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Gold Miners Starting to Pan Out

Gold Miners Starting to Pan Out

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Published by dpbasic
August 13, 2012 article on gold miners, Barrons
by Michael Kahn
August 13, 2012 article on gold miners, Barrons
by Michael Kahn

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Published by: dpbasic on Aug 14, 2012
Copyright:Attribution Non-commercial


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Although it has been quiet on the gold front in recent months, gold-mining stocks are finally making sometechnical noise. They are not yet fully in bullish mode, but several changes on the charts bode well forminers and, by extension, for the metal too.The first chart of consequence is the performance comparison between gold shares and gold itself. Byplotting a ratio of theMarket Vectors Gold Miners exchange-traded fund(ticker: GDX) to theSPDR Gold Trust ETF(GLD), we can easily see changes in their relationship (see Chart 1).
Chart 1
Market Vectors Gold Miners ETF
The chart headed south for most of this year, but it looks as if it washed out in May. That means the desireto sell gold stocks vs. gold itself reached a climax. On a relative basis, investors started to shift their interestto gold stocks. Or at the very least, some may have begun to cover short positions in gold stocks taken inconjunction with long positions in the metal, which reportedly had been a popular pair trade with somehedge funds.We can apply many technical indicators to ratios in much the same manner we do for individual stocks.Indeed, momentum indicators, such as the relative strength index, showed that the bears did not wield thesame power heading into the July low as they did in May.The makings of a technical base or bottoming pattern are now in place.To be sure, the ratio is still battling its 50-day moving average and appeared weak in Monday's trading. Butafter years of lagging the metal, it is an encouraging change in market tone for the better for gold-stockbulls.As for the gold miners' ETF itself, the July low represented the second time this year that it bounced in thevicinity of a historically important price level (see Chart 2).
Chart 2
Market Vectors Gold Miners ETF
 A long-term chart of weekly closes shows these bounces at the 41.50 level (GDX traded at 44.12 Mondayafternoon). What makes this a compelling place for the bulls to finally get back into the game is that thislevel is also the 50% retracement of the October 2008 to September 2011 bull market. During that span, theETF quadrupled in price.
Although not shown on the chart, 41.50 was also a very important support and resistance level for GDX in2006 through 2008. In fact, it was the move below this price that preceded the major collapse in mid-2008,so the market's memory will be strong here.What initially tipped me off to the changes in the mining sector were several significant one-day reversalevents in some of its biggest companies.For example,Barrick Gold(ABX), the largest stock in the group by market capitalization, had been fallingall year (see Chart 3). On July 26, after announcing disappointing second-quarter earnings, it dropped 8% atthe start of trading to a new low with very heavy volume.
Chart 3
Barrick Gold
 However, it did not stay down and rallied back to cut its loss by about two-thirds. In technical jargon, itformed a "gap-down upside reversal, "which suggests that after a long decline the bears had used up all of their energy. Supply was exhausted and the trend has eased higher ever sinceTo be sure, that same day Mario Draghi, head of the European Central Bank, pledged to "do whatever ittakes" to save the euro and the market as a whole rallied. From a stock-specific point of view; however,new economic stimulus in Europe and the U.S. would likely depress the dollar, give gold a boost and helpgold-mining stocks.The same pattern also appeared in other major gold stocks such asNewmont Mining(NEM) andGoldcorp (GG).Smaller gold miners, such asCoeur d'Alene Mines(CDE) andAgnico-Eagle Mines(AEM) do not show the climactic selling of their larger peers, but they show other positives. The clearest are breakouts to the

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