A new bull was born in gold prices late last year. And since then fundamental and technical forces have combined to drive the yellow metal higher. Spectators looking to get in on the action in gold stocks will be happy to know a pullback is forming to provide lower risk entries.
Though the original spark for the gold bull market’s birth was the desire for safety amid a crashing stock market, the fuel that should sustain it hails from a different corner of the financial sphere — monetary policy. Over the past few months, the Federal Reserve has pulled an about-face, from hawkish to dovish. Talk of future rate hikes has given way to reassurances that Jerome Powell and crew will be patient and take actions supportive of asset prices if necessary.
Some even think their next move may end up being a rate cut.
With interest rate projections ratcheting lower and inflation expectations notching higher, investors are betting that the backdrop for gold is now warming.
Today we’ll look at three ways to capitalize on higher prices in the gold mine.
VanEck Vectors Gold Miners ETF (GDX)
Gold stocks are reveling in their newfound bullishness. Since bottoming last September, the Gold Miners ETF (NYSEARCA:GDX), which tracks a basket of the top gold mining stocks, has gained 29%. Along the way it climbed back above the 20-day, 50-day, and 200-day moving averages, confirming buyers have wrested control of the trend on all but the longest of time frames.
Dips have proved valuable buying opportunities along the way which is why traders should be eyeing this week’s retreat with interest. With today’s descent, GDX stock is working on its sixth down day in a row. If past is prologue, bulls should emerge to halt the decline within the next few trading sessions.
Buy the April $22 calls for around 95 cents.
Gold Miners Bull 3X Direxion ETF (NUGT)
If you’re looking for a higher octane way to bank on further upside in gold prices, then leveraged ETFs are beckoning. In sticking with the theme of buying gold mining stocks, you could use the Gold Miners Bull 3x Direxion ETF (NYSEARCA:NUGT) which aims to move 300% of the NYSEArca Gold Miners Index over a single session.
Though its performance varies significantly over weeks and months, on a daily basis, NUGT moves close to 3x what GDX does. For example, at the time of this writing, GDX is down 0.54%, and NUGT is down 1.59%.
The posture of NUGT is similar to GDX. It rallied back above all major moving averages this year and is in the midst of a six-day pullback. Because of its more volatile nature, the options listed on NUGT carry juicier premiums than the non-leveraged gold miners ETF. As such, the potential payout for strategies like covered calls and naked puts are attractive.
If you think NUGT will end up above $17 at April expiration, then sell the Apr $17 put for 85 cents.
Newmont Mining (NEM)
The previous two ideas offered diversified ways of gaming a basket of gold stocks. My final selection involves picking a specific gold stock — Newmont Mining (NYSE:NEM). It boasts one of the best setups of its peers and is rallying today, despite the drop in gold prices.
If the relative strength persists, a bullish trade on NEM could deliver sector-beating returns during the next upswing. Implied volatility for NEM stock options sits at 27% or the 38th percentile of its one-year range. That means premiums are juiced enough to make short option strategies interesting.
Sell the April $33 puts for 77 cents.
As of this writing, Tyler Craig didn’t hold a position in any of the aforementioned securities. Check out his recently released Bear Market Survival Guide to learn how to defend your portfolio against market volatility.