Are Gold Miners Majorly Oversold?
J. Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past several months Market Vectors Gold Miners Trust (NYSEMKT: GDX) has taken a beating, giving up $25 (~38%) since November 2011 highs. Obviously such a pullback is discouraging for investors holding shares. But for those of us looking for opportunity, it may be just what we’ve been waiting for.
Consider the four-year chart. Notice that we had similar action in 2008-2009, coinciding with gold’s drop from 2008 highs. During that time precious metals dropped from overbought to oversold in a matter of a few months, taking investment dollars down for the ride.
Those who bought during the overbought phase, especially around the $20 bottoming area, could have more than tripled their investment by the time gold was topping in late 2011. Take a look at the lower indicators in this four-year weekly chart of GDX. There are several clues as to the overbought condition of GDX during the drop a few years ago that are similar to what we’re seeing today.
Notice that GDX was well below the 50, 100 and 200 week moving averages during its drop in 2008. We see the same kind of drop today.
The RSI, normally close to 50, dropped down below 30 during that time as well. We see the same RSI today, for the first time since early 2009.
The slow stochastic is below 20, which seems to always precipitate a move upward. In fact, the depth of the stochastic seems to correspond with the strength of the following reversal.
The MACD also is showing similar signs as we saw back in late 2008, dropping well into negative territory. As you can see, this has not happened since coming out of the lows in 2009.
For greater volatility, Market Vectors Junior Gold Miners (NYSEMKT: GDXJ) offers investors both greater risk as well as greater potential. Since this index is only in its third year, moving averages are of little help. It is well below the 50 and 100 week moving averages though.
Lower indicators are very similar to GDX, though reveal its greater volatility with stronger divergences. Highs of about $43 in mid-2011 have given back over 50%, currently trading at $20.55.
For those who’ve already taken a core position in precious metals, it looks like we have a good trading opportunity setting up in GDX. Below we have a comparison of GDX and gold, revealing greater volatility.
The chart is scaled at approximately 30/1 (GDX/gold). As you can see, when gold fell hard back in 2008, GDX fell even harder. However, for those who caught it at the bottom, the gains realized outpaced gold’s dramatically over the next year.
Notice also that GDX’s movements appear to precipitate gold’s due to its volatility. While gold kept moving upward in mid-2011, GDX traded somewhat sideways. But when it crossed with gold later in the year, the yellow metal came down.
Now we have a setup similar to late 2008, with GDX being much more oversold than gold. For the trader, this has the potential to offer some excellent gains. Perhaps trading GDX ahead of gold, then switching to either physical or gold ETFs such as SPDR Gold Shares (NYSEMKT: GLD) or Sprott’s Gold Trust (NYSEMKT: PHYS). For even greater volatility one might pursue GDXJ or even iShares Silver Trust (NYSEMKT: SLV).
For your prosperity,
J. Keith Johnson
The Gold Informant
The Gold Informant is a Goldco Direct affiliate writer.
The Gold Informant is long precious metals and may own or initiate a position in shares mentioned at any time. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.