Gold is trading around its two-month highs but legendary technical analyst John Bollinger thinks the run has only just begun.
Bollinger is the inventor of “Bollinger bands,” a popular technical tool that charts price relative to recent movements. The price of the asset—be it a stock or commodity or whatever—is considered high if it’s on the upper band and low if it’s on the lower band.
In an interview with “Talking Numbers,” Bollinger uses the bands to explain why he thinks gold will go higher. But, he doesn’t just use them on gold. Instead, he is also looks at charts of gold miner stocks for signals as well.
Chart 1: SPDR Gold Shares (GLD)
Bollinger sees a lot of back-and-forth movement over the past few years in the world’s largest gold-tracking fund. “If you look at the chart you can see we’ve just finished a really long decline,” said Bollinger. “It started in April of 2011 and really ended in May of last year. That sort of epic ‘backing and forthing’… has existed since then. We call this building a base…. There’s a lot of bullishness building up.”
Chart 2: Market Vectors Gold Miners ETF (GDX)
In a big base, gold miners should break out before bullion, said Bollinger, but he doesn’t see that happening. However, he doesn’t think that necessarily is a problem for the yellow metal. “The nice thing about the gold complex is that we also have other related items to look at like platinum, palladium and copper,” he said. “Platinum has a very constructive chart and palladium is actually working on a new high. So there’s some evidence that this base building process that we’re seeing in gold bullion and the gold stocks actually is a base. We’re not just waiting to fall off a cliff but it’s actually constructive activity.”
Chart 3: Market Vectors Junior Gold Miners ETF (GDXJ)
“This is the one that has been hurt the most,” said Bollinger of the ETF that tracks smaller gold miner stocks. “The decline was absolutely horrific but now it has the same pattern that we’re seeing in gold and the big gold stocks.”
What Bollinger wants to see is first the GDXJ to break above the upper Bollinger band to show it has strength. Afterward, he wants to see the GDX do the same, followed by the GLD or gold, which would confirm the strength in gold stocks.
Because the junior miners are more volatile, Bollinger likes to use them as an indicator more than as an investment. “There is a lot of information contained in the price action of those small gold stocks,” he said. “When they start to move to the upside, we will really start to pay attention. We will think that this big base-building process that we are seeing going on now will be completed and it will be time for investors to commit some capital.”
To see the full interview with John Bollinger on gold and gold miner stocks, watch the above video.