Gold and Gold Stock Outlook as the Price Consolidates Awaiting Next Move
Gold is in an uptrend. It started out the year with a flurry to the upside, but since Jan. 9 has traded sideways in a relatively tight range. Silver experienced the same early-in-the-year rally but has drifted lower since.
From a trading perspective, a tight consolidation—like the one occurring in gold—is favorable. While there is a potential for a false breakout or two, these types of patterns tend to provide high reward:risk trading opportunities.
Given the uptrend, an upside breakout would align with the trend.
I don’t trade gold directly very often; I prefer to trade the gold mining stocks. And here is where I have a concern.
During periods where gold is performing very strongly, the mining stocks typically outperform gold, leading the way higher. That isn’t happening right now. The mining stocks, as represented by the Gold Miners ETF (GDX), could get stronger on a gold advance, but as of right now most mining stocks are below their September peak, while gold is above (currently at) its September peak.
The two charts below show gold (top) and the ratio of GDX to GLD (the gold ETF). Notice that during the major advances in gold the ratio moved aggressively higher. But in early 2020 gold moved up and the ratio plunged, showing that investors weren’t interested in the gold mining stocks, even as gold was rallying. That is a reason to be cautious in this sector as a whole. If the stocks don’t rally in the good times, they are more likely to get hammered lower in mediocre or poor times.
That said, gold is still in a good looking position. I have a longer-term target of $1750.
I am still willing to take some stock positions in the miners, but only in the strongest ones. The ones that are showing relative strength.
The Strongest Gold Stocks
There are a couple of easy ways to search for stocks that are performing strongly. I use StockRover.com and have a list of metal and mining stocks with a few simple criteria.
This produces about 127 stocks. The volume criteria is low; adjust if needed or be sure to check the volume before taking a trade.
The results can then be sorted by performance.
You could sort by 1-year return, 3-month return, or proximity to their 52-week high. All these methods would sort the gold list, putting the strongest stocks at the top. These are the stocks I am most interested in. Even though they have rallied the most, these are the stocks that people are most interested in, have been buying, and have held up the best even during the tougher period in gold.
Here are the stocks sorted by 1-year performance.
A quick glance at the gold chart tells us that gold is up over the last 3-months. Therefore, stocks with negative or minimal returns over the last 3 months have been lagging behind gold. They may still present a possible trading opportunity, but these stocks have not been as strong recently.
We can also look at their 52-week range. Maybe the stock was really strong over the last year, but it is currently trading in the middle of its 52-week range. That instantly tells us that the stock isn’t as strong as it once was.
Therefore, look for the top 1-year performers that are also near their 52-week high, and that have a good 3-month return as well.
The list can also be sorted by 52-week range. This will put all the stocks closest to their highs at the top of the list. These are the stocks putting their best foot forward right now, as they are at their highest price (or close to it) in the last 52-weeks.
A lot of the names on the list end up being the same. It’s just a different way of looking at it. One way isn’t necessarily better than the other.
Just because a stock is on the list doesn’t mean it should be traded. Look at the charts of the stocks to see if it matches a strategy that you use.
To save time, I typically look at the top 15 to 20 stocks on each list (sorted via the two methods above). You only need to check each stock once, so if you get the same stock on both lists, just move onto the next stock on the list.
I like stocks that are consolidating near their highs. NGT.TO (NEM on the US exchange) is an example of this. Regardless of what gold goes, if this stock breaks above its recent high at 57.55 I would consider a long (buy) with a stop loss near $56. Consider the use of a trailing stop loss, or utilize one of the exit methods discussed here.
This is just one example, as it was one of the first stocks listed on the 52-week range list. Scan through the top 15 or 20 stocks and find the trades that suit your strategies.
Gold is still looking good, but it is important to be very selective with trades. A lot of the mining stocks aren’t acting very strongly right now, but a handful still are. I prefer to be in those strong ones when (if) they break out to the upside. Gold may follow, it may not…and that why is why we use a stop loss and always manage our position size to control risk.
Given that all the factors aren’t aligning right now, and there is some reason for caution, I start each trade with a smaller position than usual. I then add to the position if it acts favorably.
By Cory Mitchell, CMT, join me on Twitter @corymitc.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, or even more than you deposited if using leverage.