Will Gold Miners Breakout vs the Metal?
This has been a big one I've been watching develop since late last year: Gold Miners vs Gold the Metal. When it comes to the yellow metal, we always hear the arguments, "buy gold, stay away from the companies", or "the miners are a better value than the metal". People can make very intelligent arguments for each side, but the trend is really the only thing that matters. For three years, the metal has been the place to be relative to the miners. In fact the GLD:GDX ratio is up 170% during that time span.
Today we're taking a closer look at this ratio because I believe things are changing. Going forward, I have a good feeling the miners will be the outperformers between the two. I first wrote about this last month as it started to develop. Since then, we're seeing some further consolidation that I think is worth following up on.
The first one is a daily line chart showing a clean downtrend line from 2012 breaking to start the year. Now, just because a trendline is broken doesn't necessarily mean the trend has reversed. We just know that the trend has changed; perhaps a sideways or upward trend will be follow.
The next chart takes a little bit of a closer look at this same line chart, but this time we're focusing more on what could potentially be a false breakdown in November/December. Notice how in January we got back above those June and October lows.
This could potentially leave all of those participants stuck down there: Longs that were stopped out, shorts that were initiated at new lows. If things get going to the upside, stopped out longs have to buy it back to participate and new shorts have to buy it back to unwind their short position. This creates a vicious cycle of buyers that could send this ratio substantially higher within a relatively short period of time.
This next chart shows daily candlesticks where I brought in a 50 and 200 day moving average to get a better idea of the direction of the future trend. I really like how the 50 day moving average has now turned around and started trending higher. More importantly the 200 day moving average has now flattened out and served as resistance since January 21st.
If the price of this ratio breaks out above this consolidation we've seen over the last few weeks, we're not only talking about a major breakout above this "bullish flag pattern", but it also takes us above what is now a flat 200 day. When you bring in the fact that we have now broken the downtrend line from 2012 and have a potentially false breakdown in prices last year, we could see a monster new trend develop where it's the Miners and not the metal outperforming in the Gold markets.
I think this would be a fascinating new development for 2014 that I don't hear to many people talking about. We like that. And remember, this has nothing to do with whether gold prices rally or keep selling off. This is strictly a miners vs metal conversation and keeps this as a 'gold neutral' position. We like that too.
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Tags: $GLD $GDX $GC_F