With risk assets continuing to wrestle with the reality of higher interest rates, investors have had to look elsewhere for gains. The bond market certainly hasn’t been an option. Rising rates have been hurting fixed-income nearly as bad as stocks. But commodities? They’ve been hopping, with gold and gold stocks seeing large inflows.
Today, we will look at three of the best ways to capitalize on the new trend.
The logic for money flowing into gold is undoubtedly sound. In high inflationary environments, commodities have historically outperformed stocks and bonds. What’s perhaps most curious about the yellow metal this go-around is that it took so long for it to start to rise.
We’ve seen many false starts over the past year, but with last week’s launch, gold is in its best technical position since last May.
Gold stocks are heating up as well. So I’ve scoured the industry’s charts and found three attractive ways to play:
Let’s break down each chart and identify an intelligent options strategy to consider.
Gold Stocks to Buy: Gold Miners ETF (GDX)
I suggest the Gold Miners exchange-traded fund for more conservative traders seeking a diversified route. It counts the largest miners in the world among its top holdings. Though it may carry less volatility than buying an individual miner, it still moves enough to make it interesting. Many look to GDX as a higher beta alternative to purchasing gold outright. Its lower price tag also offers a cheaper contrast to the popular Gold Trust (NYSEARCA:GLD).
Last week’s launch saw heavy volume, signaling big buyers entering the fray. Price blasted through horizontal resistance and the 200-day moving average. The magnitude of the follow-through suggests the new trend could have staying power. For targets, use $36 and $39.
The Trade: Buy the April $34/$39 bull call spread for $1.60.
You’re risking $1.60 to make $3.40 if prices rise to $39 by expiration.
Newmont Mining (NEM)
Most gold stocks boast charts that mirror GDX. But not Newmont Mining. It’s been exhibiting relative strength for months and now sits in a robust intermediate uptrend. The rising 20-day and 50-day moving averages confirm the bulls’ dominance. In addition, Thursday staged a powerful breakout candle, complete with surging volume.
There isn’t much resistance between here and $72.50, so the stock has clear air for continuation. However, the following quarterly report is scheduled for Feb. 24 premarket, so that’s the one variable that could derail the trend.
That said, gold stocks don’t usually move that much following earnings announcements, and the entire industry is in favor right now, so I suspect any weakness following the news would be short-lived anyway.
I like the risk-reward offered by call spreads, so I’m echoing the GDX idea.
The Trade: Buy the April $67.5o/$72.50 bull call spread for $1.70.
You’re risking $1.70 to make $3.30 if prices rise to $72.50.
Gold Stocks to Buy: Barrick Gold (GOLD)
Our final pick perfectly illustrates why I’m unafraid of leaning bullish into NEM earnings. Barrick Gold released rosy numbers last week, sending its share price soaring. The past six trading sessions have seen above-average volume, officially registering as accumulation days.
Given the rally’s strength, prices are overbought in the short run. But that $21 resistance break was legit, and I think any pullback will be a significant buying opportunity over the coming days.
The cheaper price tag makes this gold stock a quality candidate for selling puts.
The Trade: Sell the April $21 put for 50 cents.
Consider this a bet that GOLD stays above $21 for the next 51 days.
On the date of publication, Tyler Craig was LONG GDX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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