Focus On The Gold Mining Stocks

Includes: GDX
by: Clif Droke

Gold returns to favor as a safe haven while investors fret over rising tariffs.

Beaten down mining stocks should benefit the most from fear climate.

Group internal momentum for gold stocks show significant improvement.

The latest rally in the price of gold has presented an excellent opportunity for traders interested in taking advantage of the leverage offered by mining shares. After the steep share price decline in many gold producing and exploration firms in past months, an excellent opportunity for profit beckons. Rising gold prices are almost always good news for gold stocks, an observation I’ll enlarge upon in today’s report.

Fear on Wall Street has risen sharply in the days since President Trump threatened to place a 5% tariff on all imports from Mexico starting June 10. Headline-generated fear is controlling the financial market right now, as stock prices fall at the mere hint of higher tariffs. In such a climate of uncertainty, safe-haven assets have attracted a great deal of attention. While U.S. Treasury bonds and the Japanese yen are among the favorite destinations for flight capital, gold has quickly returned to favor among investors.

The extent to which gold has come to the attention of panicky participants can be seen in the August 2019 gold futures chart. Since late last week, gold prices have risen over 3% and have recovered most of the losses since the February peak. Gold is normally a stolid asset, and for it to respond in such a frenetic fashion to the latest global economic threat is a sign that investors are truly shaken with fear right now.

August 2019 Gold

Source: BigCharts

I’m not a believer in chasing rallies, and whenever an asset like gold sees a violent rally, I’m more inclined to look for opportunities in beaten down, overlooked assets which are closely related to gold. In this case, gold mining stocks is the asset group I’ve been focusing on lately. In my previous report, I drew attention to the fact that an important measure of the incremental demand for gold stocks reversed its declining trend last week just two days before the rally in the PHLX Gold/Silver Index (XAU) commenced. Specifically, the 4-week rate of change (momentum) indicator turned up sharply last week and provided a “heads up” that a rally was likely imminent for the actively traded gold mining shares.

The latest rally is clearly visible in the daily graph of the XAU, and as might be expected, the percentage gain of the average senior, mid-cap, and small-cap mining stock has been much greater than that of the physical metal itself. Moreover, the XAU has decisively confirmed an immediate-term bottom per the rules of my technical trading discipline by closing two days higher above its 15-day moving average. The XAU’s 15-day MA has also turned up in reflection of the sharp reversal in downside momentum among the gold stocks.

PHLX Gold/Silver Index

Source: BigCharts

Turning our attention to the internal momentum behind the latest rally, let’s take a look at the 4-week rate of change indicator for the gold stocks. This indicator is based on the new highs and new lows of the 50 most actively traded U.S. and Canadian gold stocks. I regard the new highs and lows to be the single best way of gauging the demand for equities. What’s more, when it comes to the financial market, rate of change is everything. This is why I place so much emphasis on the short-term rate of change in the new highs and lows. For a reversal in the 4-week new highs-lows indicator often precedes a reversal in the short-term price trend for the gold miners as a group. That was definitely the case last week as the 4-week highs-lows indicator gave a brief, but valuable, warning that a sharp rally was about to begin.

Source: NYSE

A simple projection of the rate of change in the coming days for the gold stocks new highs and lows indicator suggests that the above graph will continue to rise sharply for the next several days, and possibly for the next few weeks. The reason for this anticipated rise is that gold stock prices were depressed for so long, even if the mining stocks simply stop making new lows from here the rate of change has nowhere to go but up in the immediate term. This means that the gold stocks have one less headwind to contend with, given that internal momentum is no longer declining. Based on this important technical factor alone, beaten down mining shares can be purchased for short-term trading purposes in view of how “oversold” they’ve become in recent months.

Of course, an even bigger consideration when purchasing gold stocks is the prevailing strength or weakness of the U.S. dollar index. Right now the dollar is still near a yearly high but has shown signs of weakening since last week. The Invesco DB U.S. Dollar Index Bullish Fund (UUP) has already closed under its 15-day moving average and is now testing its psychologically important and widely watched 50-day MA (blue line) as of June 3. A decisive penetration below the 50-day MA on a closing basis would definitely help both gold and the gold stocks to recover additional lost ground. More importantly, a weekly close below the 50-day MA would confirm that a shift in the dollar’s intermediate-term (3-6 month) trend has likely begun. This would be even better news for gold stock investors.

Invesco DB U.S. Dollar Index Bullish Fund

Source: BigCharts

My favorite vehicle for participating in a gold stock rally is the VanEck Vectors Gold Miners ETF (GDX), and as you can see here, it has already closed decisively above its 50-day moving average. GDX should be able to benefit from gains in the gold price, as well as the anticipated strengthening of the internal momentum in the gold mining stock group discussed above.

VanEck Vectors Gold Miners ETF

Source: BigCharts

With the current climate of fear continuing to worsen, gold has everything to gain from investors’ urgent desire to liquidate risk assets and hedge against the economic threat posed by higher tariffs. Gold stocks in particular should outperform most major assets while fear remains the dominant driver on Wall Street. Investors who don’t mind the volatility risk should consider owning some beaten down gold stocks which have shown relative strength to the XAU index in recent weeks. For those who prefer to invest in ETFs, there are many gold mining stock-oriented funds which will benefit from rising gold prices.

On a strategic note, I’m currently long the VanEck Vectors Gold Miners ETF (GDX) using a level slightly under the $20.42 level (the May 29 closing price) as the initial stop-loss on an intraday basis. Investors can also maintain longer-term investment positions in physical gold, although I don’t recommend loading up on the yellow metal until the U.S. dollar index shows substantial and sustained weakness.

Disclosure: I am/we are long GDX. 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.