Choo Choo, Here Come The Miners

Making money in the market isn’t always straightforward and usually requires an edge, which can sometimes be found by thinking about about how the flows of capital work.

Take for example the recent surge in metals. On a weekly chart, you can see silver has broken out of a channel that had constrained it for the past couple of years.

So too has gold been on a tear recently, soaring to the moon as they say.

So, what’s the angle to make money now that the metals and indeed commodities have already run?

Key Points

• Gold and silver have run substantially higher on their weekly charts, as have many commodities with cocoa being the breakout star.
• A continuation or sustained increased in prices is likely to benefit miners, that have not yet fully reflected the breakouts.

How To Spot The Opportunity

If you simply track the flow of capital for businesses, the opportunity to spot money-making trades can leap out. A business has costs and revenues so when the top line goes up and the costs stay the same, the profits should follow. And that’s precisely what should happen to miners now if metal prices and commodities more generally remain elevated.

It’s clear that the miners ETF (GDX) has not yet caught up to the breakout that’s occurred across the board in commodities and precious metals.

That’s not entirely a surprise because, until the earnings reports are actually announced, there is room for doubt and higher costs to creep in as announced by management teams.

In aggregate, however, the thesis should play out in favor of the bulls where rising revenues across the sector lift up share prices as investors reward the higher profits that follow.

Breakout Already Occurred

As you can see from the chart above of the GDX, the technical breakout has already occurred in the miners. Now a pullback would be ideal to offer an opportunity to get on board the next leg of the rally.

Only a sharp reduction across the commodities space from gold to silver to cocoa and beyond would strike a blow to the thesis.

It’s no fun chasing an ETF that has run up from $26 to $33 in the space of a few weeks, but a pullback to what had been the downtrending resistance line would offer support and and an attractive entry point around $32 per share.

If history doesn’t repeat but merely rhymes, the odds are that this rally continues for some time, even if a short-term correction to reflect profit-taking occurs soon.