were less severe. (Note: Smaller-cap stocks normally perform better in bull markets.) Even though GDX has only been trading for four days, you will note on the chart below that we are showing data prior to that time. At DecisionPoint.com it is our custom, whenever possible, to create historical data for new securities by adjusting data from the derivative index. In this case it we have used adjusted GDM data, and we think the chart gives a relatively accurate theoretical picture of how GDX would have traded. For we technicians this simulated data provides a context for trading the security without having to wait for live data to accumulate.
Before I conclude, I should probably make a quick analysis of the chart. A lot of people think the gold rally is over, and they could be right, but at this point the chart only shows a short-term correction in the context of a rising trend. Also, the PMO (Price Momentum Oscillator) has moved back to the level where two previous corrections found support, and the price index seems to be forming a small double bottom. The conditions are good for a short rally at the very least. It is my opinion that the introduction of the gold ETFs over a year ago had quite a bit to do with the sharp rally gold experienced during that time. By the same token, it is also possible that the debut of GDX could attract a lot of money to gold stocks, causing at least one more run at new highs. Nothing here should be construed as a recommendation to buy or sell this security, but I am a big fan of ETFs, and I am delighted that this new product is available.
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