The stock market’s main function is to extract the most money from the largest possible amount of people. Two years ago the price of gold was over $1,700 per ounce and the question was when, not if, investors should be buying dips.
Since then it’s been nothing but pain for gold and almost all of the companies in the gold complex. The SPDR Gold shares ETF (GLD) has fallen 24% and the Market Vectors Gold Minters ETF (GDX) has been more than cut in half.
Suddenly in 2014 Gold has regained its mojo, bolting more than 7% higher while equities struggle to stand still. According to Ryan Detrick of Schaeffer’s Investment Research the rally in gold is just getting started.
In the attached clip Detrick explains that gold has recaptured the critical 200 day moving average on its chart and, in laymen terms, simply “stopped going down.” That refusal for investors to use any opportunity to sell is a sign that an asset is washed out to the downside. In other words, anyone who was possibly going to sell gold probably already has.
The challenge for gold now will be getting through the overhead resistance on the charts. In human terms there are a lot of folks who have been invested in precious metals and deeply engaged in the so-called “Prayer of the Bad Trade” (“Please God get me back to even and I’ll never buy this again”). Gold hasn’t gotten very far, but for the legions of those who bought into the myriad fake breakouts of the last 18 months it’s going to be tempting to sell should the metal get back to $1,400 or more.
Detrick isn’t making any promises for the long term but the sentiment is wildly bullish from a contrarian perspective. “In the near term it’s had such a big rally that in the near term you could have some consolidation,” Detrick concedes, but bigger picture, bearish sentiment is good and there’s plenty of negativity surrounding gold. “Gold stocks only have 46% buys currently. People haven’t been this bearish on gold stocks in eight years. To me that says this rally could have a long way to go.”
For the believers out there Detrick says the best way to play is via the miners in the form of the GDX ETF. It gives broad exposure in a comeback story he thinks is just getting started.