The many uncertainties that have fueled gold to the recent highs are subsiding. Overall demand for safe havens is waning, which is poised to add to gold’s downside pressure, suggests Omar Ayales, resource sector specialist and editor of Gold Stocks R Us.
Also consider that gold’s secular bull market that seemingly began in December 2015 was on the start of a rate hike cycle. We could see some of gold’s froth removed if current Fed action is perceived as a rate cut cycle, as opposed to an isolated event.
To counter expected weakness in gold and gold shares, we have secured a short position using the Direxion Shares ETF Daily Gold Miners Index Bear 3X Shares ETF (DUST).
DUST is pulling back after breaking above $8. It has strong resistance at the top side of its bottoming sideways band near $9. A break above $9 on a 2-day close would push DUST into a stronger phase.
DUST is a volatile one with wild swings daily. Don’t get spooked, remember this is its nature. This is why I don’t overload on on this leveraged ETF. The risk and swings are just too big!
But these instruments do have a purpose and have a very valid use. You can use them as protection against risk which is similar to options trading.
This decline will give us great opportunities to buy more gold and gold shares. But timing is everything and we want to wait for weakness to mature and a bottom to emerge before buying new positions in gold.
Meanwhile, the reduction in rates could give emerging markets much-needed breathing room, and an uptick in global business activity could give other resources a boost.
I believe the best sector within resources will be crude oil. Crude has fallen sharply from the highs earlier this year. The decline was worrisome, particularly as an oil glut remains.
However, crude has shown strong support at $52. It’s now bouncing up showing increased upside potential. Moreover, remember crude oil and the S&P 500 tend to move together. This means that upside potential in stocks is likely to morph into energy.
Notice crude has been bouncing up after testing support at $52. It’s now rising, approaching key resistance near the top side of a sideways consolidation band near $63. A break above $63 however, could push crude higher, to likely the lower $70s.
We currently have a full position in crude oil and have also been buying Denbury Resources (DNR) to have exposure to the energy trade.
The stock continues to form a solid base above support at $1. This suggests the downside is limited with strong support. I recommend increasing your positions to DNR to have exposure to energy stocks.
