Well, so much for gold’s 2011 record high; We just smashed through it like a wrecking ball. In fact, the same goes for the psychologically significant $2,000 mark. And as the momentum feeds on itself, now is a perfect time to consider how to profit with precious metals stocks.
The bullish narrative for gold prices is simple. Government spending has risen to astronomic levels, with no slowdown in sight. The U.S. Dollar is plunging and just hit a two-year low.
Also, interest rates continue to flirt with zero — making the opportunity cost of owning precious metals virtually nil.
Fundamental arguments aside, the helium-filled price of gold tells you everything you need to know about how traders feel regarding the threat of inflation. There are many avenues available from profiting on gold’s booming bull market, but here are three of my favorite vehicles:
That said, let’s take a closer look at their price charts and go from there.
Ways to Profit From Precious Metals Stocks: SPDR Gold Trust (GLD)
SPDR Gold Shares is the Street’s go-to fund for gold exposure. And because it owns gold bullion, it perfectly mirrors the price of the yellow metal. However, it trades at roughly one-tenth the price of gold futures. For example, the futures price is trading near $2,000, but GLD is closing in on $200.
Volume has exploded in recent weeks, confirming the masses are piling in. There’s no denying GLD stock is overbought, but good luck picking the top of this move. Gold’s unwillingness to pull back, or even pause for a few days, has put spectators in a pickle. They’re either forced to chase or completely miss out.
In situations like this, I have a few preferred techniques. First, you could scale-in with a partial position. That way, if prices retreat, you can buy more at a discount. Secondly, you could enter with a full position and use a tight stop. Therefore, if prices finally falter, you exit quickly. Third, you can use a low-cost bull call spread to keep the risk minimal.
With all of that in mind, here’s one to consider:
The Trade: Buy the Sept. $195/$200 bull call for $1.55.
iShares Silver Trust (SLV)
A second popular precious metals stocks play is to use silver. Many consider him gold’s wild cousin. He boasts a higher beta, and thus, more volatility. It also carries a much lower price tag, though, as SLV stock currently trades for around $25.
It’s long lagged gold’s ascension, but we’ve seen SLV stock make up for lost time over the past month. Ever since breaking $18, the fund has gone vertical. That said, all of the suggested trading techniques for GLD apply to SLV as well. The one tactic I’d add is using naked puts if you want to get paid to buy shares at a discount.
The Trade: Sell the Sept. $23 puts around $1.10.
Ways to Profit From Precious Metals Stocks: Yamana Gold (AUY)
Yamana Gold rounds out our pick of precious metals stocks. And instead of playing gold and silver directly, we could build bullish trades on gold miners. At under $7, AUY stock offers a really cheap route for betting on continued strength. Its price trend is rising, complete with ascending 20-day, 50-day and 200-day moving averages.
Moreover, momentum increased on its last advance, along with a surge in trading volumes. Last week saw a shallow pullback form providing a lower-risk entry. Spectators accepted the invitation, and have been piling in over the past few trading sessions. In fact, AUY stock already made a push for $7 on Wednesday.
So, given its cheap price tag, I don’t think there’s any need to complicate matters with an options trade. Buy the stock outright with a stop under the $6.20 pivot low.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! At the time of this writing, Tyler held bullish positions in GLD and SLV.