The search for a bottom in gold mining stocks continued over the holidays. While a few promising developments in the Market Vectors Gold Miners ETF (GDX) were discovered, evidence of a definitive bottom in the beaten-down sector remains elusive.
Let’s take a post-holiday look at recent developments — the good and the bad — in the GDX ETF.
The Good in GDX
Rather than plumbing new depths day after day like it was last fall, the GDX ETF has been able to remain above its 52-week low near $16.50 for two months now. The ongoing consolidation has taken on the form of a symmetrical triangle boasting higher pivot lows and lower pivot highs.
The series of higher pivot lows is a particularly welcome change as it shows an increased willingness of buyers to buy at higher and higher prices on each dip. If GDX can continue to tread water it will allow the 50-day moving average to further flatten out improving the posture of its long-term trend.
A second improvement in the behavior of gold mining stocks is their recent decoupling with the U.S. dollar. During the worst part of the descent in the GDX ETF last fall, it had a strong negative correlation with the U.S. dollar, declining virtually every day the dollar would rise. Over the past month, however, the relationship has been decisively different. The correlation has hovered near zero, suggesting the strong rally in the dollar has not exerted as much downward pressure on gold mining stocks.
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The Bad in GDX
Gold mining stocks and gold are linked at the hip. The odds of GDX and its constituents — like Goldcorp Inc. (USA) (GG) and Barrick Gold Corporation (USA) (ABX) — rising from the abyss without any type of major bottom in gold is slim.
And, unfortunately, the chart of gold remains a mess. It’s a chop-fest in the middle of no-man’s land. With the long-term trend still pointing lower in the yellow metal, any type of rally will be suspect.
Get Paid to Wait in GDX
Since we’ve yet to see any major confirmation of a low in the GDX ETF, bottom fishers should adopt a premium selling strategy. That way they’ll be paid even if gold mining stocks continue to flounder around before finally recovering.
Because of the cheaper price tag of GDX, selling naked puts is a great way to go. If you’re willing to bet GDX remains above $17.50 over the next month, sell the Feb $17.50 put for 53 cents or better.
The reward is limited to the initial 53-cent credit and will be captured if the GDX ETF remains above $17.50. By selling the put, you obligate yourself to buy GDX for $17.50 if the put sits in-the-money at expiration. Since you received 53 cents in credit up front, your true cost basis in the event of assignment will be $16.97.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
