Gold Selling Exhaustion, Miners And The Bottom In Gold

by: George Kesarios

Several days ago I said that "Gold And Silver Might Bounce On Selling Exhaustion". Well I think exhaustion is probably confirmed, if one looks at what is going on in the metals today.

Gold and silver (intraday) and their respective ETFs, the Gold SPDR (NYSEARCA:GLD) and the Silver Trust (NYSEARCA:SLV) were up as much as 2.5% and 4.5% respectively. More important however is that miners were up twice as much.

So is this the real McCoy? Is this the bottom for all things gold and silver?

The answer is that we do not know yet. Let me reiterate my thesis on what I think will happen in gold and silver, and when we will be able to more safely call a bottom.

In order for us to call a bottom in the metals with some possibility of success, gold and silver miners must outperform the metals for a considerable period. The reason for this is that stocks are smarter than the metals, because they conform to known investment rules as we know them (revenue, profits, debt, equity etc).

So when investors think miners will benefit from mining (one reason might be because they might think the metal itself will go higher), then they bid up mining stocks. They sell mining stocks -- as has been the case over past several years -- when they think the opposite is true.

So the whole trick is (as far as I'm concerned) is to see when and if miners will outperform the metals. If and when that will happen -- for a sustained period of time -- we will be able to call a bottom in gold with a higher success rate.

Today, mining stocks as defined by the Market Vectors Gold Miners ETF (NYSEARCA:GDX) and the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) are outperforming gold by about a 2:1 margin. So on the face of it, mining shares share are indeed outperforming gold, which is what we want to see.

But mining shares will need to outperform gold itself for a considerable period of time in order for my hypothesis to be confirmed -- the hypothesis being to be able to call a bottom in gold.

And if we look at the chart below, that shows the relative performance of the GDX and GDXJ ETFs, you will notice that they have a long way to go before we can say gold has reached a bottom.

(Click to enlarge)

However, if we look at the intraday chart below, we see that on a very short term basis, miners have indeed been outperforming gold most of the time over the past period.

(Click to enlarge)

Gold or gold miners?

The answer is gold miners, because they will outperform gold over an extensive period of time, if indeed gold is close to a bottom.

Gold might be a buy in the future, when on a relative basis the miners stop going up, even as the metal keeps going up. That might be several years away.

Bottom line

I still think that gold will see $1,000 before we are ready to call a bottom in gold (perhaps even lower), however this is not a given. We don't know what gold will do, even if every analyst on the planet says it will go to $1,000.

However keeping a close eye on mining stocks will reward investors in the mean time, because if I am correct, mining stocks will outperform gold for a very long period of time before we can call a bottom in gold.

Two other very interesting ETFs in the gold space, are the Direxion Daily Gold Miners Bull 3X Shrs (NYSEARCA:NUGT), which is up about 17% as I write this article, and the Direxion Daily Gold Miners Bear 3X Shrs (DUSK), if you feel bearish on mining shares (it's down about 17% today).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.