Gold: Bear Market Rally, or New Bull Market?

by JDH on March 5, 2016

Interesting question.  Allow me to present both sides, using the chart of the price of gold over the last six years as our point of reference (click to enlarge the chart).

Gold-6-years-March4-2016

The peak at just over $1,900 occurred in 2011, and the bottom in the $1,045 appeared in December, 2015 (with a very significant “double bottom” occurring on December 4 and December 18, both at the $1,045 level).  Since then gold has rocketed up to close on Friday at $1,260.  Was the double bottom in December the final test of the lows, or does that level require testing again?  My guess: that was the low, but that does not necessarily imply that a new gold bull market has commenced.

As the chart shows, using the peaks in 2011 and 2012 to draw the downtrend line, the bear market cannot be officially declared dead until we are over $1,450, and we ain’t there yet.  So, for now, we can not rule out the possibility that this is a rally in a bear market, a “bear trap”.  As the chart indicates, the next stop is the first Fibonacci level of around $1,380, so if you want a target, that would be it.

Gold 3 years - March4-2016

A shorter term chart (since the beginning of 2014) shows a similar picture.  The next stop on the gold train is around the $1,394 level, corresponding to the spring 2014 intermediate top.  Using this short term chart the downtrend line is broken, and it’s all systems go.

Just for fun, let’s zoom out, just a bit, and consider a five year chart, with the top drawn across the obvious double top at just under $1,800 at the beginning and end of 2012:

Gold-5years-March4-2016

With this view $1,331 becomes the next target, with $1,419 and $1,508 appearing as the next targets.

Fine, enough with the pretty charts, what’s the point?

The point, it would appear, is that gold has some room to run, which leads to the logical question: how do you play it?

The logical answer is to buy gold stocks, such as blue chips like RGL.TO – Royal Gold Inc. (which in hindsight was a fantastic buy at $35, if only I had had the guts to pull the trigger).

RGL-March4-2016

It would appear that there will be some resistance around $67, so it may be prudent to do some covered writing at this level, and put in buy orders closer to the $60 level.

Want a better looking blue chip?  FNV.TO – Franco-Nevada Corp..

FNV-March4-2016

This is a beautiful, long term uptrend, and it is already made new highs this year, so there is minimal overhead resistance.  There aren’t a lot of people waiting to “get out even”, because everyone is sitting on a profit.  I like the RSI at 55, implying the pullback may be over, so bids at $75 should be profitable in the medium term.

Perhaps you want to take on more risk?

No problem.

Check out NUGT – Direxion Daily Gold Miners Bull 3x Shares, which aims to leverage 3 to 1 the daily price movement in gold miners.  On Friday alone it traded in a range of $59.19 to $71.46.

NUGT-March4-2016

That’s a 20% spread in one day.  Pick the tops and bottoms correctly and you can make a lot of money.  Do it wrong and you can get crushed.  That’s leverage.

Next stop on this chart is $80, or a lot lower depending on gold’s movements.  Here’s how I play it:

I buy on down days, and then double down if it’s down again.

So if I want to own 1,000 shares, I may buy 300 today, 300 tomorrow if it drops, and the final 600 if it drops again.  Then, when I’m up 10%, or whatever, I start selling.  It’s risky, so don’t use your retirement savings or you may get killed.

Two final thoughts:

First, silver is looking good, and may play catch up and outperform gold in the near term.

SLW-March4-2016

Silver Wheaton is on a roll, blasting through some key resistance levels before pulling back.

A pull back below $21 is possible, but it would appear that $24, and perhaps $29 are in the future.

Looking good.

Final thought: don’t ignore the juniors.

We are early in what appears to be a resumption of the gold bull market, so the blue chips will get the initial investments by the big investors.  But, as those shares become pricey, the next stop is the juniors.  There are lots of examples, but here’s one:

ICG.V – Integra Gold Corp.

ICG-March4-2016

Integra has a good story, and is a prime take over candidate.  Technically it has finally exceeded it’s previous high from early 2014, so while a pullback into the 37 cent range is possible, longer term it looks great.

So, the prudent approach is to spread it around.  Put some of your gold money in the blue chips, and some riskier capital in NUGT and the juniors.

Have fun.  We’ve waited a long time for this.  Enjoy, and see you next week.