JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas. Today we're sitting down with Steve Strazza of The Chart Report. It is great to have you back.
STEVE STRAZZA: Thanks for having me.
JUSTINE UNDERHILL: So we've had, actually, a fair amount of Real Vision contributors come on, from Greg Weldon to Peter Boockvar, and talk about the breakout that we've seen in gold. And so far, a lot of contributors have been fairly bullish on this rally. I'm curious as to where you stand and what you see going on right now in the gold markets.
STEVE STRAZZA: So we're bullish gold, definitely. On June 20, it broke out above the $1,375, $1,380 level, which has been a critical level of resistance for about six years now. So now that we're above that level, we're definitely erring on the bullish side. And I have a trade idea today that's in the gold space.
But I wanted to talk a second about, like you said, a lot of technicians and a lot of investors are talking about gold broadly. And at The Chart Report, that's what we do. I call it the top technician, top-down analysis strategy.
So what we do is we look at the top technicians. We see what are the themes that they're talking about. And we see how can we express this theme into a trade idea or a trade setup.
And that's what we've done with gold. We see a lot of people talking about it. So now we've kind of dug in. I'm going to share some risk appetite ratios with you today. And I'll share a vehicle that we're going to use to express our bullish thesis in gold.
JUSTINE UNDERHILL: Now, in terms of the technicals, just looking at a basic gold chart, I can understand why the technicals might look good, because we are seeing a breakout. But stepping back and taking a look at the macro picture, stocks are near all-time highs. The dollar's fairly strong, given the fact that we might see a Fed rate cut. Unemployment's still pretty low. So why would now be the time to be looking at gold?
STEVE STRAZZA: Our bullish thesis on gold has nothing to do with the economy crashing, stocks going down, anything like that. This is isolated to gold, the precious metals complex. We're seeing bullish price action.
Stocks and gold can go up together. We've seen it many times throughout history. Gold and the dollar, they don't typically go up together.
So I guess our bullish thesis on gold really has nothing to do with equities at all. I think you could be buying equities right now, and I would be, as they're all resolving to the upside. And I think you could also be buying gold. And you're diversified in that way. So it's a great way to hedge.
JUSTINE UNDERHILL: So then is your thesis, a lot of it's predicated on weakness in the dollar specifically?
STEVE STRAZZA: That's one of-- I'm going to share like five characteristics today that I think you want to pay attention to and make sure are in place. And if they are, I believe that we're in the beginning of a new secular bull market in not just gold but precious metals.
JUSTINE UNDERHILL: OK, so starting out with the first out of those five things that you're going to talk about, what do you see going on with the dollar?
STEVE STRAZZA: So we want to see the dollar roll over here, stay below that critical 0.98 level, which has been key resistance for more than a year and a half now. It failed to break out twice earlier in the year a few months ago. And then it recently broke its downtrend line going back to early 2018. And now it's back and retesting that key 0.98 level again.
We want to see it roll over and fail here. That would be very bullish for gold and commodities more broadly.
JUSTINE UNDERHILL: OK. And so then, moving on from that, in terms of other precious metals, what are you looking at there?
STEVE STRAZZA: So when we look at gold breaking out, we want to look at the entire precious metals complex and make sure everything's clicking, that we're hitting on all cylinders in order for this to be a true new long-term breakout. So when you look at gold, you see a lot of very bullish price action. But silver's been lagging, and that's been a concern.
Palladium's been doing very well for multiple years now. So that's been the leader in the space. Platinum is finally looking like it's picking up.
So what I brought with me is a custom index of equally weighted precious metals. So that's all of them, platinum, palladium, gold, and silver. The one we're most concerned about is silver. We'll often also look at a ratio of gold to silver to gauge that outperformance or underperformance from silver. And the reason that we do this is, I'll liken it to last time I was on, I said frontier markets are to developed markets as micro-caps are to large cap stocks. They're the riskier. They're like the ugly stepchild. That's what silver is.
Gold bulls or gold bugs can get pretty crazy and pretty bullish on metals during bull market periods. But silver bugs are really where the true crazies hang out. So if we see silver working and moving to the upside, that's just a risk-on signal for the entire space that all metals should really be working in that environment.
JUSTINE UNDERHILL: And we haven't really seen as big of a breakout in silver right now. So what do you see going forward here?
STEVE STRAZZA: So we finally just got a breakout of a multiple-year downtrend line in silver. So that's something, nothing like gold. Gold is at new six-year highs. Silver is still facing overhead resistance, even from their year to date highs, I think, which are around the $16 level.
So we want to see silver continue to break above this downtrend line, see some follow-through, take out those year to date highs and keep moving higher. And the way we really wanted to see silver performing well is relative to gold. So we won't be paying close attention to either the gold to silver or the silver to gold ratio.
I brought a long-term chart of the gold to silver ratio. And that'll show you it's at pretty much nosebleed levels. Historically, it's rarely been over $80 an ounce, gold over silver. And it was briefly in the '90s, and it is right now. It doesn't seem to hang out at these types of extreme highs for very long.
So what I then did was I inverted the ratio using popular ETFs, SLV and GLD. And you can see, silver to gold, silver relative to gold, we have a nice bullish divergence in momentum as price just undercut some key lows. So I think you're starting to see that ratio thaw out.
And if we could get a failed breakdown and see prices reverse to the upside here, that'd be incredibly bullish. And to me, that'd be another feather in the hat for precious metals bulls. And that would be a sign that this rally is really going to have legs.
JUSTINE UNDERHILL: OK, so seeing silver specifically rally in regards to gold, that's going to be big for precious metals overall?
STEVE STRAZZA: Yes. And it's also important to point out that that's not just bullish for silver. That's also bullish for gold. So even though silver will be outperforming gold, if you look at the longer-term chart that I marked up with red and green, it shows the zones. It shows times when silver was outperforming. So that gold to silver ratio was falling. And you can see silver rising in the lower panel each time.
And if you were to chart gold in that lower panel also, even in periods where silver's outperforming gold, you're going to see gold rising. So it's good for the whole space, really.
JUSTINE UNDERHILL: So in addition to the dollar weakening and seeing silver outperforming, what other factors are you looking at?
STEVE STRAZZA: Right, so we want the dollar to be weak. Want gold to stay above that key resistance level. We want silver to keep moving and working to the upside. We want the silver to gold ratio to reverse and begin a new uptrend.
But then we also look at another very important risk appetite indicator in the precious metals space, which is simply the gold miners' performance relative to gold. So you can easily chart that with GDX, which is a popular gold miner ETF. And if you chart it over GLD, you'll see that it's been in quite a downtrend for some time. But it's finally basing. And we're starting to see this break a nice downtrend line and start moving to the upside as well.
So that's similar to silver versus gold. We want to see that investors are buying gold miners at a more aggressive rate than they're actually buying spot gold, because that's the higher beta leverage trade in the space. And it shows that those animal spirits are really alive and well.
JUSTINE UNDERHILL: So that people are taking on more risk in this space?
STEVE STRAZZA: Absolutely. And you can even take it a step further, same exact concept. But you taste the junior gold miners, which are really venture capital firms. They're literally looking for gold in the ground. And if they're being capitalized, and they're moving to the upside and working, then it means that there's a lot of bullishness in the space and that sentiment's really good. So you see those junior gold miners actually outperforming the gold miners. And that would be GDXJ.
And the gold miner ETF, GDX, is really gold producers. These are companies that actually have already hit gold. They have gold. They're often paying a dividend. They're mature companies, while the miners are really, they're like biotechs.
JUSTINE UNDERHILL: So right now, we've seen this rally in gold. Do you see that as a sustained breakout? Are we now in new bullish cycle for gold? Or is this simply a short-term trend?
STEVE STRAZZA: So I think that's still a big if. But I think that this is a very timely thesis in the sense that we're just seeing these risk appetite indicators that we just talked about. We're seeing them bottom out and start to move higher.
And if that happens, then to me, I would say, yes, we're in a new secular bull market for precious metals. This will be a one to three year thing at least. And you'll probably see gold move back to all-time highs, potentially silver also.
And I think in that scenario, you'll see the gold miners go too. But it's very important to just keep in mind, you only want to be in this trade for the long term. And it's only going to be a long-term bullish trade if all these five things are working.
JUSTINE UNDERHILL: So how would you go about trading your thesis?
STEVE STRAZZA: I think that GDX, the gold miners ETF, is really an excellent way to do it. It's a leveraged play. It's higher beta. You'll make more money on this than you will if you just are long gold.
For example, I think GDX is about 140% off its all-time high still. So in order to get back there, if you use that resistance level that I'm talking about, which is about $25.50, $25.25, that gives you about a 17 and 1/2 risk/reward ratio.
JUSTINE UNDERHILL: OK. And you would consider buying that even now, even though we've seen somewhat of a runup?
STEVE STRAZZA: Yeah, so there's a couple of ways you could play it. If you're going to hold on long-term, and all the risk appetite indicators that we're talking about and silver and the dollar rolls over and everything kind of plays out the way we want it to, I think, yeah, you can continue buying weakness all the way back to all-time highs. And that could be awhile.
There's other more tactical ways to play it. If you want to wait for prices to potentially retrace back to our risk level, closer to $25.25, $25.50, then you can get long there again and play a tactical trade just back up to 2016's highs. And then we also have a 62% Fibonacci retracement, which I have on the GDX chart. You could also use that as a price target.
So there's a couple of different ways that you could play this. But I think the bottom line is that this is a brand new secular bull market. So it's going to take some time to play out. There's going to be some backing and filling. And we could be buying weakness and betting on much higher prices over the long term if we're patient.
JUSTINE UNDERHILL: And where are you putting your stop loss on this?
STEVE STRAZZA: The $25.25, $25.50 resistance level in GDX that they finally just resolved above.
JUSTINE UNDERHILL: And then in terms of time horizon, you're in the long run? This is one to three years that you see it hitting the target?
STEVE STRAZZA: If you don't want to put on a more tactical trade-- and like I said, right now, I think we have about 15% to 17%, depending on where the current price is, back to the 2016 highs. You could play that as a trade and maybe buy weakness back towards the $25 level so that your risk is a little more well-defined on the long end. So you could definitely craft a tactical trade out of it.
But personally, me, seeing all these risk appetite indicators turn bullish, I'd rather be in it for the long run, not try to pick spots, and just kind of buy and hold and accumulate on weakness as we go.
JUSTINE UNDERHILL: What do you see as the biggest potential risk to this trade?
STEVE STRAZZA: If silver doesn't start working here, or if the miners don't keep working, what looks like failed breakdowns right now and whipsaw moves that are going to resolve higher, they could actually turn into prolonged downtrends. And if we do see that happen, and you do see silver-- again, silver's been outperforming for about a week now. It's been underperforming for months ahead of this.
Even as gold had shown strength earlier in the year, silver was not there. So we need to see this actually turn into a sustained move from silver. I think that's your biggest risk.
And you want to see the miners continue to work. As long as those things happen, and the dollar remains below 0.98, and the sideways or in a downtrend, this trade's going to keep working.
JUSTINE UNDERHILL: All right, can you briefly recap your trade thesis as well as the trade on GDX?
STEVE STRAZZA: Sure. So for this trade thesis to be in play and for it to work for a multiple-year time frame like we talked about, we want to see the dollar continue to roll over, stay below 0.98. We want to see gold continue to break higher, stay above the $1,375 breakout level.
We want to see silver do the same thing and move above those year to date highs and begin a new uptrend. And then we also want to see silver start outperforming gold. That's very important. And we want to see the miners outperforming gold, and the riskier miners, the junior miners outperforming the less risky miners, the gold producers.
So if all those things are happening-- and I've brought all the charts that you could look at to check on these things-- then you want to be long gold. And I think you want to express that bullish thesis through the ETF GDX. And the reason why you want to do this is because there's still a lot of room back to highs.
So you could do this in a number of ways. I would define your risk at that key resistance level that's now support that we've talked about at the $25.25, $25.50 level. Then you can either play the move in GDX up to the 62% retracement, which is at about $45. That gives you about an 8X risk/reward. Or you can play it all the way back to all-time highs, which, if you limit your risk at the $25.50, $25.25 level, that's about 8% of downside. That'll give you about a 17 and a 1/2 X risk/reward.
JUSTINE UNDERHILL: OK, great. Steve, thank you so much for breaking this down for us.
STEVE STRAZZA: Thank you for having me.
JUSTINE UNDERHILL: So Steve is bullish on gold. Specifically, he likes buying the gold miners ETF, ticker symbol GDX, at current levels with a stop loss at $25.25. His a national target price is $45. And he sees it breaking through all-time highs over the next one to three years.
Just remember this is a trade idea and not investment advice. You should do your own research, consider your risk tolerance, and invest accordingly. For Real Vision, I'm Justine Underhill.