GDX: Forming A Higher Base?

About: VanEck Vectors Gold Miners ETF (GDX)
by: Dividend Investors

GDX still caught in a tight range at the lower long-term levels.

The all-important interest rate outlook could be influenced by energy markets and consumer inflation.

Chart levels at 18.90 and 31.80 mark the key range parameters in identifying the next major trend.

This year, gold markets have been something of a mystery for analysts and experts quoted in the financial media. Most of the market activity in the precious metal has fluctuated between the $1,200 and $1,300 marks, and this has made it difficult for companies that compose the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) to gain much traction. These bearish trends are perhaps most obvious when viewing the stock from the longer-term perspective. But what is also clear from this viewpoint is that a higher base has been posted over the last year, and this type of activity is often viewed as a precursor to potential rallies going forward. As a fundamental catalyst, investors can point to possible changes to the rate hike outlook at the Federal Reserve. If certain economic factors continue, a lower interest rate reality could make it easier for GDX to boost total revenue performances in its component companies. Here, we will look at some of the external factors that could alter the market environment for mining companies and potentially change the trajectory of GDX over the next few months.

In the chart above, we can see that the real pain for those holding positions in GDX came in late 2012 after highs were posted at roughly $55 per share. Those familiar with the price history of the underlying gold and silver assets will recognize this as a critical period and further evidence that the fate of the gold miners will rest on their ability to command higher prices for the assets they are able to pull out of the ground. This has been something of a point of contention for many authors and pundits that make price forecasts about GDX, but there is simply too much connecting these assets to ignore the relationship.

Long-term highs below $1,800 became vulnerable once the Federal Reserve started signalling its intentions to normalize its monetary policy. Higher interest rates can deter investors from entering into large precious metals positions because these are not yield-producing assets, and so rising interest rate expectations could be isolated as the primary reason behind the drastic fall in GDX. For these reasons, investors with positions in the ETF should continue to monitor the central factors that could change this outlook and its impact on the broader market activity.

The chart graphic above should give us a few insights into those very areas. Here, we can see that the one-year outlook shows drastic increases in consumer prices and from this we can gain a realization of what the Fed has been looking at when public commentaries are released. The trends here also show us slowing momentum that has occurred during an ‘improved’ market environment, which is another logical inconsistency that should be viewed as problematic for those with active positions in the markets. Further, these numbers are likely to continue seeing declines as lower energy costs at the producer level filter down to consumers.

Over the last five years, we have seen massive declines in the price of oil and very little in the way of topside corrective retracement. The prolonged nature of these trends suggests that we will continue to see reduced inflationary pressures - and this is something that could ultimately change the interest rate outlook at the Federal Reserve. If we do start to see changes in the monetary policy expectations at the Fed, the assets held by mining companies will likely see a boost and the result would be better valuations in GDX. These are not often factors that are seen as having a direct correlation with one another, but at this stage, the broader price trajectories could be guided by this if we do not see geopolitical uncertainty stories or major surprises in the underlying economic data.

Investors that are viewing the ETF from the medium-term perspective should find it encouraging that a base has formed at the 18.90 lows from the end of last year. This means that an upside break of 31.80 would confirm that a new uptrend is in place for GDX. Creating some level of doubt, however, is the fact that the prior failure at 31.80 validated 38.2% Fibonacci resistance in the same region. This means that investors should exercise caution on the next approach as another failure there would only strengthen the resistance level further. Indicator readings in the Commodity Channel Index suggest that prices have already deviated too far to the downside, and this could keep 18.90 support intact over the next few weeks. Investors ready to initiate long positions can consider this area for stop loss placements as this higher base will need to remain valid to confirm the outlook.

Disclosure: I/we 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.