Although we expected a rally in the gold mining sector, we have been surprised
by its strength and recent buying pressure. From the lowest ticks, Gold has
rallied less than 6% but GDX has gained 25% and GDXJ has soared 36%. This rebound
adds to the evidence that the gold stocks are leading the metal. That being
said, the gold stocks are approaching some strong resistance levels which coincide
with Trump's election victory.
Below we plot the weekly line charts of GDXJ (top), GDX and Gold (middle).
The weekly closing price is each data point. Note how both GDXJ and GDX (other
than for one week) held their 62% retracement and 80-week moving averages while
Gold did not. On the monthly charts (not shown) we find that the miners tested
but closed above their 20-month moving averages (in November and December)
while Gold closed below its 20-month moving average at the end of both months.
Furthermore, note that Gold is some $50/oz below its Q1 2016 levels yet both
GDX and GDXJ are trading considerably above those levels.
While the gold stocks are showing good progress and have more immediate upside
potential, they are approaching strong resistance. The daily candle charts
below detail the resistance in GDXJ (at $40-$41) and in GDX (at $25-$25.50).
Note the strong selling (thick black candles) immediately prior to and after
the election. Also, with respect to GDX, the more widely followed and traded
ETF, the 200-day moving average comes into play near $25 and the 50% retracement
is at $25.15. You think GDX's advance might stop at $25?
We expect the miners will reach these upside targets soon but a correction
will follow, which will inform us quite a bit as to how sustainable this rebound
is. If Gold is going to rollover again then the miners could end up retesting
their December lows. However, if bonds continue to rally and real yields decline
then this rebound could push beyond the Trump resistance levels. We bought
a few positions recently but are holding some cash as we suspect there will
be more buying opportunities before the gold stocks really takeoff.
