Are Gold Miners Predicting an Upswing in Gold Prices?
Over the past couple of days, the price of gold has been heading slightly downward. In fact, bears might argue that because the price of gold has been trading below $1,300 per ounce for a couple of days that we can expect additional downward price action in the gold price.
However, I think it might be time to look at the market from a different perspective — that is, we should be looking at gold mining shares.
While gold has been selling off, the exact opposite has been taking place in the gold mining stocks. If we look at the largest gold miner ETF, the Market Vectors Gold Miners ETF (NYSEARCA:GDX), we see that the prices of these stocks have been incredibly strong over the past couple of days. Since hitting a low of about $23 per share on Monday afternoon, this fund has traded up to $24.50, a more than 6 percent return.
This price action is extremely positive, especially since the Market Vectors Gold Miners ETF made a low at the same level toward the end of March. This means that we could be looking at a double bottom in the gold miners, which means that more aggressive gold traders are betting on a rise in the gold price.
This sentiment is corroborated by the fact that when the Market Vectors Gold Miners ETF reversed in March, it was met with heavy volume, which means that a lot of investors are betting on further upward price action in the gold price.
If we look back at the performance of the Market Vectors Gold Miner ETF relative to the gold price, we see that it has generally been a leading indicator. For instance, going back to the market peak in 201,1 we see that the Market Vectors Gold Miner ETF started to make a triple top as early as late 2010. While each peak was slightly higher than the last, we find that it wasn’t by much, especially considering the large amount of volatility we see in gold mining shares. This peaking process began months before we saw the peak in gold prices.
If we go back to the market trough in December, we find that the Market Vectors Gold Miners ETF hit its low around December 19, and it started to move upward despite the fact that gold continued to trend lower for the remainder of 2013. Had you taken the cue from gold miners, you would have been able to predict the rebound in gold prices.
Now we are seeing a strong bounce off a double bottom in the Market Vectors Gold Miners ETF, and I think that we can expect something similar. We might see the price of gold trend downward for a couple of more days, or even weeks, but the strength with which we are seeing gold miners rise in price these past couple of days gives me a lot of confidence that we are nearing a bottom.
With that being the case, I think that traders should consider taking a position in the Market Vectors Gold Miners ETF (GDX) on any weakness, and they should use a stop order of about $23 per share when doing so. Those looking for a less volatile trade should take a look at the SPDR Gold Trust (NYSEARCA:GLD).
As I said, we could see continued weakness in the price of gold even as we see strength in the gold mining stocks. Since there is significant support in the gold market at around $1,270 per ounce, traders should consider taking a position in the SPDR Gold Trust at around $122 per share (which converts to about $1,270 per ounce for the gold price). Note that the SPDR Gold Trust also looks like it is making a double bottom, but I am less confident that this will hold because it is not bouncing off of this level, which means we have not yet found strong buying in the gold market.
Ultimately, gold is in a long-term bull market, and it has been in an intermediate bear market within this bull market. It is difficult to know for certain if this bear market has ended, but given the strength in gold mining shares, I think it is a good time to bet that gold prices will move higher from here.
Disclosure: Ben Kramer-Miller owns gold coins and shares in select gold miners.
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