From Jeff Clark, Editor, The Delta Report:
Gold popped $12 higher last week. But the VanEck Vectors Gold Miners Fund (GDX)—a fund of large-capitalization gold stocks—ended the week lower by 0.8%.
At first glance, this is a bad sign for the gold sector. Gold stocks tend to lead the metal. And the sector always does better when gold stocks are rallying stronger than gold itself.
So last week’s underperformance in gold stocks could be a “caution” sign for an impending decline in the price of gold.
Or… it may not be that simple.
Let me explain…
One of two things happen when gold stocks underperform the metal. Either the price of gold falls in order to catch up to the decline in gold stocks. Or gold stocks rally in order to catch up with the price of gold stocks. The outcome usually depends on the look of the GDX/gold ratio.
If gold stock underperformance occurs when the GDX/gold ratio is high, then look for the price of gold to fall.
On the other hand, if the GDX/gold ratio is low while gold stocks are lagging the metal, then odds favor the stocks rallying to catch up with the metal.
Look at this chart of GDX divided by the price of gold…
For the past six months, this ratio has traded between 0.0168 and 0.0205. Last Friday, the ratio closed at 0.0178—near the bottom of the recent trading range. Gold stocks are already trading relatively low compared to the metal.
So while the chart displays weakness in gold stocks—which is usually a bad sign for the metal—the ratio is low enough that much of any potential damage is already priced into the sector.
The blue lines are downtrending resistance lines. The chart needs to break above those lines in order to signal a new rally phase in gold stocks.
Yes… gold stocks are currently underperforming the metal. That’s usually a caution sign for gold. But the underperformance is happening while the GDX/gold ratio is already near the bottom of its recent trading range. So gold stocks have likely already discounted the potential for a pullback in the price of gold.
If the ratio turns higher from here—and if it can break above the current downtrending resistance line—then gold stocks will likely enter a new short-term rally phase.
I’m not willing to bet aggressively on gold stocks until the GDX/gold ratio breaks above resistance.
But I continue to like the idea of slowly adding exposure to the gold sector on weakness. Last week’s action gave us a good chance to do just that.
Good trading,
Jeff Clark
Crux note: Jeff’s professional trading experience goes back three decades. And the strategies he used in that time were so successful, he was able to retire at age 42. These days, he spends most of his time in his California home. His neighbors think he’s growing marijuana, or flipping penny stocks. But what Jeff has been doing is far more lucrative… an investing secret that has brought him huge returns in short periods of time, like 100% in less than 24 hours. Click here to learn more..
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