Got an interesting question: What would the fundamentals be behind a REALLY HUGE run-up in gold? I’ll answer that toward the end.
But first down to business! Today let’s roll up our sleeves and look at one of the first-quarter market darlings, NUGT. NUGT is a VERY risky thing, so be warned up front!
NUGT is a 3x ETF, tracking a basket of gold mining stocks. There’s a lot going on in that short description. What it means is that NUGT is leveraged so that a 1% move in the tracked basket translates to a 3% move in NUGT. As gold mining stocks are a very nervous bunch, this means you’re making a nervous thing more nervous. So NUGT is something you want to trade with caution, not abandon.
As an ETF you can trade NUGT like a stock. The price moves during the day, with lots of volume, so getting in and out is easy, even if the price is not always predictable. NUGT has been known to move 40 cents in a single second, especially near the open and the close. And sometimes even more, if there’s news out. You’ve been warned!
I trade NUGT technically, meaning with an eye on the price levels on the chart. What’s the chart telling us now?
The 1-year chart of NUGT shows a sobering story. After a choppy run-up from January to August, NUGT has dropped from about 36 on August 12th to almost 11 today. That’s a 68% drop in two months! No wonder the gold bulls seem a bit panicked.
Really, if you think about how the market works, it’s nothing to panic about. Unless you held on during the drop, of course! Smart traders were lightening up or getting out completely as NUGT stepped down through 32, then 30, then 25, then 18.
Now what are we looking for?
I’ve drawn my choice for next-level-down for NUGT. While NUGT seems to be firming up here between 11 and 12, there was a pretty solid support at 10 back in February. 10.18 if you want to be precise. 10.17 was as close as I could draw the thick red line.
Readers with experience with technical chart patterns may notice NUGT is in a descending triangle now, starting just below 14 with a floor at 11.09. When stocks and ETFs break out of any kind of triangle, they tend to move in a hurry, one way or the other.
Typically, a descending triangle shows downward pressure. The most likely direction for NUGT to go is down from here. Dropping from 11 to 10 wouldn’t surprise me a bit.
On the upside, a run from 11 up to 14 is less likely, but still possible. I just don’t see that happening in the current environment.
However, I don’t see any change in the long-term fundamentals. This is where we get to the question posed at the beginning.
The world is deeply in debt, with no solution anywhere in sight. The national and international banks continue to play shell games with debt like it doesn’t matter. “I’ll buy yours if you buy mine.”
When you hear about a bailout they’re usually doing it with taxpayer money. If you pay federal taxes, that’s YOUR money they’re using.
Right now NONE of the big countries are running a national surplus. So bailout money is coming from new bond issues. Bonds are debt, with interest payments. Which is paid until the bond is fully paid off.
Which won’t be for many, many years. Or until the system collapses and the bonds are written to zero.
If that point approaches, local currencies will start to collapse. If that happens, you can expect gold, and NUGT, to hit new highs. And then some.
But probably not this week, this month, or even this year. If I see that looming I’ll definitely let you know.
Signed, The Gold Enthusiast
DISCLAIMER: At the time of writing, the author is long NUGT and DGP, with small positions in some individual gold miner stocks.