Precious metals tend to be the commodity segment of choice for those looking shelter against market volatility and uncertainty. Given the rising geopolitical tension, as evident by the stories that have dominated the headlines in recent days, traders will become more sensitive to headline risk, and a seemingly small story could act as catalyst for increased buying pressure in gold, silver, platinum and palladium. In this article, we take a look at the charts of three exchange-traded funds (ETFs) that are commonly used for gaining exposure to these metals and analyze how traders will look to position themselves for a move higher. (For further reading, check out: When in Doubt, Buy Precious Metals.)
Some investors may not quite feel comfortable with an overweight position in precious metals and may prefer to have diversified exposure to a broad basket of commodities. One potential solution for this group of investors could be to look to the PowerShares DB Commodity Index Tracking Fund because it comprises futures contracts on 14 of the world's most important commodities and happens to have a weighting of approximately 10% in precious metals.
Taking a look at the chart below, you can see that the price is trading within a confined trading range and that it recently broke beyond the resistance of the dotted trendline. The breakout is a clear signal that the bulls are in control of the momentum and will likely be used as a buy signal. Stop-loss orders and other protective strategies will likely use the support of the lower trendline, 50-day moving average or 200-day moving average as guides. Regardless of the strategy, based on the chart shown below, the bias is undoubtedly to the upside. (For further reading, see: 3 Charts for Navigating the Commodities Market.)
The price of gold is trading within one of the most popular chart patterns used by active traders. The ascending triangle is created by having the price trade within a defined range that narrows toward the breakout point near the end of the pattern. The pattern is commonly found amid a defined uptrend and is known as a continuation pattern. As you can see from the chart of the SPDR Gold Shares (GLD) below, the recent pullback has sent the price toward the support of the 200-day moving average and seems to be readying for another test of the resistance. Traders will keep an eye out for a breakout above $130 over the coming weeks, which would then lead to target prices well above $150. (For more, see: Does it Still Pay to Invest in Gold?)
The symmetrical triangle is another common pattern used by active traders because it is defined by two converging trendlines, which set out clear buy and sell areas. Since the price is currently trading in the mid-point of the pattern, as shown by the chart of the iShares Silver Truest (SLV) below, traders would traditionally hold a neutral outlook on the metal. However, given the bullish sentiment evident by the broader commodity market and gold, which was discussed above, it could be strategic to enter a trade in anticipation of a move higher. (For further reading, see: Precious Metals Pullback Suggests It Is Time to Buy.)
The Bottom Line
Commodities and the precious metals segment in particular have gained in recent sessions due to geopolitical factors. While many investors look to seek shelter from the rising levels of volatility and uncertainty, it looks as though now could be a strategic time to add exposure to one of the funds mentioned above. (For more, see: Traders Turn to Precious Metals Among Volatility.)
Chart courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.