GDX - This Breakdown Is Fake
Summary
- Miners are approaching a very dangerous spot after almost breaking out a few weeks ago.
- However, this move seems to be fake and will offer an interesting entry for longs.
- This move will be supported by further economic growth and a weakening dollar.
The most active gold mining ETF the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) is currently breaking down and on the verge of doing serious damage to one's gold mining investments. In this article, I will tell you why this breakdown is fake and why I am buying gold miners.
From Almost Breaking Out To Breaking Down?
Normally, I never start with technical analysis but in this case, we are at an interesting point that might cause a lot of traders to make the wrong investment decision. What we see is that gold miners are breaking down after almost breaking out just a few weeks ago. A technical breakdown could drag miners down towards the Q4/2016 lows.
The last thing I want to mention regarding technicals is that these patterns tend to fail the further a certain charts moves towards the 'end' of the pattern. Not only does this add a little bit to the bull case, it is also fully supported by the indicators I am about to show you.
The Big Picture (Almost) Never Lies
The picture below might seem a bit messy without the proper explanation. What you see are three lines. The green line displays the leading economic ISM manufacturing index, the red one shows the inverted USD index while the candlestick graph displays the gold price (GLD).
The very first thing that strikes me is the fact that gold is not breaking down but close to breaking out. The gold price has stabilized in the fourth quarter of 2017 and is currently testing the downtrend that started after the recovery of 2016.
Most importantly, this move is fully supported by the USD. The simple sounding reason is the strong economic trend in the US. Hence, the green line which shows the leading ISM manufacturing index. This index tells us what we can expect in terms of economic growth over the next 1-3 months.
The most recent numbers showed a further acceleration to 60.8 points, which is a 14-year high. Not only does this mean that we are about to see stronger earnings, industrial production, retail sales et cetera, it also means that the dollar is likely to weaken further. Money will flow into cyclical regions and currencies, which will cause the dollar to underperform major currencies like the Australian dollar, Euro and Canadian dollar.
It also means that inflation is going to accelerate even further given the current strength of commodities. Below, you find the leading regional prices received index, which is a very good indicator of consumer prices growth.
The result is nothing short of stunning. Pricing sentiment has hit its highest level since 2011 after being in the strongest uptrend since the early 2000s.
This, in combination with a weakening dollar and strengthening economy is a beautiful bull case for gold miners.
If you want more info about the ISM index and regional manufacturing surveys, feel free to use the links below.
So, Why Are Miners So Weak?
I believe that the graph below shows the current situation very well. We are seeing a significant divergence between the world's most famous shiny metal and its miners. This happens to occur during the same time when the stock market is in a very volatile time of multiple severe down days.
Gold miners are currently the victim of their own characteristics of being companies instead of a commodity, which is not prone to higher interest rates and people having to sell their stocks to protect their portfolio.
This is another reason why the current breakdown is fake. There is no fundamental explanation to actually sell or even short the current gold mining trend.
Especially not because traders are repositioning themselves for the next leg up for gold.
Future Traders Are Not Turning Bearish
At least not when it comes to gold. The dollar is a different story. Asset managers have lowered their net exposure to the lowest levels since 2013 right before the dollar uptrend started. Traders are riding the dollar bear but covered some of their shorts recently. Note that this happened during the same time when the stock market got ugly and entered a risk-off scenario where people bought into safety.
Source: Tradingster
Net gold positions show something similar. Moreover, the two boxes show the performance during gold uptrends. Every time money managers' net positions drop to the lower bound of these boxes at around 150,000 net contracts, we can expect higher odds for gold to accelerate to the upside.
Source: Tradingster
Takeaway
Everything fits very well together to buy this failed gold mining breakdown. Gold is about to soar further backed by strong economic growth, a weakening dollar and a minor repositioning of smart money. Especially the divergence between gold and gold miners will cause traders to play catch-up over the next few weeks.
And to answer your inevitable question why I am buying GDX instead of single gold mining stocks, I can say it's because I am trading a very specific macro case. I do not want to add single company risk, which could cause me to underperform or even lose money even though the bullish gold miners call could be right.
What do you think? Is this a buying opportunity or are miners going to retest the lows? Let me know in the comment section below!
And as always...
... Stay tuned!
Thank you for reading my article. Please let me know what you think of my thesis. Your input is highly appreciated!
This article was written by
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