The stock: Eldorado Gold Corp.
Yesterday's close: $12.78
Trend: In the face of a falling U.S. dollar and the bleak prospect of its recovery investors should be topping up their exposure to precious metals. Gold bugs have bullion pegged to go much higher than the $1,060 (U.S.) level it now trades, but Canadian investors have to wary of diminished returns on bullion investments as the loonie gains strength against the greenback. While the price of gold is up over 15 per cent in the past three months, the Canadian dollar-denominated iShares Comex Gold Trust exchange traded fund is only up 3 per cent - a result of the diminishing value of U.S. dollar-denominated assets for Canadians. Gold stocks, however, currently deliver a better bang for investors - they are up 17 per cent since mid-July. Gold stocks had a major price breakout in early September and are again challenging 52-week highs. Investors can trade the sector with the iShares S&P/TSX Global Gold Fund, or look to bullish-trending gold stocks that can continue to outperform the group.
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The trade: Eldorado Gold Corp. is the most recent gold company addition to the S&P/TSX 60 Index. Along with Agnico-Eagle Mines, it is the best performing blue chip gold stock over the past 13-weeks, outperforming the broad TSX market by 11 per cent. Eldorado has been trending bullish since early 2009 and was one of the first Stock Trends stock picks of the year. A year ago the stock was trading at a low of $3.44 (Canadian) when the financial crisis buffed a shine on this gold play - it rallied strongly to plateau near its first-quarter high of $11.90. Echoing the movement of the gold sector, the stock stagnated in mid-year trading.
Since Eldorado's graduation to the TSX's blue chip index at the end of July its price has trended above the 13-week moving average trend line, and has built upon a longer-term positive trend. Its upward sloping 40-week moving average trend line is a rare sight on a large-cap gold chart - most of the big gold plays have relatively flat long-term price trends. Investors can continue to harness Eldorado Gold's long-term trend as money flows increasingly gravitate toward the sector.
The upside: With each new record high in the price of bullion, gold stocks earn broader attention from investors. Even the most conservative market participants are susceptible to the gold bug. Eldorado's trading typically shows more of a retail character than its blue chip gold peers - average traded value of Agnico-Eagle, for instance, is twice Eldorado's. This small investor interest often heightens the opportunity for an expansion of price momentum. As the share price elevates above $13 a sector rally will make this stock shine even more.
The downside: If the share price drops below $11.25, the Stock Trends indicator will change from Bullish to Weak Bullish - a sign that this trade needs to be re-evaluated. Volatility of the stock suggests a stop price around $10.50, near its 40-week average price and 15 per cent below the current price.