How To Profit From The Current Gold Bull Market

August 11, 2016

Gold and gold miners are finally having a huge rebound after five years of a brutal bear market. Moreover, we are having a spectacular year so far. Recently gold and silver are shaking off the potential summer weakness. We have been seeing very weak physical demand from China and India in the past few months due to high prices. Specifically, Chinese demand was down 30%–40% -- and India's was down 70%–80% in Q2 versus the same period last year. In the meantime we have some Federal Reserve officials signaling that more interest rate hikes are coming up.

However, gold and silver are still looking very strong in the shoulder month of August. This year's gold and silver rebound tracks the strong rebound of 2009, the period when gold and silver rebounded off the brutal 2008 crash. Following the 2009 playbook, we should have a good second half if gold and silver continue to follow in the footsteps of 2009. As you can see from the charts, gold started to take off big time after the summer consolidation in 2009. By the end of August and early September, gold exploded parabolically…and peaked in early December. If you look at the monthly gains of 2009, two-thirds of the annual gains happened during the three-month period of September, October and November!

Seasonally, gold and silver usually bottom around August. When the summer ends, jewelry shops are busy buying precious metal for the holiday seasons, starting with the Indian wedding season into Jewish Hanukkah into the Christmas holidays into the New Year - and finally the Chinese New Year. Even the recent report of weak physical demand for gold from China and India may indicate that jewelry shop precious metal inventory there is low. They may have to play catch-up in the second half to restock the inventory…and that can drive the gold price even higher.

As traders, now we need to prepare for a similar move of gold and silver in the next three to four months. This type of opportunity happens only once or twice in a decade - and I don't wish to miss it. We want to build up our positions in the month of August in case a similar move of gold and silver happens again later this year.

How to trade? If you are not very familiar with the gold mining industry, I strongly suggest you stick with exchange-traded funds (ETFs): SPDR Gold Trust (GLD) for gold, iShares Silver Trust (SLV) for silver, plus Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ) for gold miners. There are other physical-metal-backed ETFs for long-term holding. You can also try the leveraged ETFs, futures and options if you can tolerate the risks. Gold and silver miners are extremely difficult to analyze. Moreover, they fool even some seasoned experts all the time. Don't take any unnecessary risks.

For people like me who have been in the industry for a long time, there are actually a lot of opportunities. The recent rebound of mining stocks has been very uneven. There are many very good value stocks if you look around. 

Chen Lin manages a family fund and writes about it in the popular stock newsletter, “What Is Chen Buying? What Is Chen Selling?” published and distributed by Taylor Hard Money Advisors, Inc. While a doctoral candidate in aeronautical engineering at Princeton, Lin found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.

Gold is the world’s oldest and most known currency.