As I was preparing my weekly update on the price of gold and precious metals mining stocks on Monday, I noted some hints that the answer may finally be yes.
It may not be time to jump back in with both feet, but dipping a toe in the water now looks less risky and more promising than it has in many months.
In August it looked as though the price of gold was going to plunge through the extensions of the lower boundaries of the 4 year cycle and long term trends in the 1170 area. But miraculously, there was a rebound. Support bent, but didn’t break. Buying and short covering showed up.
After the rebound, the price slid back to test the lower boundaries of the two longer term cycles.
Then this Monday, the 6 month cycle moving average upticked.
Last week and so far this week, the price of gold has also traded above the 9-12 month cycle moving average. These are both signs that those cycles have bottomed, and are poised to turn up. Gold must now close above the high of the range of the past 4 weeks of 1215 to confirm a tradable upturn in those two cycles. If it does, it could be off to the races.
However, if it doesn’t clear 1215, then there’s still a big risk. That risk is that the August low will not hold, and an even more ferocious bear decline may follow a sideways move that can’t separate to the upside.
Urgent: If You Want a Shot at Recovering from This Catastrophe, You Need to Act Now
The Long-Term Gold Charts Reiterate the Short Term View
Taking the very long-term view, we still arrive at the same place.
From this long-term chart, we can see that the price of gold is sitting squarely at an important support level. If it breaks, we could quickly be looking at 1133, or worse. The 4 year cycle momentum indicator is not promising.
On the other hand, if gold hangs around the 1200 level and ends September above the downtrend line now around 1230, or if it ends October above 1210, it would have clearance to run back to 1369.
We also see a massive consolidation pattern since 2013 that could break either way. At the same time, the symmetry of the pattern suggests that it’s now or never. One way or the other, a move is likely.
If You’re a Gold Bull, There Are 3 Ways To Play This
The weekly chart looks promising, and a weekly close above 1215 would be a trigger to expect a bullish move.
- Buy Calls on the GLD Gold ETF
One way to play such a move would be to buy calls on the GLD gold ETF. The price moves in the ETF closely approximate those of the metal.
While I can’t predict at what price the option would trade at that time, it should move nearly point for point with GLD, thereby providing significant leverage on a small amount of risked capital. A small position could yield big profits. The current level on GLD that corresponds with the 1215 level on gold is 114.80. So if gold has a weekly close above 1215, we could buy the GLD 115 calls, with approximately 1 month remaining until expiration, to participate in any rally.
- Buy Gold Mining Stocks
For even more thrills and chills, we could look at the gold mining stocks, which themselves are highly leveraged and provide much greater bang for your buck than an investment in gold itself.
At the same time, their downside potential is also greater, and therefore they are much riskier than buying the metal. I like the idea of using options to limit risk.
- Buy Calls on the GDX ETF
To play the miners, and capture the upside potential with limited downside risk, we could buy calls on the GDX ETF.
The GDX is an ETF that holds a basket of gold mining stocks. It has taken a brutal beating since mid-July, dropping from a high of 22.93 to as low as 17.28 last week. Late Thursday it was trading at 18.88.
We can see on the weekly chart that the decline has reached the lower extension of channel support for the nominal 18 month cycle in dark blue. It’s not clear that the decline has ended, but this level would be a lower risk entry point, particularly if the GDX ends this week above the 6 month cycle moving average, now around 18. A close above that level would have a good shot at popping back to 20, or more.
Conversely, the downside risk in the short run would appear to be to around 16 or 17. If you want to bottom fish, this would be an opportune risk reward setup.
I’d further tilt the risk reward potential in our favor by buying a limited amount of calls at the 18 strike price to expire in around a month. I would do that if it looked reasonably certain that the GDX would end the week above 18.
The 18 calls expiring on October 19 were trading at 1.11 late on Thursday, September 20. If the GDX reaches 20 at any time before October 19, those calls would sell for 2.00 or more depending on the time left until expiration. If GDX moves above 20, the calls should then move point for point with the GDX, providing tremendous positive leverage.
In either case, when you buy calls, your risk is the amount invested. Our goal is to capture gains with limited risk, not to go broke if our timing is off. So we want to limit our exposure to a tiny percentage of our total portfolio. This is an outright bet, and we should not bet more than we’d be willing to lose.