Gold Stocks: A Tale Of 2 Markets

Includes: BVN, GDXJ, GG, GORO, IAU
by: Clif Droke

Select gold stocks show promise, but group remains weak.

Until gold strengthens and dollar weakens, investors should avoid.

Gold stock internal momentum needs to improve on short-term basis.

Gold mining stocks as measured by the popular averages like the PHLX Gold/Silver Index (XAU) have gone nowhere since April. Yet below the surface, there are signs of promise among individual mining shares. In today’s commentary, we’ll examine this bifurcated market condition and remove the chaff from the wheat to see just where the strength is coming from. We’ll also see that while short-term conditions remain weak for the mining stock group, improvement should become visible by later this summer.

Before we begin our review of the mining stocks, let’s examine the physical gold market to see what’s mainly responsible for holding the XAU back. The answer to that question is immediately apparent when we glance at the chart of the iShares Gold Trust (IAU), below. IAU has been bottoming in the last few weeks after coming off a disappointing performance since its prior peak in April. Since gold and the XAU tend to trade in sympathy, a downward-sloping gold price pretty much guarantees a weak performance for the share price of companies which mine the metal.

iShares Gold Trust

Source: BigCharts

It’s also not helping the mining stocks that the U.S. Dollar Index (DXY) has been buoyant of late and has prevented the gold price from rallying due to gold’s currency component. Although DXY recently fell under its 15-day moving average, which signifies a temporary break of its immediate-term upward trend, the dollar index is still just under its yearly high. Until DXY shows greater weakness it’s unlikely gold will be able to build enough upside momentum to allow the mining shares to rally.

U.S. Dollar Index

Source: BigCharts

Turning our attention to the mining stocks, the PHLX Gold/Silver Index (XAU) continues to meander sideways in a narrowing range as shown in the following graph. As I intimated in a recent commentary, the XAU needs to break out decisively above its nearest chart resistance at the 84.00 level to show that the bulls have decisively taken control of the immediate trend. As long as the XAU remains under 84.00, the trend is neutral. Of concern, however, is that the XAU will also remain vulnerable to a selling raid in light of the following consideration.

PHLX Gold Silver Index

Source: BigCharts

One of the simplest ways of measuring the incremental demand for gold stocks is to look at the cumulative new highs and lows for the 50 most actively traded mining shares. The following is the graph of this indicator since the beginning of April. It needs no additional commentary other than to say that the trend of the new highs-lows is down, and until this important measure of demand reverses its decline, the overall mining stock market is assumed to have an undercurrent of weakness. As long as this internal weakness persists the risk of buying individual mining stocks is still greater than normal. For now, I suggest waiting for this indicator of market health to show improvement before making any new additional purchases among the mining stocks.

Source: WSJ

It’s worth mentioning, however, that the 24-week rate of change (momentum) of the new highs-new lows indicator continues to improve. This indicator (below) isn’t enough by itself to warrant a bullish stance on the gold stocks in the immediate term. However, it does suggest that we could see improvement in the mining stocks in the coming weeks – assuming the 24-week indicator continues to rise and eventually enters positive territory (it’s still in negative territory as can be seen here). The rising trend in the 24-week momentum indicator is also reflective of the relative strength visible in some select segments of the mining stocks. Meanwhile, most of the actively traded mining shares are feeding off the negative short-term momentum visible in the new highs-new lows indicator shown above.

Source: WSJ

The weakest segment of the gold mining stocks is the junior miners. Shown here is the VanEck Vectors Junior Gold Miners ETF (GDXJ). Not only is GDXJ below its 15-day moving average, it’s also underperforming the XAU index on a short-term basis. This underscores the fact that many smaller cap junior exploration and production stocks have shown unusual weakness of late, with many making new yearly lows recently. From a relative strength standpoint, investors would do well to avoid the juniors for now.

VanEck Vectors Junior Gold Miners ETF

Source: BigCharts

In contrast to the weakness in the junior mining stocks, there are varying levels of relative price strength among some actively traded senior and mid-tier mining stocks. This out-performance is what investors should focus most of their attention on once the gold stock internal indicators discussed above finally confirm that strength has returned to the sector. Individual examples of outperformance among the 50 most traded mining shares include the ADR for Compania de Minas Buenaventura (BVN), Goldcorp Ind. (GG), and Gold Resource Corp. (GORO). These stocks, and stocks with similar levels of relative strength versus the XAU, will be worth owning once internal strength returns to the gold mining industry on an interim basis.

Unfortunately, there aren’t enough widespread examples of strength among the 50 most actively traded gold mining stocks to warrant initiating new long positions. We need to see a significant increase in these individual gold stocks getting back above their 15-day moving averages and establishing immediate upward trends. This will be confirmed when the cumulative new highs-lows indicator for the mining stocks turns up and reverses its decline.

On a strategic note, we’re still in a cash position since May 15 while waiting for the selling pressure to end after gold’s latest setback. I recommend that investors continue to remain in cash until technical strength returns. For now, no new trading positions in the gold ETF (NYSEARCA:IAU) are recommended.

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.