Shares of gold mining companies have risen notably and nicely so far in 2015 both in absolute and in relative terms. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) looks constructive in both the near- and intermediate-term with well-defined risk/reward areas to focus around.
Gold has been in a downward spiral since 2011 and as these things usually go, just when sentiment in late 2014 got really bad on the yellow metal, a meaningful oversold bounce began to take place. From an inter-asset class perspective, rising bond prices in a slowing economic growth environment is something that gold likes.
It is important to note that while I am here discussing the gold mining stocks, the correlation to the price of gold is high but not perfect. As such, unless it is a very large gold mining company, overall I prefer to focus on the gold mining ETF, which takes out some of the single-stock risk.
In general I view GDX as simply a leveraged tool to ‘trade’ the price of gold.
GDX Stock Charts
Over the years we have all heard the arguments that the price of gold can only go up, but the reality is that just like most other assets, there is a cyclical aspect to gold, and thus to gold mining stocks. In fact, it has been my experience that the gold bugs get louder than bulls in just about any other asset when the getting is good. Hence this can be a great contra-indicator.
The precipitous slide in the price of gold and the gold mining stocks since the 2011 top, however, has over the past few years increasingly quieted the gold bulls. After a frustrating year for gold from a ‘trading’ perspective in 2014, many seemed to have tossed in the towel.
Click to Enlarge Looking at the multi-year weekly chart of the GDX ETF, we see that in the second half of 2013 and through most of 2014, price moved in a range that made a series of lower highs. This ultimately led the GDX to break below support in late 2011, which resulted in a re-test of the late 2008 lows and subsequently was enough to lead to what so far has been a good bounce.
From a momentum perspective, the Relative Strength Index (RSI) at the bottom of the chart made a higher low last November while price made new lows. This positive divergence is powerful and likely favors further upside in the the gold miners.
On the daily chart we see that after the GDX broke below support and bottomed in early November, it formed a notable higher low on Jan. 2, which led to a sharp rise and saw the ETF push above its 50-, 100- and 200-day simple moving averages within a matter of two weeks.
Click to Enlarge Active investors and traders now can either look to buy the GDX on a dip or renewed strength. Support in the near-term is around the $20 area while a push past the $23 area could open it up toward $26 and $27 from a multi-week/month perspective.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
