A new golden age is upon us. But don’t take my word for it. Go look at a chart of gold prices. The yellow metal is en fuego right now and it just tagged a six-year high. Momentum chasers are flocking to gold stocks for the first time in ages.
Traders seeking sweet-sounding explanations for gold’s sudden emergence have multiple catalysts to cling to. Falling interest rates, a weakening dollar and deteriorating economic data are all developments that have likely spurred demand for the shiny stuff.
The ten-year yield fell to a two-and-a-half year low this week, briefly breaching 2%. Lower rates reduce the opportunity cost of gold ownership. They also reflect lower growth expectations for the economy, which is another reason why buyers are adding gold to their portfolios. If stocks start to suffer due to softening economic conditions, owning precious metals will provide diversification.
Let’s look at three ways to profit from further gold strength.
Gold Trust (GLD)
For our first pick, we’re going for the jugular. No need to muddy the waters with derivative plays that should go up alongside gold prices. Just buy gold directly. The simplest route for everyday investors is to use the Gold Trust (NYSEARCA:GLD), which is Wall Street’s go-to gold exchange-traded fund. The fund owns physical gold and thus moves in lockstep with gold prices.
Its price is roughly 1/10th the value of gold. For example, gold futures currently carry a price tag of $1,400, and GLD sits at $133. It offers ample liquidity and a low-cost avenue for dollar cost averaging if you want to buy in small increments over time. Aside from the price difference, the chart of GLD is the identical twin to the futures contract.
A monthly view reveals what all the excitement is about. GLD is breaching six-year resistance and completing an epic long-term basing pattern. If the breakout sticks, this could set the stage for a long-lasting bull market.
Buy GLD with a stop below this month’s low of $123.90.
Gold Miners ETF (GDX)
Now we come to the derivative ideas. If you’re not buying gold directly, then you’re looking to buy an asset that lies in precious metals’ sphere of influence. Take the Gold Miners ETF (NYSEARCA:GDX), for example. The fund holds 44 of the largest gold mining companies on the planet, thus offering a diversified way to play the space.
It boasts a powerful correlation to gold prices, as shown in the accompanying chart. The primary difference between the two (aside from the price) is volatility. Think of GDX as high beta gold. Since bottoming last month at $20.14, GDX has rallied 25%. GLD, on the other hand, is only up 11%.
Implied volatility has rallied alongside price, so GDX options are officially pumped and ripe for the selling. If you’re willing to bet that GDX sits above $24 in six weeks, then sell the Aug $24 put for 55 cents.
Barrick Gold (GOLD)
The third and final avenue for playing in the gold mine is to pick individual gold mining companies. While the risk is higher, so too is the reward. Barrick Gold (NYSE:GOLD) is the second-largest holding in GDX and it boasts one of the best-looking stocks in the industry. While GDX has rallied 25% off the lows, GOLD stock is up 34%.
Just remember the higher volatility slices both ways. If precious metals suddenly fall out of favor, stocks like GOLD will fall further much harder than the underlying commodity.
This week’s mild bout of profit-taking in metals is providing a pullback in GOLD shares. Given the monster volume accompanying this month’s breakout, dips like this have a high chance of being bought. A pullback toward $14 or $15 could be in the cards, but I’d be surprised if sellers can push us below that.
Wait for signs that the retreat is ending, then buy GOLD stock.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.