Gold Miners: Something’s Wrong…

| October 22, 2014 | 0 Comments

mining stocksAfter some gut churning swings last week, stocks are on the mend. Major averages are strongly higher this week as investors factor in earnings and a dovish outlook from global central banks.

But one industry isn’t participating in the rally…

Mining stocks.

Despite the fact gold has rallied $60 an ounce since early October, miners are still stuck near 52-week lows.

Take a look…

Gold vs GDX

As you can see, gold (blue line) benefited from the extreme fear in the marketplace last week. The yellow metal is pushing to multi-week highs near $1,250 per ounce.

However, the Market Vectors Gold Mining ETF (GDX), which is represented by the red line, isn’t reacting to the recent gold upswing. Nor is it participating in the broad rally seen in other industries over the past few days. As you may know, GDX holds top-tier miners like Goldcorp (GG), Barrick Gold (ABX), and Newmont Mining (NEM).

What’s going on here?

Clearly, there’s a performance divergence between gold and companies producing it. One is rallying while the other is not. Generally speaking, solid gold gains should be reflected in the mining space within a few days.

Yet, here we are with miners still sitting at yearly lows.

Are investors waiting for further gold bullishness before they start aggressively buying miners?

Or is the lack of bullish investor interest in miners a warning sign?

Here’s the deal…

The last time I noticed such a significant performance divergence between gold and miners was in mid-2011. At the time, gold was surging over $1,600 an ounce. Meanwhile, mining stocks essentially traded sideways- like they are now.

We all know what happened next. Gold put in a long-term top at $1,900 in August 2011. And once the yellow metal reversed lower, miners sank like the Titanic.

Here’s my take on the current situation…

Much like 2011, mining stock investors are skeptical of the recent gold rally.

As a result, they aren’t willing to bid companies in the industry higher. If gold succumbs to another price downturn in the near future, there’s a very good chance mining stocks break to new yearly lows.

How can you capitalize on this situation? 

First, take a look at this chart… 

Market Vectors Gold Mining ETF
Without question, GDX is one of the easiest ways to trade mining industry trends. If the mining ETF breaks below $20.50 (red line), we could see mining investors run for the hills. In such a situation, you may want to short GDX. And if you like a bit more risk, you may want to look at the Direxion Daily Gold Miners Bear 3x (DUST).

Now let’s be clear… 

There’s still an outside chance investors send mining stocks higher, especially if gold runs to $1,300 an ounce in coming weeks. In this case, you may want to buy GDX if it breaks above $22 (green line).

Until Next Time,

Justin Bennett

Tags: , , ,

Category: Gold

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.