After a prolonged period of low volatility across the public markets, investors seem to be getting skittish thanks in part to the increasing number of concerning stories such as those that have plagued shares of Facebook, Inc. (FB) in recent weeks. When volatility spikes, it is a natural tendency for investors and long-term traders alike to shift capital to traditionally stable sectors such as precious metals. In this article, we take a look at gold, which is the favorite of the group, and try to determine how to profit from the newly established trading environment moving forward. (For more, check out: Precious Metals Pullback Suggests It Is Time to Buy.)
When active traders want to analyze the performance of precious metals, they often look to exchange-traded products such as the ETFS Physical Precious Metals Basket Shares. As you can see from the chart below, the price has tested the combined support of the horizontal trendline and the 200-day moving average several times in recent months. Monday's price action suggests that this level will continue to provide traders with a lucrative risk/reward setup, and it could prove to be a very timely entry for those willing to assume risk. From a risk management perspective, stop-loss orders will likely be set below $64 in case the bounce off the technical levels fails to materialize. (For further reading, check out: Now Is the Time to Buy Gold and Silver.)
The price of gold has slowly managed to trend higher over the past 18 months, and the price action over the past several weeks suggests that the bulls are in control. As you can see from the chart of the SPDR Gold Shares, the 50-day and 200-day moving averages have started to diverge, which means that the medium-term momentum is building faster than long-term momentum. This happens to be a common sign used by active traders to confirm the direction of the long-term trend. Given the proximity of the major support levels, active traders are seeing some of the best risk/reward setups in years. More specifically, buy orders will likely be placed near current levels and then protected by using tight stop-losses around $122.50 or $121 depending on risk tolerance. (For further reading, check out: Traders Turn to Precious Metals Among Volatility.)
Of all the gold-related assets, the chart pattern on the VanEck Vectors Gold Miners ETF is one of the most interesting. As you can see from the chart below, a well-defined channel pattern has been forming on the chart since early 2017. The defined trading range has established obvious buy and sell points for active traders who rely on technical analysis. Buy orders have been and will continue to be placed near the lower support around $21 and sold when the price rises toward the resistance of $25. Bullish traders will look for this behavior to continue in the future and will likely set stop-loss orders below the lower support in case of a surprise shift in fundamentals.
The Bottom Line
Precious metals and related commodities generally benefit from sudden shifts in volatility. Since underlying volatility has remained low for so long, and given the rise in volatility over the past couple of weeks, it could what many gold bugs have been waiting for. As we've discussed above, the trading action over the coming few sessions will be very telling in terms of the direction of the next leg in the trend of these metals, and some traders are starting to position themselves in anticipation of a move higher. (For further reading, check out: 3 Charts That Suggest It's Time to Buy Gold.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.