Gold sank like a rock last week. But it was the Vaneck Vectors Gold Miners ETF (NYSEARCA:GDX) where panic selling was fully embraced. Let’s examine what’s happening off and on the price chart and determine whether GDX stock is a more worthwhile buy, sell, or hold-off proposition for your portfolio in today’s market.
Some gold investors might be asking the question, ‘what just happened?’ And the answer isn’t entirely clear, other than the listed and highly-liquid SPDR Gold Trust (NYSEARCA:GLD) tumbled 3.05% Friday to cap off a weekly decline of just over 9%. In total, the selling pressure was the fiercest for the hard asset since September 2011.
The aggressive selling in gold comes on the heels of the precious metal narrowly hitting seven-year highs out the gate last Monday. But the metal’s status as a safe haven was quickly compromised by a couple drivers to varying degrees.
A surprise rate cut by the Federal Reserve and other stimulus packages to combat the COVID-19 economic fallout may have found some gold investors attempting to rotate unsuccessfully into U.S. debt markets during the week. Gold investors may also be guilty of rotating prematurely into equities during the week as well.
Undoubtedly, Friday’s massive oversold rally in the broader averages and better-than-expected March consumer sentiment report also played a hand in gold’s fast price collapse. Lastly, analysts point to forced selling in the metal to cover losses in other risk assets, as well as a way for gold investors to simply raise cash in a crisis that’s still far from finished.
But as bad as it was for straight-up gold investors, on the back of those same drivers, it was gold mining companies and GDX which fared even worse. Bottom-line, with the smallest businesses to largest household names from Microsoft (NASDAQ:MSFT) to Disney (NYSE:DIS), or Coca-Cola (NYSE:KO) taking costly preventative measures, it would be nearsighted to believe mining companies will prove immune to similar actions and economic hardships. Right?
Others appear to see the connection in a big way. Industry giants and heavily-weighted ETF constituents Newmont Corp (NYSE:NEM), Barrick Gold (NYSE:ABX), Franco-Nevada Corp (NYSE:FNV) and Wheaton Precious Metals (NYSE:WPM) fell 7% to 21% on the week. Still and maybe somewhat ironically, diversification fared even less well as GDX investors saw shares plummet nearly 15% Friday and 41% for the five-day period.
GDX Monthly Price Chart
Source: Charts by TradingView
The good news is, if you’re thinking the panic selling in GDX may be a bit too extreme, the monthly price chart is trying to promote that belief. With shares of GDX indicated to fall again out the gate Monday, prices in the ETF will be challenging a key area of technical support from $16 – $17.
The technical zone is backed by the instrument’s 76% retracement level of its five-year cycle low-to-high, as well as lateral and angular support lines formed over the last couple years. It’s an interesting spot to consider picking up stock in the gold mining ETF. That being said, I’d suggest holding off on any purchases within the framework of a falling knife.
A failure to hold price support could lead to a continued quick plunge towards $13 and the 2015 low in GDX. As much, today’s recommendation is for investors to monitor shares for a flattening of the monthly stochastics or a bullish crossover on the weekly time frame. Should that play out and $16 level hold on the price chart, then taking out the shovel and buying stock in a less risky safe haven makes appreciably more sense.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.