Grading Top-3 Mining Stocks as Gold, Copper Price Breaks Out and Dollar Falls
Freeport-McMoRan and BHP are breaking out as copper and gold prices are on the rise.
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We’re digging the recent action in mining stocks. Some of the biggest names in the mining industry are breaking out to fresh 52-week highs, driven by rising commodities prices.
Precious metals and other commodities are breaking out, in part due to weakness in the U.S. dollar. The U.S. Dollar Index, which measures the greenback versus a basket of foreign currencies, recently fell below its 200-day moving average (red) and touched its lowest level since May.
Why would the falling dollar cause commodities prices to rise? The simplest explanation is that when the dollar weakens, it takes more dollars to buy an ounce of gold or a barrel of oil. In this manner, a weaker dollar creates inflation in the U.S.
Net-export countries favor a weaker home currency because it raises the value of those exports, as measured in other currencies. However, as a net importer, many of the benefits that can be obtained via a weaker currency elude the U.S.
Gold Vs the Dollar
It’s no coincidence that as the dollar reached its lowest level since May, gold reached its highest point since May. Gold is trading above its 200-day moving average for the first time since June (right chart), just as the dollar is trading below its 200-day moving average for the first time since June (left chart).
Like gold, copper appears headed for a significant breakout, after forming an ascending triangle pattern (black dotted lines).
This should help copper miners, which are already breaking out. Which stocks are best positioned to benefit from a further increase in commodities prices?
1. Freeport-McMoRan (FCX)
There’s an old saying among traders: “The longer the base, the higher in space.”
If that saying holds true, we can expect good things from Freeport-McMoRan (FCX). This stock has been forming a base (shaded yellow) since the start of this year. The stock finally broke out from that base last week.
With key mines in Indonesia, Peru and Arizona, Phoenix-based Freeport-McMoRan is one of the world’s largest copper miners. Based on this chart, Freeport-McMoRan appears headed toward the $90 to $95 area.
GRADE: A
2. BHP Group Ltd. (BHP)
Australia-based BHP Group (BHP) is also among the world’s largest copper mining companies. This stock has just broken out of a base that started forming in April (shaded yellow).
Based on the breakout from this pattern, BHP appears headed to the $115 area.
GRADE: A-
3. Newmont Corp (NEM)
Denver-based Newmont Corp. (NEM) is the world’s largest miner of gold. The price of gold has climbed by nearly 15% since the start of this month.
Newmont is trading within pennies of its all-time high, but still needs to break out of its current consolidation (shaded yellow). A breakout could result in this stock reaching the $160 area, but that breakout hasn’t occurred yet.
GRADE: B+
Bottom Line
We’ve been holding Freeport-McMoRan for years, and we’re opening a new position in BHP. We’ll consider buying Newmont if it can break out to new highs, as Freeport and BHP have already done.
At the time of publication, AUTHOR was long FCX and BHP.
