Gold and by extension, gold mining stocks, as represented by the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX), remain one of the better positioned assets to be allocated to in this current environment. After some volatility in recent weeks due to the broader market setting, the GDX ETF now looks poised to stage a breakout soon.
The equity market, particularly U.S. equities, have been one heck of a trend following trade over the past decade. While my base case currently doesn’t call for equities to completely fall apart, I do think upside is capped and a wide trading range is in play.
To wit, over the past twelve months it was U.S. Treasuries, orange juice, and gold that were the three major out-performers versus most other things. I don’t think this trend will change, particularly not the bullish trend for gold.
Looking back at the last few weeks of market volatility, particularly the first half of March, gold and gold mining stocks also saw a downdraft. This was not because investors gave up on those bullish trends, but for margin calls, i.e. forced liquidation reasons. Since then both the GLD and the GDX ETF have rebounded sharply. Indeed, on the monthly charts the March volatility barely registered.
The current environment of negative economic growth (economic contraction), low-to-no inflation, and historic monetary debasing (central bank bailout programs and money printing) should be, if history is any guidance, as positive an environment for gold and gold mining stocks as there is.
GDX ETF Stock Charts
On this first chart I plotted the Gold Miners GDX ETF versus the SPDR Gold Shares ETF (NYSEARCA:GLD) (blue line). Note how the blue line has already broken out and that the GDX ETF may soon follow suit.
At the bottom of the chart I added a ratio of GDX vs GLD. Note that this ratio has rallied nicely in recent weeks and may have higher to go, which would be bullish for GDX.
The daily chart of GDX shows that after the sharp rebound in the second half of March and the first half of April, price has consolidated around the $31 area, which has offered well-defined technical resistance. This price consolidation over the past week or so to me, however, looks like a pause to refresh and to soon resume the trend higher.
Active investors and traders wanting go get involved on the long side of gold miners via the GDX ETF would be wise to use wider-than-usual stops and smaller position size, given the volatility of the instrument.
The GDX ETF from here, upon a successful breakout past the $31 area, could see a next upside target around $34 while any daily close below $26 could be used as an initial stop loss signal. Any further bullish reversal upon a stop-out could be used to get back into long positions.
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