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Gold Alert: This Breakout Points to Big Gains

Investor Insights: 
  • A seven-year pattern for gold mining stocks just completed.
  • Gold miners could be the best way to trade rising gold prices.
  • Right now, one chart is flashing a huge buy signal.
 
Gold Alert: This Breakout Points to Big Gains

A great buying opportunity in gold miners just opened up. And we can see it in one chart.

Technical analysts, like myself, look for patterns in price charts. Patterns represent the emotions of traders.

Among the most reliable patterns is the “big base,” which shows apathy. Investors must lose interest in an investment for it to develop.

So it makes sense that the pattern starts to form after a bear market.

In a bear market, investors sell. When most get out of their positions, prices stop falling.

That’s when the big base forms, before there’s interest in buying.

For months, with no interest from buyers or sellers, prices move back and forth in a narrow range.

The pattern is completed when prices break above the top line in the pattern. This is a pattern for long-term investors because the base takes years to form.

Initially, only aggressive traders buy the breakout. As the price move continues, other investors become interested. Within months, trend followers buy. Eventually, momentum traders buy.

Waves of buying drive a long-term uptrend. And now we have an opportunity to get into this trend in gold miners…

Gold Miners Are Breaking Out Right Now

The chart below shows a historical example of a big base. A current trade based on the pattern is at the bottom:

Apple’s Big Base Breakout vs. Gold Miners’ Big Base Breakout

This signal comes after many investors lost interest in gold mining stocks as gold prices moved sideways. The breakout is an indicator that interest in gold is picking up.

“Big base” patterns form when prices move back and forth in a narrow range. Analysts draw rectangles to highlight this range, as you can see in these charts.

The Apple Inc. (Nasdaq: AAPL) chart shows the potential gains — 1,100% in less than four years. A four-year base was followed by a four-year bull market.

Now the same type of pattern is appearing in gold miners.

In fact, the VanEck Vectors Gold Miners ETF (NYSE: GDX), an exchange-traded fund (ETF), shows a buy signal right now.

GDX is breaking out of a seven-year trading range. This signal comes after many investors lost interest in gold mining stocks as gold prices moved sideways.

The breakout is an indicator that interest in gold is picking up.

This Could Be the Best Way to Trade Gold

Gold miners generally move in the same direction as gold prices. But miners offer some advantages.

Gold miners, in fact, could be the best way to trade gold. Profitable miners are a leveraged investment in the metal.

As an example, consider a mining company that spends $1,000 an ounce to produce gold.

This miner produces 1 million ounces a year. If gold trades at $1,700 an ounce, the company earns $700 an ounce in profit, or $700 million.

If gold increases to $2,000 an ounce and costs remain the same, the miner earns $1,000 an ounce, or $1 billion. Earnings increase more than 40% as the price of gold increases about 18%.

In this example, the miner offers more than 2-to-1 leverage. A 1% increase in gold prices results in a 2.2% increase in the earnings of the mining company.

This leverage makes gold miners an ideal way to invest in gold. That’s especially true when the chart is flashing a big base buy signal.

So look into the VanEck Vectors Gold Miners ETF (NYSE: GDX) to get in on this breakout.

Regards,

Michael Carr, CMT, CFTe

Editor, Peak Velocity Trader

 

P.S. Money & Markets Chief Investment Strategist Adam O’Dell is also high on gold mining stocks right now. Click here to read his take on MoneyandMarkets.com.

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