by: Andrew Hecht
- A spectacular rise from the April low.
- Markets rarely move in a straight line.
- This time could be different.
- Gold mining stocks outperform on the upside; leverage on dips to turbocharge performance.
Gold has been in a bull market since the early 2000s. In 1980, the yellow metal reached a high at $875 per ounce. In early 2008, the price moved above that level for the first time. In 2011, it reached its peak at $1920.70 per ounce in dollar terms before a correction took the price to a low at $1,046.20 during the final month of 2015. Gold then consolidated and traded in a $331.30 range over the next four years. The 2015 low was a critical support, and the July 2016 post-Brexit referendum high at $1,377.50 stood as the crucial technical resistance level.
Gold reached its low during the month that the US Fed began increasing the short-term Fed Funds rate from zero percent. The yellow metal broke through the resistance level at $1,377.50 in June 2019 when the US central bank told the market that short-term interest rates would move lower by the end of 2019. The move by the Fed was the first rate cut in many years, and it lit a bullish fuse under the gold market that continues to take the price to higher highs. The next technical target for gold is at just over the $1,600 per ounce level, but the ultimate goal is a challenge of the 2011 high. Even the strongest bull markets undergo corrective periods. Buying dips in gold is likely to enhance performance if this bull market has legs on the upside.
Meanwhile, gold mining shares tend to outperform the price action in the gold futures market on a percentage basis on the upside. To turbocharge performance, the Direxion Daily Gold Miners Index Bull 3X Shares (NUGT) could be an excellent short-term tool to take advantage of bull market dips in the precious metal.
This week's highs were next week's lows
Since June, when the price of gold moved steadily higher. The prospects for falling interest rates in the US and around the world lit a bullish fuse under the gold market, and the price rallied steadily from late May through early September. Over many of the summer weeks, the highs in gold from one week became the lows during the next week.
Source: CQG
The weekly chart shows that the trajectory if the most significant rally in years took gold over $290 per ounce high over 16 weeks. Gold posted gains in 12 out of the 16 weeks, and three times the high for one week was close to the low for the next week.
Open interest, the total number of open long and short positions in the COMEX futures market, rose from 465,077 contracts in late May to 643,563 contracts on September 4, the day of the most recent peak at $1,566.20 on the December futures contract. The metric rose by over 38% over the period to a new record high. The over-the-counter gold market in London is larger than the futures market, but the measure of activity on COMEX reflects increased volumes and interest in gold in the OTC market.
In a futures market, rising price and increasing open interest is typically a validation of a bull market trend. However, gold declined last Thursday and Friday causing the yellow metal to put in a bearish reversal on the weekly chart. The technical pattern could lead to further selling over the coming sessions. Meanwhile, open interest fell to under 620,000 contracts as the price of gold turned lower, which is not typically a bearish technical sign in a futures market.
A spectacular rise since from the April low
Gold fell to the lowest level of 2019 during the week of April 22.
Source: CQG
The weekly chart illustrates the move from $1,266 to the most recent peak at $1,559.80 on the continuous futures contract. The rise of 23.2% from the low to the high this year took gold to its highest price since 2013. The next target on the upside stands at $1,602.60 per ounce, the April 2013 high. However, the price at just above the $1,600 level only stands as a minor technical resistance level as gold's ultimate target is the 2011 peak at $1,920.70 per ounce.
Markets rarely move in a straight line
The chart shows that the rally in gold took the slow stochastic, a momentum indicator, and relative strength into overbought territory. On September 5 and 6, gold suffered its most significant correction of the year as the price of the yellow metal dropped by around $50 per ounce. The downdraft came on the back of positive news on trade that caused stocks to rally.
Moreover, Prime Minister Boris Johnson's plan to exit the EU without any deal on October 31 ran into a roadblock as the UK Parliament voted to put a leash on the new leader. Thursday, September 5, was a day when optimism returned to markets and stocks moved appreciably higher. The prices of some industrial commodities, including crude oil and copper, moved to the upside, which caused gold and silver to correct to the downside.
Gold moved from under $1,270 per ounce to the $1,560 level in a little over four months. Silver exploded from under $14.25 to over $19.50 per ounce in just over three months. The trajectory of the moves has been impressive, but markets rarely move in a straight line. December gold and silver futures were at $1,515 and $18.17 per ounce respectively on September 6.
Both will likely fall to lower levels over the coming days and perhaps weeks. A 50% retracement from the April and May lows to last week's highs in both metals would take them to $1,412.90 and $16.8925 per ounce.
The current correction could be the healthiest thing for the gold and silver markets as a cleansing of weak longs would clear the path of new buying that could take both of the precious metals to higher highs in the future. Higher prices could lead to wider daily trading ranges and severe corrective periods. The moment of truth for the next leg of the bull markets will depend on how they react to corrections as we witnessed at the end of last week.
I remain bullish on the prices of both metals and would view a continuation of selling as a golden buying opportunity.
This time could be different
It is virtually impossible to pick the top in a bull market or the bottom during a bearish market.
Human nature in the form of fear and greed leads market participants to buy on rallies and sell on price dips. Everyone loves a bull market and wants to profit by joining a herd of others in the way up.
When prices are falling, market participants often head for exits and liquidate positions at the same time. Many markets take stairs higher and an elevator to the downside, which is why the VIX index tends to appreciate during stock market corrections and collapse as share prices rise.
When it comes to the next leg of the bull markets in gold and silver that began just before the start of the summer of 2019, it is always possible that we have already seen the highs that will stand as resistance levels for an extended period. However, one factor is telling me that this time is different, and both metals will reach much higher lows and move to much higher highs over the coming weeks and months.
Gold is both a currency and a commodity. Gold recently rose to a record high in almost all currencies other than the US dollar and the Swiss franc. The last currency instrument to fall to a new low against gold was the euro at the end of last month. Gold has rallied in all currency terms, which is a commentary of the full faith and credit of the governments around the world that print the legal tender that is the foreign exchange instruments.
Over a decade of historically low interest rates and programs of quantitative easing around the globe pushed rates lower in the short-term and further out along the yield curve. The central banks have been running the currency printing presses overtime to stimulate the economy, and the world has become addicted to accommodative monetary policy.
The US attempted to end the vicious cycle of stimulus from 2015 through 2018. Meanwhile, the pivot in June that led to the first interest rate cut in years and the end of balance sheet normalization in the US amounted to a white flag as the US rejoined the stimulus party.
Central banks hold currencies as reserve assets, and they also hold gold. The monetary authorities can print paper legal tender to their heart's delight, but they cannot print more gold. When it comes to the yellow metal, governments can only buy and sell gold in the market or accumulate from producers who control the extraction process. They cannot print or create more gold. Central banks have been net buyers of the precious metal, with Russia and China leading the way over the past years. The two countries are leading gold producers, and they have been accumulating domestic output like vacuums.
Gold is the oldest means of exchange in the world. For thousands of years, gold has been a store of value and a currency. Long before king dollar, the euro, yen, yuan, ruble, or any other foreign exchange instrument was around, gold was the monarch when it comes to money. Gold is telling us that currencies are falling in value across the board, and that is why this time could be different when it comes to the bull markets in gold and silver.
Gold mining stocks outperform on the upside - Leverage on dips to turbocharge performance
If the price action in gold late last week is only a speedbump on the way to higher prices, gold mining stocks could be the perfect way to turbocharge profits. The mining stocks are not for the faint of heart as they outperform the price action in gold on the upside and underperform during corrective periods.
So far in 2019, the price of gold from a low at $1,266 to a high at $1,559.80 or 23.2%. Over the same period, the VanEck Vectors Gold Miners ETF (GDX) outperformed the yellow metal.
Source: Barchart
GDX moved from a 2019 low at $20.14 to a high at $30.96 or 53.7% as the ETF that holds many of the leading mining stocks delivered over twice the percentage return as the gold futures market. Last week, nearby December gold futures dropped from $1,566.20 to a low at $1,510.70 or 3.54%. Over the same period, GDX fell from $30.96 to $28.81 or 6.94% as the mining stocks underperformed the metal.
If the gold mining stocks are not for the faint of heart, the short-term Direxion Daily Gold Miners Index Bull 3X Shares is only appropriate for the bravest of the bulls. The fund summary for NUGT states:
"The investment seeks daily investment results, before fees and expenses, of 300% of the daily performance of the NYSE Arca Gold Miners Index. The fund invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index is a comprised of publicly traded companies that operate globally in both developed and emerging markets, and are involved primarily in mining for gold and, in mining for silver. It is non-diversified."
Source: Yahoo Finance
NUGT has net assets of $1.6 billion, trades an average of over 10.5 million shares each day, and charges a 1.23% expense ratio. The highly liquid product is only appropriate for short-term trades as the leverage causes time decay for the instrument. However, in a market that moves higher in a straight line, the results can be explosive. During a correction, the value can melt like a snowball in the hot Nevada desert.
Source: Barchart
During the period when gold moved 23.2% higher, and GDX rallied by 53.7%, NUGT took off like a rocket with a rise from $14.06 to a high at $45.10 as it moved over three times higher.
Late last week NUGT fell from $45.10 to $35.60 or 21.1%, highlighting the risk of the leveraged product.
I continue to believe the next target in gold is at $1,600 and that is just a pit stop on its way to new record highs and a move that will take the yellow metal over $2,000 per ounce. On dips, NUGT could be an excellent short-term trading tool, but I'd use tight stops on any long positions. With triple-leveraged instruments, prices will probably hit stops often, but the goal is to capture a period where the product turns in explosive returns as it did from May through early September.
This time could be different because while the dollar is still the king of currencies, it is becoming clear that gold is the monarch of money.
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