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A Ferocious Breakout by Precious Metals

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Gold and silver are preparing to reverse an 18-month correction.While Wall Street's zookeepers tighten restraints around the waking bear that was tranquilized after last year's equity-mauling rampage, elsewhere in the park, an animal has broken free.

Leaping a tall fence and trampling its short captors, the gold and silver bull is running amok. By itself, a quick $40 surge in the gold price is not without precedent. But a nearly 10% move in silver, and a dramatic breakout throughout the precious-metals mining group, signals an obvious sea change from the range-bound trading that had characterized recent months.

Reading the gilded tape
So far this week, the SPDR Gold Shares (NYSE: GLD  ) ETF is up more than 4%, the iShares Silver Trust (NYSE: SLV  ) has tacked on 10%, and the shares of miners have fared even better. In a dramatic display of the leverage to metal price increases that mining shares are expected to eventually deliver, the Market Vectors Gold Miners ETF (NYSE: GDX  ) has surged more than 15% at the time of this writing. From Tuesday's close of $38.79, it rose to nearly $45 intraday Thursday. Remarkably, even large-cap miners Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) -- both heavily weighted within the Gold Miners ETF -- have enjoyed a greater-than-13% lift since Tuesday's close.

Having suggested that Fools hone their focus upon intermediate and junior producers, let's see how my top picks have performed. After an 18% surge, my top pick for gold in 2009 -- Agnico-Eagle Mines (NYSE: AEM  ) -- has outperformed the S&P 500 by some 20% so far this year. Silver Wheaton (NYSE: SLW  ) , which I highlighted as an unmistakable value at $2.51 per share last November, has blossomed into an easy four-bagger, appreciating 16% since Tuesday's close. Not surprisingly, shares of many junior miners and explorers have exploded to the upside, with accompanying moves of more than 20%.

As seen in the tea leaves
Not to toot my own bull horn, but this breakout came as little surprise to those who followed the combination of technical and fundamental indicators that I track for Foolish readers. From a technical standpoint, the longer-term charts have displayed an inverse head-and-shoulders formation recognizable since the midsummer. More recently, gold's trading range contracted within a shrinking triangle that suggested a looming breakout.

To some degree, I believe the analysts are correct in calling this a technical breakout. Institutional momentum-based buying and short-covering appear to be at play as we head into September, historically one of gold's strongest months of the year. However, as a long-term investor tracking the fundamental landscape for precious metals, I am focused on some nontechnical factors that may be boosting the strength of the move.

Stay tuned for that analysis. In the meantime, Fools who have patiently awaited this monster move in gold and silver can take a moment to rejoice in a call well made.

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at CAPS lists 44 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker carries a silver coin which reads: "Honest value never fails." He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines and Silver Wheaton. The Fool owns shares of iShares Silver and has written a strangle on it. Try any of our Foolish newsletters today, free for 30 days.

The Motley Fool's disclosure policy is 0.999 pure.

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10/21/2016 4:00 PM
ABX $16.92 Down -0.12 -0.70%
Barrick Gold CAPS Rating: ***
AEM $49.05 Down -0.12 -0.24%
Agnico-Eagle Mines CAPS Rating: **
GDX $24.62 Down -0.19 -0.77%
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GLD $120.83 Up +0.09 +0.07%
SPDR Gold Trust CAPS Rating: **
NEM $36.35 Down -0.66 -1.78%
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SLV $16.65 Up +0.01 +0.06%
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SLW $24.33 Down -0.08 -0.33%
Silver Wheaton CAPS Rating: ****