Worrisome Divergence in Gold, Miners ETF Charts

The placement of the 200 MA in both of these charts is somewhat puzzling. Given the strength of gold since the November lows, one would think that the miners would be displaying equal strength. However this is not the case.

GLD, which is roughly 1/10 the price of gold, has had a series of higher highs and lower lows and is trading above its 200 MA. This is a bullish scenario, whereas GDX has failed to remain above its 200 MA and is looking like it wants to roll over. When you take a look at the volume patterns of GDX you’ll notice considerable selling pressure in the past few weeks and when it did manage a green day the volume was in most cases under its 60 EMA.

While I’m not ready to throw cold water on the rally in gold itself, I remain a skeptic as to whether mining stocks are going to benefit from the precious metal’s rise. Right now the pressure is on the bulls to close convincingly above its 200 MA in the gold miners ETF, or I would be looking to short the sector in the upcoming days.

Comments

[Roger Knights:]

I can think of a few reasons why gold miners are lagging:

1. A substantial portion of their earnings depends on sales of base metals like copper, whose prices have tanked.

2. Many of the miners may have hedged (sold forward) much of their gold production for 2009 at below-market prices, insulating them in the near-term from gold's price rise.

3. Several large-cap miners have had secondary stock offerings or added debt recently.

Leveraged junior miners with low debt have been doing well lately compared to the seniors. (The one I like and own, because of its leverage, is Seabridge Gold (SA).)

Mar 16 09:15 AM

[Pat Shuff:]

Anyone notice how the oft-touted 3-5 times leverage of gold stocks to the pog only kicks in during declines and the gearing disappears on the rises. What a deal.

Suggests the so-called non-expiring 'embedded option' on the price of gold in gold stocks justifying a premium in share price should instead be discounted and has been.

Mine management manages to ensure that the rising price of what they sell never flows to and/or subtracts from the bottom line. Meanwhile, the dilutive share incentives awarded flow from the shareholder's pocket to the management's. Mine all mine.

They lost money at $250oz. They lose money at a $1000oz, resource depleted and a bazillion more shares later. That's why they call it a mine.

Mar 16 09:56 AM

[HBWOW:]

The mining stocks are collectively one of the most manipulated group by the "Big Boyz" whose tier selling and buying keep the market low and off balance. They of course continue to gradually pick up more shares without being obvious. The insiders are into the game as they wish to add to their holdings at lowest prices. The general investment public who are experiencing daily loss of investment wealth are exempt from hopeful gains in gold stocks. Chart GFI(compare to GLD, AEM KGC, ABX) to see how this large gold reserves and B/S net equity mining company relate to their volatile and grossly under valued stock prices.

Mar 16 11:07 AM

[bloex:]

The miners have doubled in value since the October low. Just a chartist battle with the 200 SMA before moving even higher. I peg 60 to 70 by late Summer. But GDX now and you will be smiling by the pool this Summer.

Mar 16 12:19 PM

[The Hern:]

Jeff, how come GDX was trading around 50 when oil was at an all-time high and the price of gold was similar to now, yet now that oil is almost 5x less and gold is roughly the same price, GDX is trading around 30? Isn't oil/gas a huge component of the costs of miners? Why wouldn't this be reflected in the price of GDX? I jumped into GDX at 20 but I still see no reason yet to sell...

Mar 16 04:14 PM

[RiskReturnO...:]

I've found VIX and GLD to be both good fear indicators, and inverse to SPY. GDX works the best when VIX and GLD are moving in opposite direction (occurs once in a while); in this environment, GLD is not fear indicator, but inflation hedge, and GDX rises with the rest of stock market.

Mar 16 08:14 PM

[Jeff Pierce:]

Hern,

I wish I could give you a detailed, value investor oriented response, but I trade only on technical analysis, and the charts point to lower prices right now. But if you're time frame is longer than a few weeks, then it's up for you to decide how to handle this position.

best of luck


On Mar 16 04:14 PM The Hern wrote:

> Jeff, how come GDX was trading around 50 when oil was at an all-time
> high and the price of gold was similar to now, yet now that oil is
> almost 5x less and gold is roughly the same price, GDX is trading
> around 30? Isn't oil/gas a huge component of the costs of miners?
> Why wouldn't this be reflected in the price of GDX? I jumped into
> GDX at 20 but I still see no reason yet to sell...

Mar 17 09:47 AM

[growthvalue:]

HELLO People..GDX has gained 100% since it's lows....GLD is not close to that number.....I would GDX has been much stronger.

Mar 18 12:20 PM