Is the Drop in Gold Mining Stocks a Warning Sign for Gold?Mar 04, 2013
The correlation between mining stocks and gold has disintegrated since March 2012. Could this spell trouble for gold?
One of the few sectors within the stock market now sustaining sizable losses are gold mining stocks (NYSEARCA:GDX). The sector has lost more than 30% over the past year and is already down over 24% since the beginning of 2013. Meanwhile the total world stock market (NYSEARCA:VT) has gained 9.13% that same one-year time frame.
Is the sharp downturn in mining stocks a sneak preview of significant losses ahead in precious metals?
A closer look at gold mining stocks versus gold (NYSEARCA:GLD) shows a serious breakdown in correlations. Since March 2012, GDX has lagged GLD by an incredible 35% and change. Market dislocations like this can last months and sometimes years, but they never last forever. Will GLD follow GDX down the tubes?
In our Weekly ETF Pick from Feb.14 we wrote:
“Despite a modestly rising stock market, the Market Vectors Gold Miners (GDX) has lagged both the broader U.S. stock market along with the SPDR Gold Shares (GLD) by a very significant margin. At present, GDX trades around $41.50 and is well below both its 50 ($44.41) and 200 ($46.06) day moving average. Buy the Direxion Daily Gold Miners Bear 3x Shares (DUST) at these levels.”
Since then, GDX has slid 13% and our Feb.14 DUST trade resulted in a +29% gain. Instead of cooling off, the slide in mining stocks has intensified. DUST aims for triple inverse daily performance to miners and will appreciate when they decline.
For investors/traders weary of leveraged ETFs, we also gave a paired bearish trade in the Feb.14 alert using GDX put options. This trade has already doubled by gaining 150% and a triple could be ahead. Since we’re still long the position, the exact GDX strike price and monthly expiration is only available to subscribers.
In reality, gold’s 12th consecutive yearly gain has been masked by underlying weakness.
Over the past year, GLD has lost -8.5% and the only real strength in the precious metals sector has been with tinier markets like platinum (NYSEARCA:PPLT) and palladium (NYSEARCA:PALL). The next move in gold may be an unpleasant surprise for permabulls.
Although buying gold on the dips has worked like a charm in the past, history isn’t prologue for the future. And with GLD posting -8.5% one-year losses, the pain in gold prices might not be over. What are the key support/resistance levels in gold - that if violated, could trigger panic selling? What are ways to hedge against this possibility?
The ETF Profit Strategy Newsletter uses technical and fundamental analysis to evaluate price movements and opportunities in ETFs linked to stocks, bonds, and gold. Our Technical Forecast is updated a few times per week.
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