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Will Owning Gold Miners Really Protect You in a Downturn?

A look at the charts may surprise you


Stocks closed lower on Thursday as investors’ concerns over a Russian incursion into Ukraine took priority over economic reports and earnings. The decline was the first this week for the S&P 500, which fell 0.2%. But volume was again very low in a day of quiet trading leading up to the three-day Labor Day weekend.

The index’s more defensive sectors — utilities, telecom services and materials — were the only ones to gain. U.S. Treasuries and gold rose as well, with the Market Vectors Gold Miners ETF (GDX) up 1.3%.

Initial jobless claims fell to 298,000, while expected 302,000. And pending home sales for July rose 3.3%, also beating forecasts.

At Thursday’s close, the Dow Jones Industrial Average was off 42 points at 17,080, the S&P 500 fell 3 points to 1,997, the Nasdaq was down 12 points at 4,558, and the Russell 2000 fell 7 points to 1,166. Just 479 million shares traded on the NYSE’s primary market, with total volume of 2.3 billion shares. The Nasdaq crossed 1.3 billion shares. Decliners outpaced advancers by 1.3-to-1 on the NYSE and by 1.9-to-1 on the Nasdaq.

GDX Chart
Click to Enlarge

Chart Key

The daily chart of the Market Vectors Gold Miners ETF is not encouraging. GDX has traded in a sideways trend for all of 2014, while stocks of corporations have been making new highs.

Now, even in the midst of geopolitical crises, when investors typically flock to gold, GDX is not responding well. In fact, it appears stuck at its 50-day moving average, and above that is an ominous quadruple-top.

GDX Chart
Click to Enlarge

But there are some investors that claim that gold provides good long-term insurance, and there appears to be some merit to that. Note the advance on the monthly chart from mid-2008 to late 2010, in which GDX almost tripled, while stocks, as measured by the S&P 500, advanced about 50%.

SPX Chart
Click to Enlarge

But also note the similarity of GDX’s chart with the S&P 500 from 2009 to 2011. Here, gold miners are no hedge but actually run with the stock market. And since mid-2011, the ETF has been in a bear market while stocks have screamed to new highs.


It should be obvious, even to the most ardent gold bug, that the miners do not provide an adequate hedge against a bear market. Next week, we will look at gold bullion to see if owning gold would protect investors any better than the miners in a bear market.

Have a great Labor Day weekend.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Article printed from InvestorPlace Media,

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