As I stated in previous articles, the gold trade is heating up. Gold is on the verge of a confirmed breakout which has many traders scrambling for bullish bets on the shiny metal. Analysts at HSBC went as far to say that gold could end the year at $1900 an ounce. Considering the price of an ounce sits at the lower end of $1600, that is a lot of potential upside involved. However, the question always is asked, “what is the best way to play gold?”
Famed investor Dennis Gartman was recently asked this question during an interview on CNBC. Gartman told viewers that he was bullish on gold by the end of the year. The investor says he suspects gold will breakdown first before reaching new heights by the end of the year. Moving onto the best way to play the breakout in gold, Gartman said the miners were going to be the more speculative route but since miners have been beaten down so far this year, they should be primed for a steady rise. Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ) were specifically mentioned as two possible candidates.
While these two ETFs have had a rough start to the year, they have been rebounding in recent weeks as investors are beginning to warm up to a safety asset in the wake of more stimulus and uncertainty in Europe. That being said, gold has and usually does, have a delayed response to major macro situations such as the European debt crisis.
To further add to my bullish thesis, we turn to S&P Capital IQ’s bullish outlook for the shiny metal. The reasons listed above are the main highlights that give the agency a bullish posture on the metal. However, they did not specifically say that the miner ETFs were the more suitable route to playing gold.
Looking at the Junior Miners specifically, it appears the ETF has found a bottom as the technicals show that a double bottom has formed. A double bottom represents strong support and often a bullish period follows. However, you may be more inclined to play the analyst favorites such as Barrick Gold (ABX), Newmont Mining (NEM) or GoldCorp (GG).
Taking a look at the most common ETF, SPDR Gold ETF (GLD), it appears that the price action is testing the resistance turned support. The ETF had finally broken above its wedge pattern but if prices fail to establish a base here, we could be seeing lower gold prices in the short term. This was warned to us by Dennis Gartman, as mentioned earlier. That being said, it is not recommended to short gold at this point until we get a clearer picture as to the trend.
The bottom line here is that gold faces some headwinds in the short term but come September, October I think we will begin to see that breakout in gold as forecasted by analysts and big time investors. The best way to play the rally is to buy miners ETF for a longer term horizon or simply wait on the sidelines for a more favorable entry.
Disclosure: Long GDXJ