By Nigam Arora
As the coronavirus spreads, many investors are focused on the stock and bond markets.
Why not gold?
The Federal Reserve, in a surprise move, cut interest rates Tuesday. The yield on the 10-year Treasury note is trading around 1%, a level nobody could have dreamed of not long ago. Other central banks are lining up for more money printing and monetary stimulus. Governments are getting ready to borrow more.
So the conditions are ripe for gold — just like in the good, old days.
Let’s explore with the help of a chart.
Note the following:
• Start out by defining your time frame. At The Arora Report we advocate diversifying between time frames ranging from short term to very long term. This way you always have opportunities, and you lower your risks.
• Investors should make a sharp distinction between investing, trading and hedging.
• Most investors watch the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.51% . At this time, investors may also want to develop the habit of watching gold. An easy way to watch gold is to get SPDR Gold Shares /zigman2/quotes/200593176/composite GLD +1.01% on your screen.
• The chart shows a short-term trade on leveraged gold miner NUGT that has returned 50% in three trading days. The chart shows the Arora buy signal at $20.80 for NUGT. The buying opportunity arose when stocks like Apple /zigman2/quotes/202934861/composite AAPL +2.39% and Amazon /zigman2/quotes/210331248/composite AMZN +2.55% were being crushed and margin calls were being issued; investors sold anything liquid they could. This included selling in gold. It was clear that gold fundamentals had not changed and the selling was merely due to pressure from margin calls. Such pressure is temporary and often provides buying opportunities.
• Three trading days after the Arora buy signal at $20.80 for NUGT, the ETF traded as high at $32.71.
• A trade-around position is a technique to increase returns and reduce risks. The chart shows the Arora buy signal for a trade-around position at $28.80. Another Arora signal was given a few hours later on the same day to take profits on the trade-around position at $32.38.
• Trading opportunities occur both from the long side and the short side.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Understanding the risks
Along with NUGT, Direxion Daily Gold Miners Index Bear 3x Shares /zigman2/quotes/204236046/composite DUST -2.33% , which bets on a decline in gold, is also popular. It is important that investors understand that DUST and NUGT are only short-term trading vehicles and not suitable for investment. Further, due to the leverage, these are suitable only for experienced, aggressive traders. Leverage cuts both ways. In the trade illustrated above, leverage generated over a 50% return in less than three days. However, without proper risk controls, if the trade goes bad, losses can be huge. In such trades, it is extremely important to properly size the positions and use judicious stop losses along with other risk-control measures.
Investors who want to take less risk may consider trading VanEck Vectors Gold Miners ETF /zigman2/quotes/206399889/composite GDX +1.17% . VanEck Vectors Junior Gold Miners ETF /zigman2/quotes/204075079/composite GDXJ +1.90% provides higher risk-reward ratios compared to GDX.
Those who want to take the least risk may consider trading GLD. By now, you may be asking about silver. iShares Silver Trust /zigman2/quotes/205744453/composite SLV +3.38% also provides trading opportunities, but silver can move more violently than gold; often a move in silver can be 80% higher than a move in gold. However, when trading from the long side, silver presents a higher risk at this time because silver has industrial uses. Coronavirus is causing the global economy to slow and, thereby, reducing demand for silver. On the other hand, gold is a currency of last resort and also acts as a hedge against the positions in the stock market.
It is worth repeating that trading involves a high degree of risk, especially with leveraged instruments, and is suitable only for those who are aggressive, have experience and have good guidance.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. <INTERNAL-PAGE URL="/author/nigam-arora">Nigam Arora</INTERNAL-PAGE> is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.