Is the rally fool's gold?

Gold has rallied over 7.7% in the past two weeks as global growth fears increase, oil collapses and central bank policy becomes evermore unconventional.

Source: Bloomberg

Gold is coming up on the US$1283 an ounce resistance level and with China growth numbers due on Tuesday, central bank announcements that could disappoint this week, and possibly gloomy business reads from Europe, gold breaking to the upside on an interim timeframe looks likely.

The trader in me sees gold having further room to run. The investor in me, however, sees gold waning in the back half of the year and that is why this is a short term trade idea.

With this in mind, I see equities giving me a bigger return, as additional benefits from the fall in the AUD and oil should benefit Australian gold miners on the cast cost side, increasing the gold rally.

Those companies that have strong balance sheets, with largely Australian-based operations and high grade production are the key beneficiaries  of the current conditions. The plays to watch would be the likes of Northern Star, Evolution Mining, Newcrest Mining and Regis Resources. The stand out of these is Northern Star.

The potential trade:

With this in mind, I remain bullish in Northern Star (NST). It’s Kanowna and Jundee assets have great synergies with the macro overlay stated above. I see NST outperforming its peers and it is the standout play in the gold space in the upcoming earning season.  

Buy the dips over the coming week, with a stop loss at $1.80 as mitigation to a possible move back in gold. I see NST heading to a record high of $2.25 as the three structural reasons mentioned come out in the actuals. I would look to take profit at the earnings announcements, or as gold begins to turn.

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