Gold mining exchange-traded funds (ETFs) continued their recent move higher from chart support Tuesday after Wells Fargo made bullish remarks about the yellow metal. The bank's head of real asset strategy John LaForge told investors that gold prices remain backed by favorable fundamentals, such as accommodative monetary policy and a softer U.S. dollar.
"The fundamental backdrop looks good. Interest rates remain low, money supplies excessive (quantitative easing), and we are doubtful that the U.S. dollar's September rally has long legs," LaForge wrote, per precious metals site Kitco.
- Gold prices remain supported by favorable fundamentals, such as accommodative monetary policy and a softer U.S. dollar.
- The Direxion Daily Gold Miners Index Bull 2X Shares (NUGT) found buying interest near the May swing high.
- Traders re-entered the Direxion Daily Junior Gold Miners Index Bull 2X Shares (JNUG) after its price stabilized in a zone of support between $110 and $117.
The analyst said that the commodity's retracement over the past two months was to be expected in light of its impressive run between January and early August. "Only five times since 1980 has gold seen 37%+ rallies in such a short amount of time. These types of rallies are hard to hold onto, and gold was due to cool off some," LaForge noted.
Below, we review two of the largest leveraged gold mining ETFs and use technical analysis to identify actionable trading levels.
Direxion Daily Gold Miners Index Bull 2X Shares (NUGT)
Created a decade ago, the Direxion Daily Gold Miners Index Bull 2X Shares aims to return twice the daily performance of the NYSE Arca Gold Miners Index – a market-cap-weighted benchmark comprising global gold and silver mining companies. The fund, which is designed for short-term tactical trading, turns over 3.5 million shares per day on an average 0.06% spread to minimize transaction costs. As of Sept. 30, 2020, NUGT controls assets under management (AUM) of $1.13 billion, charges a 1.17% management fee, and is trading 44% higher over the past three months. The ETF also yields a modest 0.91%.
The fund's share price broke down from a symmetrical triangle last month but has recently found buying interest near the May swing high. Active traders who take a long position at these levels should consider setting a take-profit order near $117.60, where the price may run into overhead resistance around the August high. Limit downside risk by cutting losses if the fund fails to hold above the Sept. 24 low at $76.12. The trade offers a risk/reward ratio of over 1:3 ($9.64 risk per share vs. $31.85 reward per share), assuming a fill at Tuesday's $85.75 close.
The risk/reward ratio marks the prospective reward investors can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns.
Direxion Daily Junior Gold Miners Index Bull 2X Shares (JNUG)
With net assets of $674 million and trading nearly 2 million shares per day, the Direxion Daily Junior Gold Miners Index Bull 2X Shares has an investment mandate to deliver twice the daily performance of the MVIS Global Junior Gold Miners Index. The ETF allows traders to take a short-term bullish bet on junior gold and silver miners from developed and emerging markets. Several of the leading companies making up the underlying index include Kinross Gold Corporation (KGC), Pan American Silver Corp. (PAAS), and Northern Star Resources Limited (NESRF). Trading at $131.96 and offering a 1.58% dividend yield, JNUG has gained 25% since late June as of Sept. 30, 2020. The ETF carries a 1.12% management fee.
Gold bulls stepped back into the fund last week after the price stabilized in a zone of support between $110 and $117. Those who buy here should think about targeting a move back up to $191.17, where price may encounter resistance from the August swing high. In terms of managing risk, place a stop-loss order somewhere below support at $110 and consider raising it to the breakeven point if the ETF climbs above the 50-day simple moving average (SMA).
The breakeven point formula for a stock or futures trade is determined by comparing the market price of an asset to the original cost; the breakeven point is when the two prices are equal.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.