Tuesday’s trading saw classic risk-off behavior. Profit-taking finally hit leading Nasdaq stocks, and small-caps soured. At the same time, precious metals and bonds were jumping. Precious metals stocks, especially gold stocks, looked particularly shiny. Just in case this is the beginning of a more ominous shift, I’m offering up a few tickers that should hold up best during a downturn.
We’re zeroing in on all things gold related for many reasons. First, the yellow metal has held up incredibly well during the past two months of advancing equities. The underlying fundamentals have been strong enough to keep gold afloat while giddy traders have been chasing stocks to the moon. With trillions in stimulus rekindling inflation fears, we’ve seen virtually zero selling pressure in gold during a boom in sexier assets. Second, not only have gold stocks not gone down while risky assets are flying, they’re quick to rise on days like Tuesday when equities are getting whacked.
Who doesn’t want to own an asset that rises when stocks rise or fall! This could change, but for now, I’m celebrating the resilience. The lack of correlation is another compelling reason to like metals. Currently, the 10-week correlation coefficient between gold and the S&P 500 is zero.
That said, here are four of my favorite picks for exposure to the precious metals space.
- SPDR Gold Trust (NYSEARCA:GLD)
- iShares Silver Trust (NYSEARCA:SLV)
- VanEck Vectors Gold Miners ETF (NYSEARCA:GDX)
- Newmont Mining (NYSE:NEM)
Let’s take a closer look at each chart and suggest a smart stock or options trade to capitalize.
Precious Metals Stocks: SPDR Gold Trust (GLD)
Gold prices pushed to a 52-week high yesterday at $1,810 per ounce. It’s not just the high water mark for the year, though. It’s the loftiest level seen since 2011! But it seems like there’s way less fanfare and celebration this go around. Back then, you couldn’t turn on the radio for a single minute without being inundated with gold advertisements. The lack of speculative fervor this time is a bullish omen and suggests the uptrend is built on a firmer foundation.
The price chart of GLD is bullish by any measure. It’s rising above all major moving averages, but the ascent is steady, not parabolic. And that means it’s more sustainable. The next resistance zone is $174 from back in 2012, so that’s the first upside target. After that, the all-time high of $185.85 comes into play.
Implied volatility is extremely low, and far-out-of-the-money calls are trading at higher volatility levels than at-the-money calls. The skew works in favor of bull call spreads.
The Trade: Buy the Oct $170/$180 bull call spread for around $3.
iShares Silver Trust (SLV)
Do you know what’s incredible? If silver were following in gold’s footsteps, then it would be trading around $35 an ounce. But it’s not even close. Perhaps its industrial uses and heightened economic sensitivity are to blame. At $18.65, silver has woefully underperformed. The Street’s most popular silver ETF is similarly priced at $17.01.
Though not as attractive as gold, I could see SLV playing some catch-up if it takes out overhead resistance. The ceiling around $17.20 has kept a lid on the fund for the past year, and is the level to watch. The lack of volatility and the low price tag of SLV make its options premiums too cheap to build trades with. Instead, I’d just buy the shares outright.
A break below the 50-day moving average near $15.82 would sour my outlook. Barring that, stay bullish.
VanEck Vectors Gold Miners ETF (GDX)
If the high price tag of GLD and its snail-like movement turns you off, then try GDX. It’s a basket of the top gold mining stocks and has quite a bit more pep in its step. Compared to GLD’s beta near 0, GDX has a beta of 0.92. At $37.73, it’s also cheap enough to make cash flow strategies like naked puts and covered calls interesting.
The fund rallied 2.42% on Tuesday to a new 52-week high. Its 20-day, 50-day, and 200-day moving average are all rising below in bullish fashion. And, now that its prior peak is out of the way, GDX is cleared for a run $40s. Gold stocks have done a better job of following gold higher than silver, but they’ve still underperformed.
Ideally, GDX will play catch-up in the coming months by pushing closer to its 2011 levels near $60. I’m a fan of any bullish leaning strategy. This bull call spread, in particular, has high potential profits.
The Trade: Buy the Sep $38/$43 call vertical for around $1.50.
Newmont Corporation (NEM)
The final pick moves us away from ETFs and into individual stocks. Gold stocks generally boast bullish charts, but I like the breakout pattern in Newmont. A subtle inverse-head-and-shoulders pattern formed last month, and we’ve just recently begun to turn the trend higher.
Last week’s push above the 50-day moving average and horizontal resistance launch NEM’s new uptrend and sets the stage for a run back to $69.13. I’m sticking with the theme of bull call spreads with this trade idea.
The Trade: Buy the Sep $65/$70 bull call spread for around 1.50.
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