By Nigam Arora
KIM JAE-HWAN/AFP/Getty Images
I have never been afraid to make bold predictions for the stock, commodities, bond and currency markets when supported by rigorous analysis.
Recently I made a prediction that gold is on its way to $3,000 an ounce unless there is a vaccine and money printing stops. In some ways, this is similar to my call for the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.04% reaching 30,000 points when it was trading around 16,000. (Please see “Here’s the case for Dow 30,000 in Trump’s first term.”)
Let’s examine SPDR Gold Shares /zigman2/quotes/200593176/composite GLD -0.06% , an exchange traded fund.
Note the following:
• Gold has traced a long base. This is very bullish.
• We have a very long-term rating, which is positive.
• Gold has broken out.
• RSI (relative strength index) has traced a very bullish long-term pattern.
• In the short-term, gold is very overbought. When a commodity gets overbought, it is vulnerable to a pullback.
• If there is an effective vaccine, that may stop gold’s march toward $3,000, and gold may even fall.
• Gold is a hedge against long stock portfolios, but it may not act as a hedge against the five popular mega-cap stocks of Apple /zigman2/quotes/202934861/composite AAPL +3.67% , Amazon /zigman2/quotes/210331248/composite AMZN +1.34% , Facebook /zigman2/quotes/205064656/composite FB +2.02% , Microsoft /zigman2/quotes/207732364/composite MSFT +0.28% and Alphabet /zigman2/quotes/205453964/composite GOOG +0.23% /zigman2/quotes/202490156/composite GOOGL +0.22% .
• Any pullbacks in gold in the near term should be used to add to the position.
• In the longer term, keep a close eye on vaccine development.
Gold vs stocks
Start with Arora’s Second Law of Investing and Trading: “Nobody knows with certainty what is going to happen next in the markets.” You may be wondering why a vast majority of gurus and Wall Street analysts claim to know with certainty what is going to happen next. Ask yourself this simple question, “Would you pay them if they admitted the truth?” Adopting the second law is the first step to get on a realistic path to do analysis based on scenarios and probabilities.
The assumption is that if there is a vaccine, money printing and borrowing will slow. However, without a vaccine, money printing and borrowing will accelerate, resulting in a big move in gold.
As a note of caution, the gold market is a very small market compared with the stock market. For this reason, it is highly volatile. Investors need to be nimble, develop sophistication and have stringent risk-control measures in place. In addition to the long term, there are many short-term opportunities in silver ETF /zigman2/quotes/205744453/composite SLV +0.58% , gold miner ETF /zigman2/quotes/206399889/composite GDX -0.92% and junior gold miner ETF /zigman2/quotes/204075079/composite GDXJ -1.33% . We have just published a list of gold and silver stocks as well as ETFs that are appropriate for the present market environment.
For very short-term trades, leveraged ETFs /zigman2/quotes/204236046/composite DUST +2.51% and /zigman2/quotes/208908392/composite NUGT -2.01% provide opportunities but investors should not use them without guidance and risk controls due to high risk.
Disclosure: Arora Report portfolios have positions in Apple, Amazon, Alphabet, Microsoft and Facebook. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. He can be reached at Nigam@TheAroraReport.com.