Gold Mining Shines During a Tough Week

Last week's market action has some important and interesting messages. We see rapid sector rotation, with a dramatic fall in some of last week's leaders and soaring ratings for new choices. The overall market rating is mixed -- still bullish, but lacking the strength of recent weeks.

We look beneath the overall market averages to find sector strength in our universe of 57 ETFs. The strength may be momentum-based, reflecting recent Trends, or it can represent part of a cyclical pattern in the sector. The process adds a touch of anticipation, so we call it the TCA-ETF system. (The complete current rankings are at the end of the article, along with an explanation of our methodology.)

Falling Sectors

Home Construction (ITB) plummeted from #4 last week to #51 and a place in our "penalty box." Networking fell from #6 to #44, and also went to the penalty box. These are extremely rapid one-week moves.

Market Averages

While the model retains bullish ratings on the S&P 500 and the Dow, the Q's are in the penalty box, as is the inverse ETF, the PSQ. This is a neutral rating on the Nasdaq.

Spotlight on the Gold Miners

The ratings star of the week was the Market Vectors Gold Miners ETF (GDX), shooting from #46 to #5 in our ratings. We last featured GDX in November. That article pointed out the low concentration (37% in the top five holdings), the heavy Canadian exposure (67%), and the low correlation with the S&P 500.

Part of our analysis was the advantage of taking gold stocks rather than the metal. We are not going to repeat the entire argument, so take a look.

Here is the chart.

Fundamental Analysis on Gold

There are several distinct viewpoints on the current attractions of gold stocks.

• One camp predicts that current government policies will inevitably lead to inflation. Tom Lydon summarizes those views and some alternative investments.
• Maoxian points out that the astute hedge fund manager, John Paulson, has been accumulating a gold position, including GDX.
• James Kostohryz takes a different viewpoint, although he still sees the potential for short-term gains. He writes as follows:

...gold is moving from being traded as “safe haven” play and is gaining a bit of traction as a “reflation play.” Notwithstanding, it is important to note that even within the context of the broader reflation play, gold and gold stocks have badly underperformed other commodities and commodity stocks.

I do not think gold will rally very far based on concerns about inflation. The reason is simple: The arguments offered by gold bugs for hyperinflation or high inflation, are empirically and even theoretically unsound. There is minimal risk of significant inflation occurring any time within an investment horizon that can be considered to be highly relevant to the market (1-2 years). Thus, as the data roll in, and this reality sinks in, gold will lose its appeal as a supposed inflation hedge.

It is always interesting to see divergent viewpoints and explanations. For the moment, we are once again buyers of gold miners via GDX.

Weekly TCA-ETF Rankings

45 of our 57 sectors are in the "buy" range. While a few sectors have extremely strong ratings, the overall picture is much weaker than it has been in recent weeks.

The daily portfolio lost about 9 percent on the week, with the S&P 500 down about 5 percent. This reflects the rapid nature of the rotation, and the fact that the system does not call "tops." We do exit when a sector moves into the "penalty box."

We traded out of two positions on Friday, the day after the regular ratings update. There is a reason for publishing this as we do. The ETF Update is designed as news information -- something to augment the trading ideas of our readers. For accounts that we manage, we run the model at least twice every day. Even for those in the weekly programs we may adjust at mid-week. Those who really like the concept should call us to discuss our program. We are not suggesting that people should read our weekly ratings and make their own trades, strictly on this basis.

Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.


Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETFs pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETFs. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box." The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Comments

[DONE_SONZ:]

Inflation and hyperinflation- are caused by an excessive growth of the money supply.Monetize debt-to coin money.

May 18 06:28 AM

[OLD CRONE:]

WHAT ARE YOU THINKING ?...DO NOT HOLD METALS !....WITH GLD BEING '''' PAPER '' SORRY YOU THINK THAT WAY,...

May 18 09:46 AM

[Jeff Nielson:]

The author is correct that gold miners are grossly undervalued versus the price of bullion (with valuations for silver miners even worse). Secondly, what isn't mentioned is the implicit leverage in all gold miners - typically 5 times greater than bullion, or more.

For those who wish to delve more deeply into this sector, I recommend the "junior producers", where dozens of these companies can be found on Canadian exchanges (the TSX and Venture exchange), one of the largest stock exchanges in the world.

"Junior producers" (while carrying higher risk), typically have far superior production-growth profiles than even the BEST of the mid-cap and large producers. With bullion prices HIGH and costs LOW, the risk for these producers has been greatly diminished.

May 18 11:55 AM

[Vuke:]

The article states: "There is minimal risk of significant inflation occurring any time within an investment horizon that can be considered to be highly relevant to the market (1-2 years). "

Possible so, but there is considerable risk of a currency crisis or market meltdown within that period. I'd much sooner be in a sure win two years from now than lose it all to bad luck.

Jeff Nielson has a good point. Some of the juniors have performed spectacularly while many remain poised for similar gains as copper and other metal demand picks up.

Check RBI, YRI, DGC, URE on tsx.com Waiting for VTR, which has a huge copper porphory and >1M oz. gold in Burkina Faso. It trades at $0.14 !!

May 19 11:41 AM

[Whippet:]

It would be fantastic to have a junior miners ETF- it would eliminate the need to do pink sheet trades, and you wouldn't have to spend 10 hours a week poring through the prospects of each penny stock. Pooling the top 50-100 of these would be an ideal way for the savvy yet time-constrained investor to get exposure.

May 19 01:51 PM

[Rebekah:]

Let's think more about recycled gold more in this post inconvenient truth era. www.rebekahgreen.com

May 19 04:17 PM

[Mad Hedge F...:]

Look at ABPeter Monk’s Barrick Gold (ABX) snared approval for its Pascua-Lama adventure after Chile and Argentina signed a tax treaty on how to treat the mine’s profits. When completed, the $3 billion, 13,000 foot high project will be one of the world’s great engineering achievements, extracting a forecast 800,000 ounces of gold and 35 million ounces of silver in the first five years. This will raise the company’s production by 10% at a time when precious metals are getting increasingly hard to find. Just another reason to buy one of the world’s best managed companies producing the most sought after product.

X.

May 19 11:30 PM