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At dawn – flag formations can predict a sharp rise or a sudden fall
By Rod Blake
If you are a resource stock investor, then the first 1.5 months of 2020 have been very kind to you, especially if your portfolio has been overweight in the gold/silver sector.
I don’t know the exact numbers, but I’m pretty sure that aside from the high tech sector, the gold/silver sector has been the best performing market segment so far this year. This year alone, the price of gold bullion has risen from around US$1,520 per ounce to set a new high of around US$2,070 and currently sits around US$1,900 for a gain at this day of about 25%.
Silver has done even better – climbing over 40% to currently hit US$25/oz. Similarly, the TSX Venture Exchange – the exchange that best reflects commodity issuers – rose from around 586 to a two-year high of 754 in early September and currently sits at around 715 – an increase of about 22%.
All this after the price of gold and silver fell around 11% and 38%, respectively, and the Venture Exchange fell around 40% in March during the onset of the Covid pandemic. -19 and the subsequent stock market crash. To achieve these gains in such an uncertain year has certainly been quite remarkable. When I was a trader, I used to cringe at the thought of the summer months as the Venture Exchange more often than not entered a “doldrums” induced correction that gave up often to most of the earlier gains in the year. This year – not so much.
The question now, of course, is where does the market go from here? Are these gains sustainable? Has the market peaked and is it falling now or is there even more potential ahead? Let’s take a closer look.
The price of gold, silver and, by inference, the TSX Venture Exchange all had a strong start to the year, sold off during the Covid-19 crisis and subsequently reached new highs. recent highs. All have pulled back somewhat from those highs and now appear to be trading – as seen on the Venture Exchange – in a biting sideways pattern.
But where the Venture was constrained for most of September, the charts for gold and silver are remarkably different. Where the Venture has risen steadily and formed a plateau top, gold and silver have both risen sharply since mid-summer and are now forming what appear to be very distinct and similar “Flag” formations. .
Flag formations are significant in that they are usually formed with a sharp rise in price followed by a relatively short period of congestion which can result in another sharp rise or sudden drop in price. Gold and silver both made remarkable gains from July to August to form their flagpoles and over the past month or so appear to be forming their next flags. What’s really interesting is that this is the second flag formation for gold and silver in the past few months. The two formed very similar patterns in early May and both broke out dramatically above their masthead tops to set their new August highs. This is the plot of flag formations – the magnitude of movement off the flag – up or down.
What is the outlook for resource stocks from here? Time will tell, but markets must first digest and hold onto the year-to-date gains. Gold and silver had an exceptional year. Copper hit a multi-year high of US$3.11/lb and crude oil appears to be holding around US$40/bbl, which is positive for resource investors. September to November can be very hectic for the stock markets. This fall, with a possible second wave of Covid-19 and an impending US presidential election, could make the next few months extremely volatile. Locking in well-deserved profits is never a bad decision to make.
Looking further ahead, the future for resource investors still looks bright. The momentum that has pushed tech stocks to all-time highs appears to be waning and that money has to go somewhere – perhaps in the resource sector. The world accepts the Covid-19-induced trillions of dollars that central banks have pumped into the economy, and that should be positive for hard assets such as precious metals. Meanwhile, government-sponsored infrastructure projects should benefit base metals and increased economic activity can only help the very depressed oil market.
More importantly, keep an eye out for those gold and silver cards. Their flag patterns seem to form in the equal winds of uncertainty and opportunity. We have already witnessed the power of this model earlier this year. If history repeats itself and it breaks to the upside again, then we could see moves of a larger magnitude than what we have seen previously. If they are falling lower, look for buying opportunities as the New Year approaches. The flags are up and the wind is blowing. The next few months will be really very interesting.
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