A short-term play on gold stocks

From Jeff Clark, Editor, Jeff Clark’s Market Minute:

Gold stocks look headed higher in the short term.

With the exception of holding a few longer-term positions, I’ve personally avoided trading gold stocks over the past couple of months. Even though I’m convinced that gold and silver stocks will be much higher later this year, I was a little concerned about the possibility of some short-term downside action.

There were two reasons for my concern…

  1. The potential for a strong rally in the dollar – which would create weakness in precious metals.
  2. The high level of short gold futures contracts by the “smart money.”

The dollar has put on a strong rally over the past several weeks. The buck is up more than 4% in just one month. That’s a remarkable return for a currency. But, as I noted in Tuesday’s Market Minute, that rally is now quite extended. The dollar is due for at least a pause, if not a more meaningful pullback.

The CFTC Commitments of Traders report published last Friday afternoon, and reported on positions as of last Tuesday, showed a dramatic drop in commercial traders’ short gold positions. Commercial traders (AKA the “smart money”) are now net short “just” 137,000 gold futures contracts. That’s down from about 240,000 contracts one month ago.

While the smart money position is not yet below the 100,000-contract level I typically like to see before getting aggressively long gold stocks, it is now in the range where the potential downside for the gold sector should be limited.

So, while I’m not yet totally in love with the way gold stocks look, I’m attracted enough to the sector to start adding a little exposure right here.

Part of that attraction has to do with the look of the 60-minute chart of the VanEck Vectors Gold Miners Fund (GDX). Take a look…

Thursday, GDX broke out to the upside of an inverse head and shoulders pattern. This is a bullish pattern that signals the reversal from a bearish trend to a bullish one. And with this breakout, the target price for GDX is now up around $23.60 or so.

Note that this is a 60-minute chart. Patterns in this time frame tend to play out over just a few days.

So it looks to me that the gold sector is headed higher in the short term.

Best regards and good trading,

Jeff Clark

P.S. On Wednesday night, I held an event with a select group of readers to talk about volatility. And they left with a lot to think about…

Volatility is back in full force this year. And if you want to be prepared, there are important steps to take – sooner rather than later.

I just put together a briefing on the matter, in case you missed the event. You can watch it right here.

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