Gold breakout’s while the stock market is rising should concern investors

Momentum investors, who are relentlessly pushing up stocks, are oblivious to the breakout in gold amid a relatively rare event. Because of that, prudent investors should pay attention.

Let’s explore the issue with the help of a chart.

Chart

Please click here for an annotated chart of SPDR Gold Shares

GLD, +0.41%,

a gold exchange traded fund.

Note the following:

• The chart shows the previous resistance line, which has now become the support line.

• The chart shows a technical breakout in gold. This is a positive for gold but negative for stocks.

• The chart shows the breakout occurred after two shallow pullbacks. This is a positive for gold.

• The chart shows that the breakout is occurring on four rare things coming together.

• Gold is priced in dollars. For this reason, when the dollar rises, gold falls. Lately the dollar is becoming stronger, but gold is jumping instead of sinking.

• Typically gold goes down when the stock market goes up, especially if there is an aggressive increase in the stock market, as has been happening lately. However, gold has broken out as the stock market has ascended.

• Gold typically goes up when there is a new safe-haven event, such as war. Here, gold did not break out on the emergence of the coronavirus crisis. However, now that the coronavirus scare has been subsiding, gold is moving up. Gold breaking out under these circumstances is rare.

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

• The smart money (professionals) has not been buying gold until now, but it has jumped in with light buying. This behavior is rare, as the smart money typically buys on pullbacks.

• This breakout in gold is of major significance, as the Dow Jones Industrial Average

DJIA, -0.44%

 is in a strong uptrend and investors’ portfolios concentrated in mega-caps such as Apple

AAPL, -1.03%,

Amazon

AMZN, -0.79%,

Facebook

FB, -1.34%

and Alphabet

GOOG, -0.56%

GOOGL, -0.52%.

• Semiconductors have been the leading indicators of the stock market. Investors should keep a careful watch on semiconductor stocks such as AMD

AMD, -2.77%,

Micron Technology

MU, -1.65%,

Nvidia

NVDA, -1.91%

and Intel

INTC, -2.47%.

Semiconductors are overbought and vulnerable.

• Investors should also keep an eye on short-squeezes in stocks such as Virgin Galactic

SPCE, -0.24%,

Tesla

TSLA, -1.96%,

Enphase

ENPH, +2.66%

and SolarEdge

SEDG, +11.25%.

• There are new concerns about the coronavirus and its impact on earnings. Investors should stay tuned to the news from China as well as to earnings-related announcements.

What does it all mean?

Stay cautiously bullish on stocks and consider adding gold, silver and precious-metals stocks on pullbacks in the broader market.

Among ETFs, consider watching iShares Silver Trust

SLV, -0.52%,

VanEck Vectors Gold Miners ETF

GDX, +0.00%

and VanEck Vectors Junior Gold Miners ETF

GDXJ, -0.64%.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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