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"Gold bugs" getting aggressive

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The Gold/Silver Index (XAU.X) 77.51 +2.77% has taken over as today's sector winner and the affectionately called "gold bugs" that are bullish the sector look to be getting aggressive today. My "key" stock for the pulse on how aggressive/speculative that market participants are getting set off an upside alert yesterday at the $1.47 level, and again today in Bema Gold (AMEX:BGO) $1.48 +9.62%.

Bema Gold Chart - Daily Interval

Back on May 23rd, when BGO was trading above the $1.47 level we overlaid the above retracement on BGO and used it, along with the stock action, to give us a feeling for how aggressive/speculative some market participants might be toward gold. It's interesting just how closely the stock has been traded as it relates to that retracement. Today's move above the $1.47 level on what looks to be a closing basis, is sign that bulls are starting to once again get aggressive in the sector.

Option traders understand that they would treat any stock like BGO just as they would an option. Not over leveraging, but the $1.48 price is somewhat similar to what a call option might cost on one of the more institutionally trades stocks in the sector like Newmont Mining (NYSE:NEM) $28.98 +3.31%.

I need to confess, while I looked at the Newmont Mining (NEM) July $27.50 calls (NEMGY) offered $2.55, I decided to buy a small bullish position in Bema Gold (BGO) today at $1.47.

One thing we've talked about in past commentary is that when the Market Volatility Index ($VIX.X) 31.11 +4.71% gets at these higher levels, option volatility spikes and will have an options trader paying a little bit more in option premiums.

As it relates to the above commentary, shorter-term traders looking to play some short-term bullish moves in gold stocks from the bullish side, may actually make some "option-like" bets in the smaller gold stocks like that mentioned above.

Short-term traders holding other bullish gold stock positions can perhaps use the smaller cap Bema Gold (BGO) or other stocks to get a pulse on just how aggressive/speculative the market may be toward gold stocks, and help them manage entry/exit points in their favorite trading stocks.

Again... I need to disclose that I'm currently holding a bullish position in BGO. My target for sale is $1.74 and $2.24 based on market conditions going forward, and current stop would be $1.14.

Jeff Bailey
Senior Market Technician
Option Investor

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