One way to produce exceptional trading results is to find hot sectors and themes and ride them. A good recent example is biotechnology. The group more than tripled off the 2011 levels while the S&P 500 failed to even double. Finding those sectors that are on a roll and staying with them should be a focus of all active traders.
One group that I'm watching closely now is precious metals and gold in particular. The sector has been a great disappointment for many traders for a long time. Many market players believe that a huge spike in gold was inevitable as the financial engineering by the central banks in response to the Great Recession eventually created inflation. The story was that gold would be the ultimate safe haven from the chaos and the demand would drive it through the roof.
That story has not come to fruition, but there are some indications that maybe the time finally is ripe for gold. Gold did do well off coming out of the 2008-2009 bear market, but it topped out in 2011 and the trend has been downward since. There recently was a spike back up that broke the downtrend, but momentum has slowed before picking back up this past week.
For a very long time gold largely was viewed as a hedge against inflation and a safe haven in the event of a breakdown in the financial system. Those two issues still drive many gold bugs, but in recent years the forces that move gold have shifted more toward central bank action and currencies. Those two factors cause some sharp short-term moves in gold as headlines hit.
Another factor that impacts gold is the boom in ETFs. It is very easy now to trade it using SPDR Gold Shares (GLD) and Market Vector Gold Miners ETF (GDX) as well as a number of other vehicles that allow as much as 3x leverage. Because of this increased liquidity, there tend to be many technical traders that are willing to employ.
Let's take a look at the charts. GLD attempts to track the movement in gold bullion, and the trust actually holds deposits of gold in London. GDX attempts to track the movement in a basket of gold miners and is cap-weighted. Names such as Barrick Gold (ABX), Newmont Mining (NEM), Goldcorp (GG) and Silver Wheaton (SLW) are heavily weighted. Leveraged ETFs such as Direxion Daily Gold Miners Bull 3X ETF (NUGT) and Direxion Daily Jr Gold Miners Bull 3X ETF (JNUG) are not exactly correlated with GDX, but move very closely.
The key to an uptrend in gold and gold miners will be a shift in central bankers. As the market loses confidence in the power of central bankers to keep driving equity markets higher and interest rates lower, more money will look for safety in gold.
The move in gold off the lows in December and the sharp move higher in January and February tell us that gold will be a go-to trade as we run into issues with central banks. Timing is always the tricky part, but the chart above shows signs that a new trend is developing.