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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, June 25, 2020

1. Markets signal less fear, but still not unafraid

2. Gold is more than a hedge now

3. When the Canadian dollar rises along with gold

Market Moves

The price of gold has remained relatively unchanged for the past two days after the precious metal broke out of a months-long trading channel. At the same time the CBOE Volatility Index (VIX) fell significantly on a rise of one percent by the S&P 500 index (SPX). This sets up an interesting opportunity for adventurous traders looking for strong gains as stocks struggle when hitting new highs.

The chart below details how the VIX fell today, creating a significantly larger red candle than the green candle made by State Street's S&P 500 index fund (SPY). This implies that investors are rethinking their fear from yesterday and considering re-entering the market. However, it should be noted that the VIX still closed at 32.2, a relatively high level for this index.

If investors are less fearful and yet not interested in buying up the stock market enthusiastically, then chart watchers need to cast a wide net for trading ideas at a time like this. One suggestion might be to consider gold-related stocks from the country that has so many of them: Canada.

[READER SURVEY: We are running a two-week survey of our U.S.-based readers to gauge your sentiment and see what moves, if any, you have been making with your money given the market recovery. We'll share the results, as always, and we thank you for your time and participation.]

Gold is More Than a Hedge Now
The price of gold, as tracked by State Street's Gold index ETF (GLD), has broken into a higher price range, even as the value of the U.S. Dollar index (DXY) has also risen. That is very significant because gold is most often priced in dollars, which means that mathematically the price of gold is inversely correlated to the greenback. If the dollar is rising at the same time as gold prices, that signals that demand for the metal is growing.

The chart below shows how the dollar index moved lower while the price of gold held steady. However, lately the price of gold has been on the rise while the dollar index is also rising. These moves make sense given that investors are feeling both opportunistic and nervous nowadays. It also makes sense that these conditions could likely continue for the next few weeks.

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When the Canadian Dollar Rises Along with Gold

Compared to the U.S. dollar, the Canadian dollar (CAD/USD) is strengthening. This creates a double bonus for gold mining companies based in Canada. The chart below compares several of the largest gold mining companies that do business in Canada including: Kinross Gold Corporation (KGC), Iamgold Corporation (IAG), El Dorado Gold Corporation (EGO), Barrick Gold Corporation (GOLD), and Franco-Nevada Corporation (FNV). These stocks did very well in April and appear to be rising off of their lows recently.

The Bottom Line

Stock indexes rose today even as volatility measures fell significantly suggesting less fear for investors. However, less fear is a long way from no fear, so a trade that capitalizes on both fear and opportunity should be interesting right now. As it turns out, Canadian gold stocks appear to be doing quite well.