The long and drawn-out bear market in gold prices is finally over. With Thursday’s 2% jump in the yellow metal, prices finally vaulted above resistance and turned the daily trend higher. The optimism rippled through gold stocks, resulting in outsized gains across the board.
Two movements aided gold’s turnabout. First, interest rates, which have been scorching hot, finally cooled. The 10-year yield tumbled 6.5% after breaking support for the first time this year. Lower rates decrease the opportunity cost of owning gold.
Second, the U.S. dollar has been sliding for two weeks and is now testing a key support zone at the 50-day moving average. The anticipation of a support break and yet more weakness is likely adding wind to gold’s sails.
If you think the resurgence in gold will continue, then there are many ways to profit. Here are three of the most obvious instruments to use:
- SPDR Gold Trust (NYSEARCA:GLD)
- VanEck Vectors Gold Miners ETF (NYSEARCA:GDX)
- Barrick Gold (NYSE:GOLD)
All three sport fresh uptrends worth buying. Let’s build out trades on each.
3 Ways to Profit in Gold Stocks: SPDR Gold Trust (GLD)
The most obvious way to capitalize on a new gold bull market is to buy the metal directly via exchange-traded funds. And none is more popular than the SPDR Gold Trust. It’s recently been averaging more than 8 million shares a day and has great options liquidity. Thursday’s gold rush pushed GLD above its 50-day moving average and sets the stage for a run back to the 200-day near $174.
Implied volatility is in the basement at the 7th percentile of its one-year range. The low reading suggests options are cheap, and long premium plays are the smarter choice. That points to either long calls or a bull call spread. I prefer the latter.
The Trade: Buy the July $165/$175 bull call for $3.30.
The risk is limited to your initial $330 cost and will be lost if GLD sits below $165 at expiration. The potential reward is $6.70 and will be captured if GLD can rise past $175 by expiration.
VanEck Vectors Gold Miners ETF (GDX)
For a higher beta alternative to GLD, consider GDX. It tracks a basket of gold mining companies, offering a diversified bet on stocks that have historically moved in lockstep with gold prices. At $36, GDX offers a far cheaper price tag than GLD, opening the door to other options strategies like covered calls or naked puts. Like GLD, GDX also offers fantastic liquidity. Virtually all of its listed options trade with penny-wide bid-ask spreads.
From a charting perspective, GDX has a more mature reversal than gold prices. It cleared the 50-day moving average last month and built a high base pattern that just completed with Thursday’s breakout. The 20-day moving average is also now trending higher above the 50-day. Like GLD, I like using the 200-day moving average as the next upside target. It sits at $37.28.
Because of GDX’s chart’s somewhat choppy nature, I want to build a trade that profits from time decay and further bullish movement. Toss in the low implied volatility, and that makes a poor boy’s covered call an easy choice.
The Trade: Buy the June $34 call while selling the May $37.50 call for a net debit of $2.20.
The risk is limited to $2.20, and I would shoot for a profit of $1.
Barrick Gold (GOLD)
The third and final choice is to buy gold stocks directly. This offers the most potential upside because it lacks the diversification that went along with using GDX. In surveying the top holdings of GDX, Barrick Gold stands out as one of the cleaner price charts. Indeed, GOLD’s movements are mirroring GDX with a recent climb above the 50-day.
Thursday’s breakout saw heavy volume confirm institutions were returning to the stock. While it may not experience a straight shot higher, the path of least resistance has undoubtedly shifted from down to up.
If you want a cheap bet that carries a higher probability of profit, then consider another poor boy’s covered call.
The Trade: Buy the June $20 call while selling the May $23 call for a net debit of $1.85.
The max loss is $1.87, and you should be able to capture a gain of at least 90 cents if GOLD works its way above $23 over the next month.
On the date of publication, Tyler Craig held a LONG position in GDX.
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