Both gold and mining stocks have been on the ropes so far in 2013. But while the recent acceleration in the sell-off may have you sniffing around the sector for buying opportunities, a look at the charts shows that there could be more downside ahead for bullion and gold stocks alike. Prudent investors will keep their powder dry and wait for a better entry point.
SPDR Gold Trust (NYSE:GLD) has fallen 3.9% year-to-date and 10.3% since its most recent peak on Oct. 4. Clearly, gold isn’t as popular now as it was a year ago. In fact, the Bloomberg index on gold sentiment has reached its lowest levels of the past 12 months:
Click to EnlargeSentiment is a contrary indicator in most cases, but this index is actually a leading indicator. Note that it last reached its current level in the 30s on April 6, 2012 — a month ahead of the early-May sell-off that saw GLD trade down around 7% in only 11 sessions.
The shift in sentiment is taking a toll on the popularity of GLD, which has experienced outflows of $1.47 billion so far this year. This is still a fairly small number compared to its $71 billion-plus in total assets, but it marks a dramatic reversal from the $5.7 billion inflow that occurred in 2012 — the fifth-largest inflow among all ETFs.
The negative trend was further underscored by Friday’s news that George Soros cut his position in GLD by 55% while billionaire hedge fund manager Louis Moore Bacon eliminated his stake altogether. Keep in mind, all of this is going on at a time in which global central banks are engaging in competitive currency devaluation — an event that should be extremely positive for gold.
This combination of poor performance and negative sentiment would typically indicate that it’s time to buy, but gold is in a dangerous spot on the charts. GLD is rapidly approaching the lows in the $148-$149 range that it has hit twice in the past year-plus. Ordinarily this may not mean much — GLD could find support at this level, after all — but the fund has exhibited three other signs of technical weakness, which can be seen in the accompanying chart:
- It has tracked below of its long-term, upward trendline.
- It is now solidly under its 200-day moving average (MA).
- It’s in jeopardy of printing a “death cross,” or a dip in its 200-day MA below its 50-day MA.
This argues for a continued move to previous support and a strong possibility that it could break down, at which point downward momentum could carry the metal even lower.
This type of capitulation sell-off will signal that the balance of risk and reward has swung around in favor of buyers. Right now, however, the risks continue to outweigh the potential rewards.
Gold Stocks on the Precipice
The situation in the mining sector is even dicier. The Market Vectors Gold Miners ETF (NYSE:GDX) hasn’t broken down yet, but it’s sitting just a day away from surpassing its previous 52-week low and heading into territory it hasn’t visited since 2009.
And a number of signs are beginning to show that such a move downward may be on its way shortly. First, the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) hit a new all-time low after falling 3% in Friday’s session.
Second, no fewer than six major names in the list of top-20 gold stocks have already violated support and moved to new 52-week lows:
- Gold Fields Ltd. (NYSE:GFI)
- AngloGold Ashanti (NYSE:AU)
- Compañía de Minas Buenaventura (NYSE:BVN)
- IAMGOLD (NYSE:IAG)
- Harmony Gold Mining (NYSE:HMY)
- Allied Nevada (AMEX:ANV)
Among the big names, three other stocks are sitting within 1% or 2% of new 52-week lows: Newmont Mining (NYSE:NEM) (Friday’s close: $43.27; 52-week low: $42.55), Barrick Gold (NYSE:ABX) ($31.63/$31.00), and Eldorado Gold (NYSE:EGO) ($10.06/$9.78).
At this point, further downside in these three stocks — together with GDX — seems inevitable given the breakdowns in GDXJ and the individual stocks noted above. If Newmont, Barrick, and GDX do indeed break down, the broader group could be in for as much as 10%-15% of downside even with five months of extremely poor performance already in the books. If this occurs, it will be the signal that the miners have finally experienced the kind of capitulation that has so far eluded the sector in its fall/winter downturn.
But until we see this type of capitulation, extreme patience is called for. While gold and the mining stocks look tempting here, the charts are showing an elevated degree of risk. The time to buy is approaching, but we’re not there yet.
As of this writing, Daniel Putnam did not own a position in any of the aforementioned securities.
