Analysts See More Upside In Gold Miners ETF (GDX)

Trader:  These two charts show that golden times are ahead for the miners

by Annie Pei

Traders ought to keep going for the gold, according to one trader.

The gold miners have skyrocketed this year, with the ETF tracking the group (GDX) (GDX) (GDXJ) more than doubling in 2016. And Todd Gordon of TradingAnalysis.com says the gains aren't over yet.

"The gold market (GLD), the underlying gold futures and the gold miners continue to hold a strong bid despite the stock market breaking all-time highs," Gordon said Tuesday on CNBC's "Trading Nation."

Stocks and gold tend to move inversely, with safe-haven gold shrinking as stocks rise. But that hasn't happened this time around.

"I think a lot of it has to do with the lack of response in the dollar, and specifically the weakness we're seeing in the U.S. dollar despite a strong jobs report," he added.

A weaker dollar tends to be good for stocks, because as the value of each dollar falls, it should take more of them to buy the same amount of gold. Gordon looks at a daily chart of the dollar-tracking ETF (UUP) (UUP)to make his point.

"We're not able to take out those summer highs in the dollar," said Gordon. "[This] tells me there's an underlying weakness that might result to the downside, and that would push the gold market higher."

On a chart of the gold miners ETF, Gordon shows that the GDX has stopped short at $30 a few times before — and now that it's broken through, more gains could be ahead.

More specifically, Gordon believes that GDX could move through to $32 if the UUP continues its current trend. To play the GDX for the upside, Gordon buys the 31-strike calls expiring on the first Friday in September, and sells the 32-strike calls of the same expiration, an overall bullish play that has him paying $0.43 per share, or $43 per contract.

That's how much Gordon would be risking with the trade, while he could possibly make $57 should GDX close at or above $32 in the first week of September.

Meanwhile, from a risk mitigation standpoint, "if the GDX were to move below $30.50, I'll take this trade off and protect the premium that we've outlaid in this trade," said Gordon.

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Even as the gold miners ETF hits a three-year high on Thursday, two traders would still bet on the product due to ultra-low interest rates.

"I do think there's more to come" for the gold miners, said Brian Kelly of Brian Kelly Capital.

Investors are putting their money in gold these days, Kelly said Wednesday on CNBC's "Power Lunch," because of negative interest rates around the world.

When interest rates are high, gold looks worse in comparison, since the metal doesn't yield anything. But when rates are negative, a non-yielding asset actually looks like a more reasonable investment.

"The low- to negative interest rates that we're seeing right now are driving precious metals higher," agreed Dennis Davitt of Harvest Volatility Management, Wednesday on "Power Lunch."

Kelly and Davitt see these gains ahead for gold miners despite worldwide struggles in the metals and mining industry.

"Roughly 10% of global gold mines … are running at a loss," according to a recent Deloitte report on issues facing the industry this year.

So far this year, the GDX has risen about 130 percent. On Thursday morning, the ETF rose to the highest level since April.

Courtesy of cnbc.com