Gold’s Next Big Test

Gold bugs are dancing in the streets.

The Midas metal has finally found its mojo. After flirting with a breakout at $1,300 for more than four months, gold futures shot out of the blocks and posted new 2017 highs late last month.

Gold continued its winning streak this week, climbing to a 2017 high of $1,353 in Thursday trading. By the time the markets close today, gold will have risen seven out of the past nine trading weeks. The precious metal’s next big test will be its July 2016 highs of $1,377. If it can break above these levels, we’ll be treated to prices not seen in more than three years…

On the flip side, the dollar is tanking, adding fuel to gold’s latest breakout move. The U.S. Dollar Index simply can’t find a floor. It has remained in a steady downtrend for most of the year and is now crossing below its 200-week moving average, hitting fresh two-year lows.

Yesterday’s dollar skid comes courtesy of a rampaging euro and Canadian dollar – which are both in rally mode. But even with the euro powering higher, gold is taking the lead, outrunning foreign currencies as the close of the trading week nears. That’s an important gauge for the gold rally considering that much of its August move was attributed solely to a weak dollar.

“[It’s] not enough for gold to rise when the dollar falls,” notes famed market technician John Murphy over at his Stockcharts.com blog. “It’s better when gold is rising even faster than foreign currencies.”

I noted last week that the gold rally has probably attracted more attention than it has since it was powering toward $2,000 back in August 2011. It’s true: new gold bulls are popping up almost every single day.

“The herd’s not always wrong,” I wrote. “But I can’t help but get a little skeptical when every trader on the planet crowds one side of the canoe, at least in the short-term.”

Of course, gold didn’t give a hoot about what I thought of its latest breakout move. After a short pause, it went right back to plowing higher – forget about any meaningful consolidation or backfilling. Hopping on a fresh gold trade last week could have proven profitable right out of the gate. We didn’t pull the trigger. That’s on me.

However, I still think we’ll have a great shot at putting on a profitable gold trade at some point over the next couple weeks. If you’ve followed along with the testing of our proprietary quantitative trading platform this summer, you already know about the SPDR Gold Shares (NYSE:GLD) trading window that flipped bullish a few months back.

Buying this signal that my colleague Jonas Elmerraji recommended back in June would helped you ratchet up open gains of almost 75% right now [Ed. note:Click here to get Jonas’ latest fast-moving trade recommendation]

Moving forward, we’ll have several ways we will play this gold breakout for short-term gains.

One of my favorite short-term gold trading vehicles is the VanEck Vectors Gold Miners ETF (NYSE:GDX). GDX is a great way to buy a basket of mining stocks. Even better, the miners tend to amplify gold’s moves (both higher and lower).

GDX is up more than 20% off its July lows – and could pop again today as gold continues sneak lower in early trade. We’ll stay patient and wait for a suitable low-risk entry to give you the best shot at riding the next leg higher…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning