Gold and Gold Stocks Are in a Danger Zone

by Daniel Putnam | March 7, 2012 12:07 pm

Gold has been hit by a one-two punch of bad news in recent weeks, and this adverse turn of events is being reflected in the charts of gold bullion and gold stocks. While both were still holding above key breakdown levels as of Tuesday’s close, the charts are indicating that a high level of caution is warranted right now.

Two key factors have pressured the gold price so far in March. First, statements out of the European Central Bank have made it clear that EU officials would prefer that part two of the Long-Term Refinancing Operation (LTRO) — conducted on Feb. 29 — would be the last. With the U.K. and Japan having just wrapped up quantitative easing operations and the U.S. Federal Reserve not yet providing a sign that QE3 is in the offing, the seemingly endless stream of monetary stimulus appears to have finally dried up.

Gold, one of the most popular hedges against rampant money-printing, has suffered in kind: The SPDR Gold Trust ETF (NYSE:GLD[1]) has declined 6.9% in the five sessions ended Tuesday.

In addition, the report Sunday night that China’s government has lowered its growth target has weighed heavily on stocks throughout the materials sector. While not seen as being economically sensitive per se, gold is nonetheless tied in to the emerging markets growth outlook because China and India are the most important sources of incremental physical gold demand.

One aspect of the gold story remains supportive, however: ETF inflows. According to Forbes[2], GLD took in $597 million in new cash last week. While positive for now, this trend can turn quickly once the gold price begins to reverse course.

What’s the Gold Chart Saying?

This string of bad news has left GLD and a number of mining stocks on the precipice of a breakdown. GLD closed Tuesday at $162.70, right on its 200-day moving average of $162.73. Although the ETF’s move beneath its 200-day MA in December proved to be only a head-fake, a second break here would be concerning given that 1) other than the brief period in December, GLD has traded above its 200-day for three years now, and 2) it continues to experience lower highs and lower lows.

Kenny gold 1 300x133 Gold and Gold Stocks Are in a Danger Zone
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Also, a few more days of weakness could lead to a “death cross,” or a drop in the 50-day moving average below the 200-day. At Tuesday’s close, the 50-day moving average stood at $164, less than a percentage point above the 200-day.

A Message in the Miners’ Charts?

Since individual gold stocks tend to be less correlated than you may think, few names stand out from the group as being the ones to watch in the days and weeks ahead. A number of gold-mining stocks are perched at potentially dangerous levels, and one has already broken down.


First, on Tuesday Royal Gold (NASDAQ:RGLD[3]) fell beneath its lower trend line and briefly traded at its lowest level since October:

Kenny gold 2 300x173 Gold and Gold Stocks Are in a Danger Zone
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In addition, Barrick Gold (NYSE:ABX[4]) closed the day just short of its lower trendline. . .

Kenny gold 3 300x175 Gold and Gold Stocks Are in a Danger Zone
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. . .Yamana Gold (NYSE:AUY[5]), and Goldfields Ltd. (NYSE:GFI[6]) finished at levels very close to potential breakdowns:

Kenny gold 4 300x171 Gold and Gold Stocks Are in a Danger Zone
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Kenny gold 5 300x172 Gold and Gold Stocks Are in a Danger Zone
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Last but not least, Market Vectors Gold Miners ETF (NYSE:GDX[7]) is the most critical chart to watch. GDX has bounced in the $50 to $52 range no fewer than eight times in the past 14 months, and Monday marked the ETF’s ninth trip into this territory. GDX, which closed Monday at $52.47, needs to hold above $50 to avoid a very bearish technical situation for gold stocks.

Kenny gold 6 300x173 Gold and Gold Stocks Are in a Danger Zone
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The Bottom Line

Gold bullion and gold stocks are still range-bound at this point, so an actual breakdown needs to occur to confirm a bear case. But right now, both are in a very dangerous spot. Watch the charts carefully if you’re thinking about bottom-fishing, and take advantage of technical analysis to set your stops at levels that will help protect you from further weakness.

Endnotes:
  1. GLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=GLD
  2. Forbes:
  3. RGLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGLD
  4. ABX: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABX
  5. AUY: http://studio-5.financialcontent.com/investplace/quote?Symbol=AUY
  6. GFI: http://studio-5.financialcontent.com/investplace/quote?Symbol=GFI
  7. GDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=GDX

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