There will be some very interesting developments across the market over the next few days and weeks, and maybe the most important will involve the precious metals.
Well, to begin, the dollar has now traced a very bullish continuation pattern called an ‘ascending triangle’. The pattern looks like this –
An ascending triangle is always bullish. It’s an indication that in the battle between bulls and bears, the latter are slowly running out of ammunition, and once their last shots are fired, buying power will overrun them and advance above resistance toward a new high for the move.
The upshot of a pop in the dollar is that it’ll pressure all the commodities, including gold and silver. Commodities are priced in dollars, so currency gains generally push prices lower.
At the same time, a dollar advance will make U.S. equities a more exciting prospect for foreign investors. Not only will stocks setting new all-time highs, but with the dollar on the rise, those same investors will have a chance to pocket an additional gain against their local currency.
This is a chart of the Dow Industrials for the last six months –
While we might get some retesting of the former highs at the 18,000/18,200 level, what lies ahead for the Dow is blue skies and nothing but. RSI and MACD (in green) are far from overbought, despite the nearly parabolic move of the last thirteen trading sessions. Nor do we see any signs of a volume climax (in blue), meaning the move could have a long way to run yet.
Indeed, if stocks start soaring like we here at Normandy expect, that will certainly put pressure on the precious metals. The latest charts of both gold and silver betray some of that worry on the part of PM investors, namely that the most recent bolt higher from New Year’s may now have burnt itself out. Volume in all the principal precious metals ETFs, including GLD, SLV and the Van Eck Miners ETF, GDX have fallen off precipitously in the last four sessions – precisely as the stock market was posting its latest highs.
That’s not to say this half year bullish run for gold has now run out of gas for good – that remains to be seen. But we could see a substantial first correction in this latest leg if the dollar and stock market both strengthen in tandem.
On the other hand, if the precious metals continue to exude signs of manlihoodishness, rising like the virile Studebakers that goldphiles believe them to be, then count us believers, too; we’ll go all in on the gold trade, for there’ll be little doubt the bull is on.
And that’s what makes the next few days/weeks so critical for the gold buggery crowd. When risk turns on, there’s traditionally very little reason to be involved with gold. And that’s where it appears we’re now headed – risk on.
The only question is whether new highs on the Dow accompanied by dollar strength will create a widespread warm and fuzzy feeling that leads all those recent precious metals buyers to sell their holdings for a quick and not insubstantial profit.
Time will tell.
Open ‘em up and close ‘em down!
Before we get to this week’s initiative, we’re going to move on an open trade that we launched back on June 28th. The letter was called Vexation! Gloom! Anguish!, and there we encouraged you to buy one FCX August 10 PUT and two (2) FCX August 12 CALLs for $0.91 and $0.63 respectively. Total debit on the trade was $2.17.
Since then, as you know, FCX broke out of a two months long trading range between roughly $10 and $12 and is now changing hands for $13.05. We therefore believe the time’s ripe to offload this sucker for a hefty profit – just three weeks after we got it on!
The CALLs are trading for $1.63 and the PUTs go for $0.16. Sell them all and you mine a very handsome $3.39. That’s a net gain of $1.22 on $2.17 invested, or 56%.
And that’s just fine.
We turn our attention now to that same precious metals sector we opened with in order to offer what we believe will be an extraordinarily profitable trade for the week.
It goes like this –
First, we’d like to introduce you to perhaps the most volatile index in the ETF universe. It’s the VanEck Vectors Junior Gold Miners ETF (NYSE:GDXJ), and it’s comprised of a great many Vancouver listed companies that may never produce a single ounce of gold or silver.
In any event, the stock has climbed some 160% since bottoming in early January, and if the money flows continue in the precious metals’ direction, could see a whole lot more outsized gains in the months to come.
But that’s a very big ‘if’.
If the scenario we described above (strong equities, higher dollar) takes shape, it’s likely the juniors will swerve in the opposite direction, and tumble back to earth at an even faster rate than the precious metals themselves.
Have a look below at a chart that matches the performance of the junior golds against that of bullion itself, represented by the SPDR Gold Trust ETF (NYSE:GLD).
Two takeaways to offer from this chart:
First, is the sheer overdone nature of the rise in the junior golds, more hope than substance, as far as we can tell, even with the leverage that miners carry against a move in bullion.
The second is the tremendous drop in volume over the last three sessions, something we alluded to earlier and that could spell a formidable decline if it continues.
We’d prefer not to speculate, and therefore our trade is a simple long/short call on the juniors and GLD itself. We’re positing that any decline in GLD will bring about an exponential fall in the juniors, one that will close the gap between the two stocks considerably.
And we’re playing it as follows –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew