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Gold and Gold Stocks Break Out

On Dec. 23 gold broke out of a consolidation to the upside. This was confirmed on Dec. 24 when gold rallied 1% more. As of mid-day trading on Dec. 26 gold is up another 0.7%.

Silver took off to the upside one session sooner, on Dec. 20.

The GDX/GLD ratio, which measures the performance of gold miners versus the gold ETF, had a sharp turn on Dec. 23 and continued higher on Dec. 24 for an upside breakout above short-term resistance. The pattern also occurred in SIL/SLV, which measures silver miner performance versus the silver ETF.

These factors align to indicate a strong breakout in silver and gold. 

gold breakout on daily chart with COT data Dec 26 2019

I have been awaiting a breakout in gold for some time…but just because we have it now doesn’t mean it is clear sailing to the moon. There is a large speculative long position, which can be an issue if those long positions start to unload (sell), and aren’t replaced by equally strong buyers. Speculative longs are shown as the green line at the bottom of the chart above.

Back in the 2009 to 2011 gold rally, speculative interest peaked by mid-2009, and yet the price still rallied for more than a year as the speculative interest fluctuated near highs. So a high speculative position isn’t a problem on its own. Ultimately, it is the price that matters. Right now price is indicating a breakout and rise.

With technical conditions almost ideal, I do expect gold to run higher. That said, if it doesn’t, I will exit all my metal-related trades without hesitation. Near 1480 was the breakout point, so a drop back below 1480, and especially below 1460, would be a warning sign that the market may still chop around for a while longer, or even decline further. This equates to $140 and $138 on the SPDR Gold Trust (GLD) chart.

My long-term target for gold is $1750, about 16% above current levels. That should take less than a year to achieve if this is a legitimate breakout to the upside.

Gold Stocks Pack More Punch

A 16% rise in gold prices isn’t all that impressive that when you consider that some gold stocks will rise 5 or 10 times that amount, and a gold miner’s index, like GDX, will rise 2 to 3 times the amount of gold.

The following chart shows the rise in GDX (candles) as gold (gold line) also rose. GDX has outpaced gold by more than 2:1. Bang-for-buck is in the gold stocks, at least in terms of percentage returns. The flip side is that when the stocks sell-off, they also drop more than gold.

GDX versus gold % performance Dec 26 2019

Looking at individual stocks, we see a large group of stocks with greater than 100% returns over the last year.

gold stocks by 1 year performance dec 26 2019

Sorting by 1-year returns isn’t my favorite way to sort mining stocks. Maybe the price had a big spike early in the year, but has been declining since. This can be seen by looking at the 52-week range column. For example, Eldorado Gold (EGO) moved between $2.52 and $10.09—a big move, but the price is currently well off its highs. If we are taking long positions based on the assumption that gold is going up, we want to trade stocks that are showing relative strength to gold. A relatively strong stock will be trading near its 52-week highs, as gold is only a couple percent away from its 52-week high.

Sorting by 52-week range gives us a new batch of stocks to look at, ones that are relatively strong recently. We can then also look at the 1-year return column to see the stocks that are near 52-week highs AND that have been strong all year.

gold stocks by 52-week range dec 26 2019

AUY, AG, PAAS, CDE, KNT.V, DRD, EQX.TO, FR.TO, WDO.TO, and NG.TO are just a few that stand out in the upper half of this list.

A quick look at Yamana Gold (AUY) shows that that stock just broke higher out of a range, like gold. Except the range in AUY is near highs, while gold’s recent range wasn’t, which shows relative strength in AUY.

AUY daily chart breakout dec 26 2019

First Majestic (AG) and Coeur Minding (CDE) are having similar upside breakouts. Pan American Silver (PAAS) is in a steady uptrend. K92 Mining (KNT.V) and DRDGold (DRD) are pushing to new highs on Dec. 26.

These are just examples. Go through the charts to find setups that suit your strategies and risk/reward requirements. I like it when the price has recently broken out of a tight consolidation because then a stop loss can be placed below the consolidation, often capping risk at 5% to 10% of the capital deployed (any loss should be less than 2% of total account capital). The expected gain from the stock should be at least double the expected risk, and ideally three times or more.

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.

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