If you own physical gold, gold mining stocks, or plan on buying anything related to precious metals before year end, you are likely going to get excited by what my analysis and outlook shows.
Since gold topped abruptly a year ago (September 2011) with a massive wave of selling that sent the price from $1920 down to $1535, technical analysts knew that the type of damage that had be done to the chart pattern could take a year or more to stabilize before the yellow metal would be able to continue higher.
Fast-forward 12 months to today. You can see that gold looks to have stabilized and is building a basing pattern (launch pad) for another major rally. The charts illustrated below show my big-picture analysis, thoughts, and investment idea.
Weekly Spot Gold Chart:
The weekly chart can be a very powerful tool for understanding the overall trend. This chart clearly shows the last major correction and basing pattern in gold back in 2008-2009. Right now gold looks to be forming a very similar pattern.
Keep in mind this is a weekly chart, and if you compare the 2009 basing pattern to where we are today, I still feel it could take three to six months before gold truly breaks out to the upside and kicks into high gear. The point of this chart is to provide a rough guide for what to expect in the coming weeks and months.
Weekly Chart of Junior Gold Miner Stocks
If you follow gold closely then you likely already know that junior gold mining stocks can lead the price of gold up to two weeks -- meaning, gold mining stocks (which you can track by looking at Market Vectors Gold Miners ETF
(NYSEARCA:GDX) and Market Vectors Junior Gold Miners ETF
(GDXJ) exchange traded funds) will form strong bullish chart patterns and generally start moving up in price before physical gold.
The chart below shows the junior gold miner ETF with a very bullish
chart and volume pattern. Remember that gold stocks are a leveraged play on gold in most cases. For example, if gold moves up 1% we typically see GDX and GDXJ move 2-4%. Because they act as a leveraged play on physical gold, smart money and big institutions start accumulating these investments in anticipation of gold rising.
GDXJ has formed a tight bull flag and the volume levels confirm there is big money moving into these investments. The first price target on GDXJ using technical analysis for a measured move points to the $32 area. Looking forward 12 months with gold trading above $2000 we could see this fund more than double in value.
Bonus: While most traders focus on GDX gold miner fund, I prefer the GDXJ fund because it's almost identical in price performance but
it pays you a 5% dividend…
It’s that time of year again where gold tends to move higher. Below you can see where we are and what the price of gold typically does in November.
Gold Investing and Trading Conclusion:
Looking forward one month (November) and factoring in the recent pullback in gold to known support levels along with strong buying of junior gold mining stocks, I feel gold will take another run at the $1800 level and GDXJ will test its previous high of $25.50 at minimum. If both those levels get taken out then a massive bull market for precious metals could be triggered. Only time will tell….
Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
No positions in stocks mentioned.
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