Gold is Vulnerable and so are Gold Miners

The market hasn’t even opened yet, but stocks have already bounced back and forth on good an bad news.

Investors were concerned about the stimulus negotiations in Congress after the Republican proposal failed a procedural vote in the Senate. The Democratic leaders feel the bill does too much to support corporations and not enough to help individual workers.

But then the Federal Reserve announced more aggressive quantitative easing measures. The Fed is suspending its previous guidance and says it will buy “Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.”

In other words, the previous purchase limits of $500 billion of Treasury securities and $200 billion of mortgage backed securities no longer apply.

Futures started to rise after that announcement, and if the market opens higher, it will give traders a perfect opportunity to set up a bearish trade on the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).

Gold Prices are Slipping

If you look at the chart below, you can see that gold, a safe-haven asset, hasn’t been immune to the selling in the market.

Daily Chart of  Gold Prices — Chart Source: TradingView

Though it started to recover at the end of last week, gold prices have been just as vulnerable to COVID-19 as the rest of the market. This asset always seems to turn lower when a crisis reaches its worst point because investors need cash to cover their short positions.

The lower the price of gold heads, the lower gold miners will go. And it’s worth remembering just how hard this selling has hit the market. Almost no stock has escaped unscathed, and GDXJ is no exception.

Swinging Wildly

Even as the price of gold jumped last week, GDXJ fell. After all, why put money into mining companies when you can put money directly into the asset they harvest?

Some investors may think its time to “buy the dip,” but I don’t believe the market has found a bottom. The chart below makes it look as though GDXJ has found short-term support at around $20, but it has gone lower before — as low as $17 per share in early 2016.

Daily Chart of VanEck Vectors Junior Gold Miners ETF (GDXJ) — Chart Source: TradingView

The chart also shows just how volatile this ETF has been this past week.

If the market bounces this morning, it will give traders a chance to buy a bearish put option on GDXJ. If the market makes another move lower, its better to be prepared with a cheap insurance play.

Buy to open the VanEck Vectors Junior Gold Miners ETF (GDXJ) May 15th $20 Puts (GDXJ200515P00020000) at $2.30 or lower.

InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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