Trading in Hope and Fear

Gold, lithium trading

In today’s Money Morning…two trading ideas to consider…where to invest if you’re hopeful today…a second leg to the boom in this resource…and more…

Today I want to share a couple of trading ideas for you to consider over the weekend.

Both ideas are in the resources end of the market. But for once they have nothing to do with Chinese economic growth.

Instead these two ideas rely on primal emotion to drive them along. Such drivers can generate powerful returns for investors. If you are on the right side of the trade of course!

These emotions are hope and fear. Or more accurately perhaps, greed and fear.

I’ll get to these two trade ideas shortly.

But first let’s start with fear.

There has certainly been a lot of fear around this week. I’ve read headlines ranging from imminent Chinese collapse, through to imminent nuclear war. There’s a bit of a fear industry around at the moment. Which is why some people are saying this is the most reluctant bull market in history.

For a while the markets were ignoring the noise and moving relentlessly higher. But yesterday there were a couple of indications that markets are finally beginning to get a little spooked.

The S&P 500, the index of the top 500 companies on the US stock exchange, has dipped almost 1%. At the same time, the VIX volatility index — the so-called fear index — has risen for the past three days, jumping above the 15% mark for the first time since June.

The golden ticket

There is one place investors have been flocking to in times of uncertainty for thousands of years.

And that place is gold, of course.

It is a deep and liquid market and is considered to hold its value better than any other asset, especially in times of fear.

Now I’m not a gold-bug myself — an avid supporter of gold — but I do know a decent trade set-up when I see one.

Take a look at the chart below. It’s a monthly chart of the gold price over 10 years.


Source: Incredible Charts
[Click to enlarge]

You can see in the chart that the gold price has broken a medium term downtrend line that started in mid-2011.

A break of such a strong and relatively long trend line, is usually a strong indicator or new trend. To confirm a new uptrend, the gold price will have to rise to around $1,400 per ounce and set a higher high after the higher low it made in December 2016.

An uptrend is defined by an asset setting higher highs and higher lows as it fluctuates over time. A downtrend is the opposite.

If you want to invest in fear, gold, gold stocks or gold ETFs are good places to look.

If, like me, you are more optimistic, perhaps the other side will suit you better. The hope trade.

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A second up-leg is imminent

The resource that reflects hope and excitement for the future right now is lithium. The Tesla [NASDAQ:TSLA] story has been the catalyst for a spate of development in Australian lithium mining.

The Tesla model 3 currently has 400,000 pre-orders.

This is very good news for lithium producers.

Last quarter alone, approximately 307 million smartphones were produced worldwide, most of which were outfitted with lithium batteries. And it’s not just phones. Lithium compounds are found in power tools, tablets, golf carts, portable video games…anything that needs to be periodically recharged.

Global annual production of handheld lithium batteries surpassed five billion units a few years ago, and is showing no signs of stopping.

If that were the end of the story, this would already be a compelling investment thesis, given consumers’ endless fascination with electronic devices.

Consider the following: the average cell phone contains just one-tenth of an ounce of lithium; the average laptop computer about one ounce.

By contrast, a plug-in hybrid vehicle needs 20 pounds of lithium materials. That’s 320 times more than a laptop, and 3,200 times more than a smartphone. 

Simply put, if Tesla gets the kind of orders it seems to be getting, and if the world moves further to lithium batteries — well, I don’t think I need to spell it out for you.

Here is a chart of one particular lithium miner for you to consider. I’ve not looked into the fundamentals of this company too closely yet, but you will see a similarity to the gold chart.

This is a daily chart of lithium miner Pilbara Minerals [ASX:PLS].


Source: Incredible Charts
[Click to enlarge]

As you can see, it too has broken a crucial downtrend line. It is currently hovering around the 40c mark indicated by the orange line.

I have highlighted this line as it is a crucial psychological point of support and resistance. Any strong move above 40c could be an indication of a new uptrend.

A second leg of the lithium boom.

There are two ideas to consider looking at over the weekend. I certainly will be.

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: My colleague Jason Stevenson has some great research you can use to help you quickly identify the best companies to benefit from any new trends that develop. Check out his report here.

Ryan Dinse

Ryan Dinse

Ryan Dinse is an editor at Money Morning. With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

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