The price of gold has been trending lower for the last four months, but there are signs that the metal is poised for a rally.
First, the weekly chart of gold shows that the 10-week RSI and the weekly stochastic readings both reached oversold territory in recent weeks. This has only happened, where both hit oversold territory readings at the same time, on two other occasions in the last three years.
In both of those cases, gold rallied in the months that followed. We see in the fourth quarter of 2015 that both oscillators were in oversold territory and the price was down under $1,100. By the following July, gold was over $1,350 an ounce.
In late 2016, we see both oscillators in oversold territory once again and the price of gold was between $1,125 and $1,150 an ounce. By April 2017, the price was flirting with the $1,300 level.
There were a couple of other instances in the past five years, and in both of those instances, gold rallied as well.
Another factor that makes me believe gold is poised to rally is the sentiment toward the metal. The most recent Commitment of Traders report shows that the large speculator group was net short 3,063 contracts last week. It was the third straight week that the group was net short. The last time large speculators were net short was in December 2001.
KL Stock Shows Better Fundamentals Than Most Others
Looking at ways to play a rally in the price of gold, I looked at exchange-traded funds (ETFs) and individual stocks. I found one stock in particular that has better fundamentals than most other gold-related companies. The company is Kirkland Lake Gold (NYSE:KL). Despite the downward trend in gold, KL stock has seen maintained its upward trajectory.
Let’s look at the fundamentals before we look at the chart. The Toronto-based company has seen its earnings grow by an average of 213%-per-year over the last three years. KL earnings grew by 58% in the most recent quarter and analysts expect the company to grow earnings by 50% this year. Sales have grown by an average of 86%-per-year over the past three years and they grew by 13% in the most recent quarter.
KL stock boasts a return on equity of 15.1%, a profit margin of 27.6% and an operating margin of 33.8%.
Turning our attention to the chart, we can see that Kirkland Lake stock has been trending higher since early 2016. The rally accelerated at the beginning of 2017 and a trendline has formed that connects the lows from the last two years.
Stock in Kirkland Lake has pulled back over the last month or so and that has brought it down to the trendline. We also see that the weekly stochastic readings have reached oversold territory for the first time since late 2016. KL stock rallied 78% in less than two months after hitting oversold territory.
I am not expecting that kind of gain this time around, but I can see Kirkland Lake stock gaining 50% over the next six months or so.
If you are looking to take advantage of a rally in gold, KL is positioned to move higher. And as KL stock has proven over the last four months, it can move higher, even if gold doesn’t rally.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.