Adding Rocket Fuel to Gold

Gold continues to very slowly work its way higher. It’s up 20% in the past 20 months. Junior gold miners, on the other hand, are already up nearly 80%.

Sometimes it’s worth the extra risk for the extra reward. This is likely one of those times.

We’ve been bullish on gold for a long time. We outlined our reasons for being bullish on gold last month. It triggered a Stock State Indicator (SSI) Entry signal in April and has been trending steadily higher.

Gold has a very low Volatility Quotient (VQ). Its VQ is only 11.1%. That’s on a par with the volatility of the S&P 500 itself. People tend to think that gold is volatile but it’s not. Waiting for gold to make a big move can sometimes be like watching paint dry.

However, Junior gold miners are like adding rocket fuel to gold’s engine.

GDXJ is the VanEck junior gold miners. This ETF is composed only of small cap gold and silver mining stocks.

Since the beginning of 2016, the price of gold is up almost 20%. But GDXJ is up almost 80%. It’s highly correlated to the price of gold, but with much more volatility.

GDXJ triggered an SSI Entry signal back in April 2016 and it hasn’t stopped out yet. (That was about a year before gold itself triggered an SSI Entry signal.)

The VQ for GDXJ is 42.2%. The top holdings in this ETF are overall very bullish. Eight of the top ten holdings in this ETF are currently in the SSI Green Zone.

Investing in the junior miners is not for faint-hearted investors. The VQs on these stocks start in the 40% range and are as high as 59%. Some of these have had huge gains to the upside as gold has creeped higher.

B2Gold (BTG) is over 100% higher since triggering an SSI Entry signal in March 2016.

IAMGOLD (IAG) is another of the junior miners that’s had an incredible run up. It triggered an SSI Entry signal in February 2016 and is up more than 150% since then.

Keep in mind that when you invest in such high VQ stocks, the amount invested should be kept small.

If you were to take $1,000 of risk in IAG, for example, that means you’d invest only $1,680 in the stock. If a $1,680 investment in IAG falls 59.4%, your investment would be down by $1,000.

Moreover, if you were to take the same $1,000 risk in GLD, the ETF for gold, you could invest almost $8,560. If your $8,560 investment in GLD fell 11.1%, your investment would be down $1,000.

Typically, the junior miners do well when the underlying prices of gold and silver are moving higher. We remain bullish on gold. And we believe the junior miners will continue to benefit from gold’s continued move higher.