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Trade of the Day: Gold Rush Could Boost GDX 35%

Market Vectors Gold Miners ETF (GDX) — While stocks have been in a bull market for the past five years, gold prices and gold-related stocks have been on the decline. Year to date, GDX is down nearly 30%, and in the past five years, the ETF is off more than 75%.

However, in the month of August, GDX gained 2.6% as stocks sold off on global growth concerns. Gold is a traditional hedge during a bear market, and both India and China are large purchasers of the metal.

Larry McDonald of Societe Generale said he expects to see gold prices rise 20% to 30% from current levels thanks in part to the Federal Reserve’s reluctance to strengthen the U.S. dollar. If the Fed were to raise interest rates by a large amount (over 25 basis points), then gold and GDX may be negatively impacted. However, Fed Chair Janet Yellen has emphasized a continuation of “accommodation,” and that policy favors gold miners.

GDX is in a bear market but is showing signs of stabilization. Active buying is observed with a number of buying days registering above-average volume. A classic diamond pattern is forming on the chart, which is often seen at both market tops and bottoms. Recent buying has threatened to break GDX above its 50-day moving average at $14.03. Also note that at the recent low my proprietary indicator, the Collins-Bollinger Reversal (CBR), registered a buy signal.

Buy GDX at $13.25 for a four-month trade to its breakdown point at $18 for a potential gain of over 35%. The ETF also throws off a current annual yield of 0.9%. A stop-loss order should be entered just below the recent low of $12.62.

GDX Chart
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Chart Key

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