The Reuters/Jefferies CRB Index, which tracks a diverse group of commodities, has been in an uptrend since the start of the year, lead largely by the strong performance in the energy sector. Gold and silver are now following suit, with a sharp rally higher starting in July. Here are four stock and ETF plays you can use to take part.
Relative to the January 2014 low at $114.46, the recent June low was much higher at $119.42 in the SPDR Gold Trust Shares ETF (GLD), indicating accumulation. The subsequent rally through resistance in the $126 to $127 region signals a broader upside move could be underway. There is little resistance until $131.50 to $132.50, the region of a downward sloping trendline, which extends back to the summer of 2013. If the price moves about that trendline the longer-term uptrend is likely commencing, which could put the price into the $154 area. Waiting for a pullback toward $124.50 is ideal, but may not occur due to the upside momentum. Stops can be placed below $123 for swing trades and below $119.40 for longer-term traders willing to give the trade more room based on the long-term potential.
The Market Vectors Gold Miners ETF (GDX) has a tendency to lead gold prices. The bottom in GDX occurred in late May, a couple days before the GLD bottom in early June. GDX has been slightly outperforming GLD over most time frames in the last year, indicating the gold rally may have strength behind it. Since GDX is relatively strong compared to gold – especially over the last month – it may provide better profit potential. GDX is about two-to-three times more volatile than GLD.
GDX is already approaching its resistance area between $27 and $27.50; if it moves though the resistance area it is a good indication that GLD will do the same. Waiting for a pullback to $24 would be ideal, but may not occur. Stops can go below $23.60, or below $22 for those who want to provide more room for the long-term potential. The long-term target is $36 if the ETF can clear resistance.
The iShares Silver Trust (SLV) has formed a strong base around $18, which has been tested multiple times. The June rally has broken through a downward sloping trendline (triangle pattern) extending back to the summer of 2013 – a long-term bullish signal. The breakout signals a target of $25.25. An entry near the trendline break at $19.50 provides a much better risk-reward than the current price, but strong upside momentum may not provide that opportunity. Stops can go below $19.25, or longer-term traders can place it below $18 if anticipating a long-term uptrend.
Silver Wheaton Corp. (SLW) is an alternative way to trade silver. The stock has a 1.1% dividend yield, which compensates investors for holding the stock, whereas SLV has a 0.5% expense ratio. Silver Wheaton is outperforming SLV by about two-fold (percentage terms) over the last several months. It has a tendency to lead silver prices, and the relative strength indicates that the rally has some strong hands behind it. The price needs to close above $25.80 to break above its triangle pattern, giving a long-term target of $36.8. Below $22.40 is the nearest spot for a stop loss, or $20 for those willing to give the trade more room in anticipation of a long-term upside breakout. (For related reading, see: Gold and Silver ETF Alternatives)
The Bottom Line
Commodities have been strong since the start of year, and gold and silver are finally following. The Market Vectors Gold Miners ETF has a tendency to lead gold prices slightly, and can therefore be traded on its own or used as a type of analysis tool for gold. Silver Wheaton has a similar tendency in relation to silver. All these securities are near inflection points, which will likely determine the next major trending move. Use stop losses to control risk in case the uptrend doesn't continue. (For a related reading, see: Forget Gold: Invest in These Precious Metals)