Best ETF/ETN Option for Gold Sector

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Gillie

NEW YORK ( ETF Digest) -- Two major news events have caused a breakout in gold.

The first was Bernanke testifying before The House Banking and Finance Committee and giving a nod to additional stimulus (QE3).

Secondly, Moody's said the Triple A rating on U.S. bonds would not be downgraded if the debt ceiling were raised and budget cuts were implemented.

This will basically force Congress and the White House to raise the debt ceiling quickly and work out their squabbles and political positioning later. It also gives that the all important "blameability" that they were "forced" to raise the debt ceiling to protect America's credit.

It will also put to rest the rhetoric about a halt to the payment of Social Security for seniors and pay for the military. It's interesting that the first places the government has to cut are seniors and soldiers -- throwing the golf clubs in Air Force One at $58,000 per hour and congressional junkets and perks are off the table for failure of American credit. It's good to be king.

Yeah, it's crazy. The only way to protect credit on the debt that you can't pay is to borrow more money just to pay the interest on the money that you can't pay back. I think I'm going to call Visa tomorrow and tell them I don't have the money to make the minimum payment and see if they'll raise my credit limit and give me more money. Oh wait, I'm not a government. I have to be rational and responsible. Never mind.

Anyway, for schmucks like us that can't borrow money on other people's account, it would almost be irresponsible not to have assets in gold as currencies are being crushed -- the U.S. dollar on endless stimulus tricks and Ponzi schemes and the euro on collapsing economies throughout the region.

Upon analysis on the precious metals sector, PowerShares DB Double Long Gold ( DGP) appears to be our best option in this sector. It is one of the most heavily traded of the precious metals ETFs/ETNs and leveraged for the best performance. This is a pure gold position without silver, platinum or palladium, which are substantially more volatile than gold.

Let's look at the daily chart of DGP year to date.

DGP (DB Gold Double Long) Daily

Here's a quick run down of the indicators so that you understand this position (labels on left side of indicators).

DI+/DI-: The Directional Index is one of our strongest indicators for filtering out the noise. As you can see the bulls (green) and bears (red) have wrestled over gold since early May. It wasn't until three days ago that the Bulls clearly took the field.

MACD: On July 8, we got a bullish crossover with the MACD Line (blue) crossing the Signal Line (red). Also the Divergence histogram (light blue) went positive and yesterday, the red signal line broke above the midpoint on the histogram. All bullish indications.

RSI: Our Relative Strength Indicator is somewhat higher than I would like to enter a position being at 67.87. However, gold can go into an over bought condition and remain there for an extended period as it did for over a month in September-October of 2010..

Stocs: The same analysis holds true for our fastest indicator, Stochastics, as does for the RSI.

MFI: The Money Flow Index is positioned much as it was in the previous breakout (shaded area). A greater number in investors are willing to pay a higher price for gold and even though there was a slight pullback for a couple days in the early days of that rally, the price held at the breakout level and then continued its move up.

Volume: At the bottom of the chart, we see rising volume over the past week and then the past three days, significantly higher volume than the average. There is conviction in this level of volume.

Okay, now to the hard numbers. As I've said repeatedly, "The only reason for buying a stock is to sell it. It is up to you if you want to just buy DGP at the open tomorrow or wait for a little pullback in a couple days or even follow it tomorrow to see if you can get the 'best' price.

DGP closed at $51.66 on Wednesday and was trading higher in the session aftermarket. Even in a pull back, I doubt if you'll see it under $50 in the near term.

Any time you buy you should know your selling points at the time of purchase. Here are some guidelines for you to work with.

Stop Loss Selling:The current 50- Day Moving Average is at $48. That should be a solid support level and allow more than ample volatility without getting stopped out "accidentally". Should gold take a dive, this would stop you out at about a $4/share loss (about 7%).

Limit Up Selling: As we see in the shaded area of the price chart, this Gold ETN has recently seen a $7 (or about 13%) move up on a breakout. Using that range, we should set a sell target on DGP at about $59.

This would give us about a 2:1 profit/loss ratio.

Here is an interesting way to set up this trade to minimize risk and maximize profits. Most brokerages offer the ability to make "Conditional Trades"

The way you would set up the conditional trade, is to use a "OCO Trade" (One Cancels The Other) in a couple easy steps.

1. You set a limit stop order to $48 (or 7% trailing stop loss) for all of the shares. (to protect against losses)

2. You also set a OCO conditional order to sell 1/2 the shares at $59. (to ensure profit taking)Which ever trade triggers first cancels the other trade.

3. If the $59 limit order is triggered, you've sold 1/2 of the position at a likely high point. Now, if the position still looks strong (and your risk tolerance allows)...

4. Set the remaining half of the position at a tighter stop loss (maybe 4%) and allow it to ride. Or you could watch it carefully and sell it on the next pop up.

Of course, you could set the entire position to sell at $59 and just walk away with a nice 13% profit. This is what I would recommend for the conservative strategy because when gold sells, it's usually sharp and can take several weeks to regain it's previous highs.

Earnings Seasons are notoriously volatile times and even more so in the anxiety of precarious global economies and low volume trading of summer. For the most conservative among you, cash is king. You are better off being in cash on the sidelines while there's uncertainty in the markets and sleeping well at night. If you enjoy some excitement and profitability, times like these can offer you all of that and more!

As a disclaimer, any position I recommend, I am also trading (own) along the same guidelines as my recommendations. I may also be recommending a position in Volatility (TVIX) soon which follows the .VIX (Volatility Index) which I currently already own, but was too much of a risk to recommend at the time I purchased it.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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