ETF Update: “There’s Gold ….

… them thar hills”  (Origin Unknown).  Despite the dubious construction and grammar (language buffs can check here) the statement has a certain ring.  The reason is the enduring quality of gold as a store of value.  In modern times, this means a value that is impervious to the actions of governments and central bankers.

The quest for gold is so powerful that a wise expert on the subject put it thusly:  “I know what gold does to men’s souls.”  That expert was a character in the 1948 Bogart classic, The Treasure of the Sierra Madre,

Investors need not risk their souls to consider gold mining stocks, but it is wise to take notice when this sector nears the top of our ratings list.  It provides a strong signal of inflation concern and the need for a defensive posture.  One method to do this could be to invest in a Gold IRA system rather than into gold stocks themselves. As usual, our weekly update includes something about our featured sector as well as the implications for the overall market.

Gold Mining Stocks

Our featured ETF this week is the Market Vectors Gold Miners ETF, (GDX).  The concentration is pretty good, with 34 total companies and the top five representing about 37% of the total.  Canadian companies make up 65% of the group.  There is little correlation to the S&P 500, and a beta relative to gold bullion of 1.57.

Picking gold stocks can be very tricky.  The GDX ETF has a listed P/E of an eye-popping 309.  Many of the individual companies actually have current losses.  Some of the big companies had hedges in place that limited earnings growth from rising prices.  The trick is sometimes finding companies that are moving from losses to profitability, as Bill Cara noted in this piece.  The article (recommended to interested clients a year or so ago), is cited here not so much for the recommended stocks, but the logic used in the selection.  When individual stock selection is challenging, an ETF may be the answer.

Tom Lydon at ETF Trends emphasizes the attractiveness of gold funds when the value of the dollar is in doubt. He has cited the key element of the fundamental attractiveness, although sentiment is also a factor.

David Fry captures the sentiment factor in this technical look at GDX.  He notes that in a general sell off, nothing is spared.

Overall Defensive Posture

The rankings from our TCA-ETF model (details for new readers at the end of the article) provide more than just a list of featured sectors.  The model has only five sectors that qualify for a “buy” rating.  Normally we maintain eight positions.  Three of these ETF’s are inverse market sectors — short side plays.  The remaining two are gold and oil services, consistent with commodity price pressure and a weak market.

David Fry’s charts suggest that “something is up, and it’s not good.”  Vince’s model has the same message.

Weekly TCA-ETF Rankings

There was some turnover in the holdings, most notably our exit from the KOL position.  On Tuesday, the model gave a timely exit signal, but there was a rush for the exits on Wednesday.  There were reports that China was increasing rates on electricity generated from coal and European spot prices were falling.  Whatever the reason, traders with nice gains in the sector were cognizant of the extended move.  They were ready to sell.  It was a very good trade for us, as well.  Part of the success of the TCA-ETF system is being on the right side of extended moves.

Listed below are this week’s rankings.


Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF’s and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF’s pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF’s.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the “hot money” moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit — thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a “black box.”  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

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  • Anon. July 7, 2008  

    There are several gold bullion ETFs, most notably GLD. If you want exposure to gold, why not just trade that?

  • July 13, 2008  

    The overall defense can be over come by proper planning of the economy for the situation which can really handle it

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