CFD Trading | CFD

One of the most bullish charts in recent times has been the path taken by the yellow metal. It’s climbed relentlessly with barely a pause, but there’s evidence it’s due for a fall in the near future.

Take a look at this weekly chart of the gold price, particularly the rising red bar on the price and the falling red bar on the MACD indicator below …

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As noted on the chart, the recent new high in the gold price was not supported by a new high in MACD. This is called “divergence” between the price and a key indicator. Normally this means the price will fall, often significantly, as there’s no true momentum in the latest price rise.

So does this mean the gold bull is dead?

Not at all. But it does mean there’s an opportunity to make some money on the short side of gold. And maybe pick up some metal (or gold stocks) more cheaply in the next few weeks.

The first level to which gold should drop would be $1145/oz, right at the 50 week moving average. That was also previous resistance, so it’s likely to form at least temporary support too. And it could hold there.

However, it’s probably more likely to drop further below $1145. After all, if there’s one thing a bull market does well, it’s scaring people into panicking so that they fall off the bull’s back before the ride is over.

Corrections always shake out the weak hands, after all. So if you’re a committed gold bull. Hang in there. But better yet, why not make some money with a put option on the SPDR Gold Shares (NYSE:GLD)?

Buying a put on GLD is relatively cheap. You can buy a December 123.00 put (currently an “at the money” put since it’s at the current GLD price) for $6.20 as I write this.  All the current GLD options prices are right here at this link …

http://finance.yahoo.com/q/op?s=GLD&m=2010-12

You could also go a bit “out of the money” for the December 120 put for $4.20 as this contract currently has a lot more liquidity.

But regardless of the exact strike price, I’m suggesting you look at the contracts expiring in December as this gives you a decent amount of time for the gold correction to happen. (The downdraft should be well underway within the December 17 deadline). In addition, being “at the money” or barely “out of the money” means you’ll start making money as soon as the price begins dropping.

In fact, if the correction stops at $1145/oz (that’s 114 for GLD), you’ll more than double your money with this trade. And if gold really falls off – remember, this is likely to be a correction that scares a lot of new investors! – you’ll pocket substantially more than that.

I’d suggest selling half of your put position at $1145/oz, and then unloading the rest as you see fit:

• Perhaps on the bounce if $1145 is truly the bottom,
• Or else much lower as the fear takes hold and the weak bulls panic.

If gold falls to $1000/oz, that’s probably the worst case scenario as there will just be too many buyers at such a bargain price. What then?

Well, you should be out of your put position with a very nice profit by then. You could then buy more of the metal, or else consider one of the top-performing gold stocks of recent months. I’ve done a comparison chart of six favorites of mine over the last 200 trading days (that’s from mid-November 2009). I’ve listed them alphabetically here …

Aurizon Mines (AZK, ARZ.TO) – lime green line, up over 35%

Eldorado Gold (EGO, ELD.TO) – dark blue line, up over 50%

Nevsun Resources (NSU, NSU.TO) – black line, up over 55%

Fronteer Gold (FRG, FRG.TO) – sky blue line, up over 80%

Allied Nevada Gold (ANV, ANV.TO) – pink line, up over 100%

Tan Range Exploration (TRE / TNX.TO) – red line, up over 55%

The laggard of the bunch is the green/blue line which is $GOLD (i.e. the yellow metal itself). As you can see, each of these six stocks has offered tremendous leverage to the physical metal. Gold has gained only 10% and you can see just how much more profitable the stocks have been.

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By all means, buy some physical gold for maximum security. But take a look at each of these stocks to decide if you find them suitable for your gold equities portfolio. I’ve given you each company’s website plus a brief description of each one to get you started.

Aurizon Mines (AZK, ARZ.TO) – http://www.aurizon.com/s/Home.asp A Quebec-focused company which owns the Casa Berardi mine. The mine should produce as much as 155,000 ounces in 2010 following at 159,261 ounce effort in 2009. The company also owns the Joanna Gold Project (at the final feasibility stage) and the Kipawa Exploration Property (early exploration but also prospective for rare earths too).

Ongoing drilling at Casa Berardi has turned up some exciting recent results including 42.1 grams/tonne over 21.5 meters.

Eldorado Gold (EGO, ELD.TO) – http://www.eldoradogold.com/s/Home.asp An intermediate producer with four operating mines, two mines under construction, one late-stage development project and an extensive 2010 exploration program. The company operates in China, Turkey, Brazil, and Greece.

Eldorado produced 167,940 ounces of gold at an average cash operating cost of $357/ounce in its most recent quarter to earn $0.11/share. They plan to be producing 1 million ounces annually by 2013.

Nevsun Resources (NSU, NSU.TO) – http://www.nevsun.com/ Currently a one-project company but what a project! The Bisha Mine in Eritrea, Africa is a fully financed and permitted high-grade gold, copper and zinc deposit with operations about to commence in late 2010. The mine holds 1.06 million ounces of gold, 9.4 million ounces of silver, 734 million pounds of copper, and 1,075 million pounds of zinc.

The mine will be a low-cost gold producer for the first two years and subsequently a low-cost, high-grade copper and zinc producer for the remaining 10 years. There’s also considerable potential for further resources to be discovered within the company’s licensed areas.

Fronteer Gold (FRG, FRG.TO) – http://fronteergold.com A Nevada-focused company with four separate projects including a new Nevada gold trend at Long Canyon which is currently at the pre-feasibility stage for an open pit mine. They’re also joint-ventured with Newmont on the Sandman project in Nevada.

There’s even a blue-sky Halilaga copper-gold porphyry prospect in Turkey plus they own Aurora Energy Resources, developer of one of the world’s largest primary deposits of uranium in Labrador, Canada.

Allied Nevada Gold (ANV, ANV.TO) – http://www.alliednevada.com Another Nevada-focused company with the Hycroft Mine as a flagship property producing approximately 100,000 ounces of gold and 300,000 ounces of silver annually. An expansion program will ramp up production to over 300,000 ounces of gold and one million ounces of silver per year. Plus there is ongoing drilling to prove up further reserves too.

And on top of that, the company holds interests in 100 other prospective Nevada properties. All while producing gold for $399/ounce and earning $0.32/share.

Tan Range Exploration (TRE / TNX.TO) – http://www.tanzanianroyaltyexploration.com/s/Home.asp An African-oriented company with a business strategy to acquire royalty interests in gold production from its core assets in the Lake Victoria greenstone belt (LVGB) of Tanzania.

All property agreements are structured to deliver advanced royalties before production and escalating post-product royalties based on rising gold prices. The company currently holds the rights to more than 138 prospecting licenses in the Lake Victoria greenstone belt, a large number of which are subject to royalty agreements with various companies.

And that rounds out this article on gold. You’re now prepared for a profitable correction in the gold price plus several worthwhile companies to own as the correction runs its course.

Good Investing!

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