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Why Gold Stocks are a Good Buy

Posted on May 21, 2009 by Adam

When trading conditions are tough, you can rely on gold stocks to get you through. The reasons why are fairly simple

To understand why, you need to look at the relationship between gold and equities. The role that gold plays in intermarket dynamics changes over time. It generally moves opposite to the US dollar, as investors allocate their assets in the stable metal when the fiat currency weakens.

However, lately gold has acted as a hedging device for traders. That is, people are buying gold in order to insure against downturns in the stock market. That makes for an inverse relationship between gold and stocks. When the stock market is down, gold goes up, and vice versa. Of course, this is not a one to one relationship - there are multiple intricacies, but it generally holds true.

If you find yourself trading a market where a rally seems to be fading out - one similar to the one we are in right now - it can be tough.

In times like these, I like to buy gold stocks.

When the market is up, gold equities will rally with the market. When the market is down, gold stocks will hold up well due to their ties with the metal. It’s a win-win situation.

If you want to try your hand at a gold name, here are some of my favorites. Many of these companies are involved in gold mining or distribution. They are influenced both by gold prices, and by stock prices. These are live charts, so you can follow along day by day.

LIHR

At the time of this post, LIHR looks poised for a breakout.

ABX

ABX has already broken out of a bull flag. Look for more continuation.

AUY

AUY has broken out from its recent trading range. Look to buy dips.

IAG

IAG has broken out from a bull flag.

For my complete gold watchlist, click here.

Disclosure: Long IAG

Oooh, shiny!