Gold mining stocks — once the hottest commodity among traders and trend followers — suffered mightily last year, with many shedding 40% to 50% of their value during the past 12 months.
It’s a relatively straightforward equation for the gold mining stocks; as input costs rise (at the margin) and demand for gold (price) declines, the bottom line suffers. This is a normal relationship for most companies, yet many analysts and investors I have spoken to during the past couple years seemed to think that gold mining stocks are a buy regardless of the price of gold.
As perplexing as that might be, let’s not get into that argument. Instead, let’s look at price action in this particular group of stocks.
Late last week, Newmont Mining (NEM) announced its full-year gold production would be at the higher end of its forecast, though analysts were quick to point out that the company’s outlook for 2014 looks to come on higher costs. NEM stock sold off more than 10% on the day as a result and fell to a fresh multiyear low, which coincides with a thinning support level that reaches all the way back to the year 2002.
NEM stock now looks, feels and smells very weak, and I wouldn’t buy it here. If this long-term support level around the $21.50-$22 area were to give, Newmont Mining could easily slip into the mid-teens.
On the other hand, there is Barrick Gold (ABX), which on the daily chart below developed a significant higher low in early December versus its July lows. The rally since December has in the meantime brought ABX stock back above its 200-day moving average (red) for the first time since 2012. Over the past couple of weeks, Barrick Gold has spent much time churning below a resistance line from May 2013, which currently comes in around the $20 mark.
If and when ABX stock can break past the $20 area, it opens up to plenty of upside, with a first target around the $22 mark.
This divergence between NEM and ABX is interesting, particularly as both gold mining stocks are set to report earnings over the next couple of weeks.
Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.