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Gold Breaks Out To The Upside

Barchart - Sun Nov 14, 2021

On October 21, in an article on Barchart, I pointed out that gold looked like it was sitting on a launchpad that would take the yellow metal to higher prices. I summed up the piece writing, “It may take more time, but gold’s technical picture is looking bullish, and calls for inflation or worse are compelling reasons to own the precious metal at a price that may look like a bargain over the coming years.” On Monday, November 1, nearby December COMEX gold futures were trading below $1800 per ounce. The price dropped to what turned out to be another higher low at $1758.50 on November 3. Since then, gold has been off to the races, rallying over $100 per ounce by the end of last week on November 12.   

The recent rally in gold may be the beginning of a far greater move as the yellow metal retakes the bullish torch in the commodities asset class. 

The wedge pattern gives way to a significant move

Gold made a series of lower highs since the August 2020 $2063 all-time peak. Starting in March 2021, the precious metal made higher lows, forming a wedge pattern. 

The chart illustrates the pattern suggesting that gold was preparing for a substantial move higher or lower. Last week, gold decided on the upside. 

Gold broke higher on the day of the latest inflation data

The latest consumer price index report from October ignited the gold market. A 6.2% rise in inflation on a year-on-year basis lifted the price as it was the highest reading in three decades. 

The chart highlights the break above the July 14 $1839 high on November 10, the level that broke the pattern of lower highs in the gold futures market. 

Gold has a long history as an inflation barometer. The 6.2% rise in consumer prices was bullish fuel for the gold market over the past week. 

Dips have been buying opportunities for over two decades- Gold was the first commodity to make a high in 2020

Gold reached a significant technical bottom in 1999 when the price traded to a low of $252.50 per ounce. The United Kingdom pushed gold to the low as it auctioned off one-half of its reserves. 

The long-term chart shows that since the 1999 bottom, gold has been trading in a bullish pattern. Corrections and selloffs have been buying opportunities for over two decades. At the $1860 level at the end of last week, the price was a little over $200 below the record high, but more than seven times the 1999 low.

Gold was the first commodity to rise following the 2020 pandemic. Gold’s price was already on the upswing as it had made record highs in euros, pounds, yen, and most other currencies in 2019 and 2020 before rising to over $2000 in US dollar terms for the first time in August 2020. Since then, the commodities asset class has experienced a bullish relay race to higher prices. Grains, energy, industrial metals, animal proteins, soft commodities, stocks, real estate, and cryptocurrencies have taken turns holding the bullish baton as prices have been moving higher. Many rose to multi-year highs, and some, like gold, reached record peaks over the past months. Gold’s technical break to the upside last week could mean the precious metal is now ready to take back the bullish baton and rise to higher highs. 

The GDX would likely outperform gold on the upside on a percentage basis

If gold is back in bullish mode, gold mining stocks are likely to outperform the metal on a percentage basis. Gold mining companies explore for the metal and extract the ore from the earth’s crust. Miners are leveraged to the gold price because they make capital investments to produce the metal. 

The VanEck Gold Miners ETF product (GDX) holds a diversified portfolio of the leading gold mining stocks. The top ten holdings include:

GDX is a highly liquid ETF product with approximately $14.647 billion in assets under management. The average daily volume is over 18.78 million shares. GDX charges a 0.51% management fee. 

GDX may provide leverage to the gold price, but it does not experience the time decay of other turbocharged ETF products as the leading gold miners will remain in business during bullish and bearish cycles in the gold market. December gold futures rose from $1721.10 on September 29 to a high of $1871.40 on November 12 or 8.73%. 

The chart shows that GDX rose from $28.83 to $35.01 per share or 21.44% over the same period. 

The NUGT ETF is GDX on steroids

The Direxion Gold Miners Bull 2X product (NUGT) behaves like GDX on steroids as it tends to produce double the percentage return. NUGT is also highly liquid, with $884.820 million in assets under management. It trades an average of over 2.02 million shares each day and charges a 1.14% management fee. 

Over the same period, NUGT rose from $40.83 to $59.62 per share or 46.02%. NUGT’s leverage comes at a price; time decay. The turbocharged product may outperform gold futures and GDX on the upside, but it will do a lot worse when gold and gold mining stocks correct lower. 

Time will tell if gold is ready to challenge its all-time high at the $2063 level. If the price action in other commodities and rising inflation are signs, the yellow metal could be set to take the bullish baton and continue to make higher highs over the coming weeks and months. 

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.