The Market's Measure
market's measure

Heads Are Turning Towards Precious Metals

Gold miners and silver moving toward breakout levels.

Gold mining stocks are painting a rather compelling technical picture now. Charts for four miners — Agnico Eagle Mines Ltd (NYSE: AEM), Newmont Mining Corp. (NYSE: NEM), Silver Standard Resources Inc. (Nasdaq: SSRI) and Goldcorp Inc. (NYSE: GG) — show these stocks poised for breakouts from inverse head-and-shoulders patterns.

If you’re not familiar with chart talk, a head-and-shoulders formation is a very reliable prognosticator of price movements. Recent research credits the pattern with 83 percent accuracy in price forecasts.

It’s one thing to see an individual stock exhibit this pattern; quite another when four sector mates do so simultaneously.

There’s definitely something going on in the precious metal sector. You can see gold prices as well as a key indicator of investor bullishness moving into breakout patterns in the chart below. The indicator — a price ratio of the VanEck Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) and the VanEck Gold Miners ETF (NYSE Arca: GDX) — is a reliable predictor of cyclical turns in gold. Juniors usually lead gold producers ahead of these shifts.

 

Further evidence of a gathering storm in the juniors is an inverse head-and-shoulders in the ALPS Sprott Junior Gold Miners ETF (NYSE Arca: SDGJ).

But that’s not all. Another exchange-traded product, the Credit Suisse X-Links Silver Covered Call ETN (Nasdaq: SLVO), is set for its own breakout from a head-and-shoulders bottom. Investors often look to silver as a bellwether for gold movements.

SLVO simulates the return of a covered call strategy on the iShares Silver Trust (NYSE Arca: SLV). SLV broke above resistance earlier this week.

In the SLVO note’s underlying index methodology, one-month calls are nominally written at strike prices six percent above the current price of SLV shares, generating a continuous though variable stream of option premium. A covered-call strategy is neutral to modestly bullish with a capped upside and modestly hedged downside. It is equivalent to selling a naked put on SLV.

On a total return basis this year, SLVO has outperformed SLV due to the nearly 11 percent annualized yield from call premiums. Over the past three years though, the note’s lagged SLVs return as silver’s zigged and zagged. Silver is not a market for the faint-hearted.

In the near term, the SLVO chart points to a $10.10 price objective, about a dollar above the ETN’s current level while the longer-term graph indicates a potential to test $11.

 

Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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