In 2018 the U.S. Federal Reserve tried to end the quantitative easing cycle but failed miserably. Federal Reserve Chairman Jerome Powell caved in December of that year and flipped from raising rates to aggressively cutting them. This has had a tremendously positive effect on metals stocks, and today we argue facets of that.
2020 has been full of nasty surprises, but some asset classes benefited from them. The tragic events have contributed to the resurgence of metals stocks and Bitcoin prices. Gold and Bitcoin finally overcame old failure levels to silence the doubters. Today we will focus on three tickers within this theme, with a special affinity to the shiny yellow stuff.
The gold bugs owe their profits to central banks for this resurgence. The race to the bottom in currencies is causing a panic rush to own other asset classes. Cash is being murdered by the U.S. Fed and the European Central Bank to name two, so investors seek better repositories of value. Gold is an ancient and premier place to store wealth.
I wrote about this concept a lot in the past even before gold made new highs. I realized that cash was dying, so the thesis was that we needed a better vehicle to store value. The concept is more palpable now. The Fed won’t stop anytime soon because they are unable to measure rising inflation from the traditional metrics. Therefore they have been printing money for a decade and more aggressively now.
The consumer price index still says there is none when we all know it’s there. I have no doubt that I am paying more at store checkout. Sometimes it’s subtle, like the cereal box is smaller. Other times it is blatant, like in the prices of pickup trucks. I remember days when Starbucks coffee was under $2. Now a burnt cup of coffee at the gas station is almost $3. News alert to the Fed, there is a lot of inflation and your measuring stick is broken. Nevertheless, the Fed has the blindfold tight until its hand is forced.
Within the assumption that the central banks are stuck in their QE infinity loop, here are some metals stocks to watch:
- SPDR Gold Shares (NYSEARCA:GLD)
- VanEck Vectors Gold Miners ETF (NYSEARCA:GDX)
- Freeport-McMoRan (NYSE:FCX)
Today we condone owning gold for the very long term, or trading the GDX stock higher. Copper on the other hand may have run its course for now. Investors should book their profits there and in stocks like FCX.
SPDR Gold Shares (GLD)
Gold has long been a fan favorite among humans. We’ve sought it for decades and we go to extremes to mine it. Some own it because they perceive value, but most love its luster. While buying it in its physical shape varies to taste, any way you do it has hurdles. It is expensive, heavy and is dangerous to have laying around the house. Luckily there is the GLD ETF (exchange-traded fund). It is convenient and trades like the real stuff. It tracks the price of gold very well and is very liquid. That’s why I am writing about today.
The GLD topped out in 2011, then fell into a decade-long depression. Finally, this year gold made a new high and took the GLD ETF with it. Though, it took a massive pandemic and extremely aggressive actions from all governments to make that happen.
Today’s environment gooses the price of gold on two fronts. First the Fed and ECB actions are killing cash, so investors seek gold for safety. But at the same time, we have risk equities breaking records. Wall Street is uneasy and they seek gold for safety from that too. Owning gold can be a safe haven in case the stock markets crash.
The GLD chart is now in the hands of the bulls. As long as it stays above $155 per share the trajectory is higher. There will be resting stints, but prices can’t fight the facts. Gold is rare and getting harder to mine. Add to this that people love it and you have a winning combination for the long haul.
VanEck Vectors Gold Miners ETF (GDX)
All the logic that applies to gold also applies to the GDX ETF. Except that it’s an ETF which is a collective of gold miners. Therefore they have intrinsic value and risk from their operations. They, too, went through dark times after the 2011 metals stocks crash. The ones who survived it are now lean and mean. The high prices of gold makes it so that they will be flush with cash for a long while.
If gold prices are higher in the future then the GDX stock will be even higher. This is true for as long as we are in a bullish stock market.
Gold miners have the best of both worlds. They are stocks of companies but they are also tied to the value of gold. If the markets have a bit of a tizzy, then investors buy gold. This will also bring bids into GDX stocks in sympathy. In addition, usually GDX acts like a leveraged ETF. For example on Friday, the GLD was up +0.3% and the GDX outdid it three times. This morning it’s the opposite and the GDX looks roughly twice as bad. So it’s a double edged sword on down market days.
Using the options markets is an even easier way to trade GDX. There, investors can reduce the out-of-pocket expense while leaving the leverage effect intact. Instead of buying GDX shares, savvy investors can sell puts below support and buy calls above. The net effect of this would be having a pair trade with minimal out-of-pocket costs and maximum opportunity.
Using options is daunting to most, but they are worth learning. Meanwhile, the easy way to take a position is to buy GDX shares and be patient. For the long term, right here is fine. For swing traders, it’s better closer to $32 per share. If the bulls lose last week’s support, there could be another 7% leg lower that could unfold.
While I am positive on gold and its derivatives, I am not as keen on copper. This goes against the Wall Street consensus, but I rarely seek their approval for my thesis. Copper has had a great run of late so I am not denying its trend. My contention today is that it should cool off because unlike gold, it’s not a safe haven on corrections. In fact Dr. Copper, as they call it, needs global growth, and we are lacking a lot of that this year. FCX stock is tightly tied to how the price of copper goes. Therefore I fear for its short-term stock price.
Investors who caught FCX stock right in march rode it up 340%. They should book their profits and roll into another theme. There should be a dip coming that the bulls need to reset their next run.
It rallied like this in 2016 before failing at these levels in 2018. The onus is on the bulls to prove that this time it’s different. Until then, I’d lock in the profit and re-engage higher after the breakout — if it comes. This is nothing again the company, but rather an opinion on the price action in the stock. The first two tickers we discussed today have tailwinds from the central banks, this one does not.
The Freeport-McMoRan rally is running into a level that has been in contention since 2004. I expect a fight here, which could stall the rally. If not, then it’s okay to buy the breakout from said zone. Else, It’s best to buy-the-dip 10% to 15% lower. This may upset a few fans, but it’s an unbiased opinion based on technicals. They say that price is truth and in this case the truth is in the charts. Machines are responsible for most of the trading now and they will need proof before they change the algorithms.
No one is hurt taking a profit as long as they can resist the FOMO. Leaving potential money on the proverbial table is part of the skill to be a successful trader. Else we risk overstaying our welcome in great trades.
There is an additional layer of variables from currencies. The rally of late has a lot to do with the weakness of the dollar. That’s why everything denominated in the greenback is rallying in unison. That in itself is another reason for caution.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.