Profiting From Gold

03/27/08 02:14:55 PM

by Mike Carr, CMT

If gold continues higher, smaller mining companies offer superior potential.

Security: RGLD
Position: Buy

Royal Gold (RGLD) is a US mining company. Although it has exposure to mines throughout the world, being based in the US makes it a way to play gold without worrying about the value of the dollar. RGLD is not overbought and technically vulnerable as many other mining companies are. And fundamentals support the stock price at current levels.

RGLD has operating margins more than four times the industry average and a price/earnings ratio in line with the industry. With margins indicating good management, this stock represents a balance between the rewards of higher gold prices and the risk associated with the possibility of lower gold prices. The stock also has a beta near 1, indicating that it is likely to move in line with the market.

FIGURE 1: RGLD, DAILY. RGLD is near its lower Bollinger band, an area that has been a good buying opportunity in the past.

Graphic provided by: Trade Navigator.

In Figure 1, the daily chart of RGLD shows that prices have been in a year-long trading range. When price touches the lower Bollinger band, as it is now, it has usually been a good buy point. What is not shown in this chart is that the stochastics has just turned higher and the relative strength index (RSI) is also bullish.

FIGURE 2: RELATIVE STRENGTH VS. S&P 5OO. The point & figure chart of relative strength is bullish.

Graphic provided by: Market Dynamics.

Figure 2 shows the long-term point & figure chart of relative strength for RGLD. The stock has been steadily gaining strength and is currently on a buy signal. Many gold mining stocks are overextended on these charts, making RGLD less risky than its peers. Overall, RGLD represents a low-risk bet on continued gains in the price of gold.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."