Is Now the Time to Buy Gold and Gold Miners?

Gold was the most hated asset class going into December, especially after Swiss voters rejected a proposal to boost the country’s gold reserves by some 1,500 tons (about 7% of global annual demand). Is this a good ‘blood in the streets’ trade?

Massive. That’s the only way to describe The December 1 overnight reversal of the gold futures (following the Swiss no vote).

In fact, price action painted two giant green candles. One marked the November 7 low, and than there was Sunday’s.

Two trading days before the November 7 low, the Profit Radar Report wrote: “There is a bullish divergence and gold has finally met our long-term down side target. Gold seasonality for November is bullish. Sentiment, seasonality and the bullish technical divergence increase the odds of an upcoming buying opportunity. We will dip our ‘toes in the water’ and buy gold if it dips below 1,130 and moves above 1,140.”

The Profit Radar Report identified the gold trade as one of the biggest opportunities around, and the gold rally was chugging along nicely, until the Swiss gold referendum came along.

Gold futures (chart shown) dropped more than 2% right after Sunday’s (November 30) rejection by Swiss voters. Sunday’s Profit Radar Report was published when futures were down more than 2%, trading near 1,145. It stated:

Swiss voters rejected proposals Sunday to boost gold reserves. Short-term, the Swiss gold proposal was a lose/lose proposition for gold buyers and an unnecessary cross current for our precious metals trade. As Wednesday’s PRR mentioned, soaring prices following a ‘yes’ vote were a forgone conclusion. When everyone expects a rally, the market usually doesn’t deliver one. A ‘no’ vote on the other hand would obviously be bearish.

A quick drop in gold prices was needed to shock the ‘bullish Swiss vote gold bugs.’  The question is how long of a drop? Initial (kneejerk) reactions following such newsworthy events are often wrong. Gold futures are down another 2% on Sunday.

In terms of technical analysis, the most likely interpretation of this decline is a retracement of the rally from the November 7 low. The chart shows various Fibonacci retracement levels (78.6% = 1,146.70). In terms of Elliott Wave Theory, this pullback looks like a wave 2 correction. The only requirement for a wave 2 is that it can’t exceed the prior extreme (November 7 low). In short, as long as the November 7 low remains unbroken, we are looking for higher gold prices.”

The corresponding entry level for the SPDR Gold Shares ETF (NYSEArca: GLD) was at 111.08 on November 11.

Today, gold busted through red trend line resistance. This trend line can now be used as stop-loss.

What about Gold Miners?

Gold miners tend to respond faster and stronger to rising gold prices than bullion itself. In essence, gold miners are a leveraged play on gold prices.

Friday’s kneejerk reaction offered a low-risk entry for the MarketVectors Gold Miners ETF (NYSEArca: GDX).

Sometimes when a trend line is broken, prices will double back and test the line before peeling away in the direction of the break.

The Profit Radar Report suggested a buy limit order against the green trend line to scoop up GDX in case of a pullback. That’s exactly what happened November 28, courtesy of the kneejerk selloff prior to the Swiss vote.

The actual GDX chart does not look as bullish as the gold chart, but GDX is likely to dance to gold’s beat, not vice versa.

The precious metals trade (which includes silver) is likely just in its infancy and should offer a number of good entry points along the way.

Continuous low-risk, high probability trading opportunities and gold analysis is available via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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According to a Reputable German Newspaper, New Gold Rush Lies Ahead

Gold has been one of the poorest performing asset classes in 2013, but according to a reputable German newspaper this is about to end. Unquenchable thirst by China is driving up gold prices, but there is a major caveat.

As mentioned in a prior article, I used my recent visit to Germany to dig for some unique perspectives not commonly dispensed domestically.

Here is one about a new gold rush – and rising gold (NYSEArca: GLD) prices – caused by China.

The Handelsblatt, Germany’s economy and finance newspaper, featured this headline on the August 22 front page: “China Can’t Get Enough Gold” (all the information below is taken from this article).

With 1,054 tons of gold, China (NYSEArca: FXI) sports the fifth largest gold reserve among nations. This sounds like a big number, but China’s gold holdings makes up only 1% of its total assets.

It is unknown how much gold China’s central bank is buying, but it’s certain that the Chinese government wants to beef up its gold stake.

Chinese citizens are also drawn to the shiny metal, as the stock market is considered volatile and citizens are not allowed to invest outside the country.

Does China Plan to Topple the US Dollar?

It is speculated that the communist leadership is pushing for a long-term currency reform as it amasses enough gold to return to some form of gold standard.

Even though China is the world’s biggest gold mining (NYSEArca: GDX) nation (China mined 370 tons of gold last year), according to the Handelsblatt, 798 tons of gold have been shipped from London to China in the last six months.

The metal is melted down in Switzerland and then discreetly moved to China.

According to China’s gold council, China is on track to surpass India as the world’s biggest gold consumer this year.

Higher Prices Due to China’s Thirst for Gold 

According to experts, increased demand will lift prices. The price target of $1,600 by the end of next year was given. The article mentioned that gold is insurance against increasing risks.

Weak hands sold gold earlier this year because of falling prices and strong hands are buying gold, probably for the same reason.

Flawed Reasoning

The above stats are fascinating and the conclusion is logical, but appears to be flawed. Why?

Since the beginning of 2013 gold prices tumbled from 1,700 to 1,179 despite China’s thirst for gold (NYSEArca: IAU). If China has been buying gold like there’s no tomorrow, why did prices decline at all?

Since early 2013, the Profit Radar Report has expected prices to bottom around 1,250. Whether this is a true bottom remains to be seen (we sold our most recent gold position at 1,420).

Despite China’s unquenchable demand for the yellow metal, I believe there are still plenty of risks for gold.

Fortunately, investors don’t have to take any risk right now. Gold – and silver (NYSEArca: SLV) – sport pretty clear support/resistance levels that will reveal a break down or break out. The support/resistance levels are discussed in the most recent Profit Radar Report.

Another trusted German newspaper asks if a financial collapse is near. Read more here: Trusted German Newspaper Asks: “Will the Financial System Collapse?”

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

Is this Gold Rally Real or ‘Fool’s Gold?’

A novice wouldn’t be able to distinguish fool’s gold from real gold. Even gold experts have trouble telling the difference. Miners have come up with the acid test to avoid getting fooled.

Most metals tend to bubble or fizzle when they come into contact with acid, precious metals don’t. Placing a small drop of a strong acid, such as nitric acid, onto the metals surface quickly and unmistakable differentiates real gold from fool’s gold.

Is this gold rally the real deal or is it a fool’s gold rally?

The results of this analysis won’t be as conclusive as the acid test for gold (nothing ever is in investing), but there are some worthwhile indicators to consider.

CBOE Gold Volatility Index

The April 28, 2013 Profit Radar Report examined a pattern in the CBOE Gold Volatility Index to ascertain if the April low at 1,321 was here to stay.

The CBOE Gold Volatility Index is basically a VIX for gold as the VIX methodology is applied to options on the SPDR Gold Shares (NYSEArca: GLD).

An update chart of GLD plotted against the Gold VIX is shown below. Major gold lows in 2010 and 2011 occurred against positive gold VIX divergences, where gold prices dropped to a new low, but the Gold VIX didn’t.

Such divergences are nothing new. I’ve used similar divergences between the S&P 500 (SNP: ^GSPC) and the VIX (Chicago Options: ^VIX) to nail major stock market lows in March 2009, October 2011, and June 2012. See S&P500 Forecasting History for more details.

There was no such divergence in April 2013 when gold (NYSEArca: IAU) dropped as low as 1,321. This suggested new lows and the April 23 Profit Radar Report stated that: “A new low would be the best buying opportunity.”

We got that new low on June 28, but it didn’t have all the hallmarks of a lasting bottom. We were long for parts of the rally from the June low, but never committed fully.

Our focus was on the iShares Silver Trust (NYSEArca: SLV) where we just closed out a very nice trade. We went long gold again with Thursday’s move above 1,345 (GLD trigger was 130.15).

The move above 1,345 is bullish, but gold has already reached your initial up side target around 1,365 (see resistance lines in chart below).

If gold can move above resistance here, it is likely to extend its rally and move to our second target. Otherwise watch out.

Gold prices have a huge effect on gold miners (NYSEArca: GDX). One unique valuation metric – which correctly predicted the 2001 and 2008 low for mining stocks – just flashed a rare signal. Read more about the Gold Miner’s Signal here: By One Measure Gold Miners Are as Cheap as Ever.

Simon Maierhofer is the publisher of the Profit Radar Report.

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By One Measure, Gold Miners (GDX) Are as Cheap as Ever

Gold mining is a labor and capital-intensive business. But there are times when investors can make money even in the gold mining sector. That’s either when gold prices soar or when blood is on the streets. Was the June low ‘bloody’ enough to buy gold mining stocks?

Gold mining is a tough business. It is capital intensive to wrestle the yellow metal from the ground. Once mined, gold – the most valuable asset on the company’s balance sheet – is sold.

Sometimes miners are forced to sell their gold for less than it costs to mine. The miners’ fate often depends on the price of gold.

For the novice investor, the price of gold has become unpredictable. During QE1 and QE2, gold (NYSEArca: IAU) and silver (NYSEArca: SLV) soared because investors were afraid of inflation.

During QE3 and QE4 investors were still afraid of inflation, but gold and silver tanked. Same circumstances, different outcome. Go figure. Instead the S&P 500 (SNP: ^GSPC) soared.

Most of the time the gold mining sector is not the best place if you’re looking for return of capital.

But, if you can catch a major bottom (or a gold bull market), even the gold mining sector can pay off big time.

The Market Vectors Gold Miners ETF (NYSEArca: GDX) is up 36% since its June low. Is the suffering over for the bruised mining sector?

This will largely depend on the price of gold (more below), but first let’s take a look at one unique indicator.

The chart below plots the SPDR Gold Shares (NYSEArca: GLD) against the Market Vectors Gold Miners ETF (GDX) and the GDX:GLD ratio.

The GDX:GLD ratio basically measures the price of gold stocks compared to the price of gold. When the ratio is high, miners are expensive relative to gold. When the ratio is low, miners are cheap relative to gold.

As per this measure, gold miners are cheap now and were ‘major bottom worthy’ cheap a couple of months ago.

If you go back further – until 1996, comparing the Gold Bugs Index (NYSEArca: ^HUI) with the price of gold – you will find a lower ratio in 2001, which was when HUI bottomed.

So this particular indicator suggests that a major low for gold miners is in. But what about gold prices, the lifeblood of every mining operation? The article Is The Gold Rally Real or ‘Fool’s Gold?’ takes a detailed look at gold prices.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

How Big is CAT’s Effect on Stocks and Economy?

Caterpillar’s (CAT) earnings disappointed, but is this the only reason why CAT has become the number one target of a famed hedge fund short seller? Could this CAT wreak havoc on the ‘dogs of the Dow?’ Here is how CAT affects the Dow Jones.

This CAT is bad news for the ‘Dogs of the Dow’ and has become the number one short target of a famed hedge fund investor.

Global construction equipment powerhouse Caterpillar (NYSE: CAT) announced thoroughly disappointing second-quarter earnings on Wednesday.
Revenue dropped 15.8% to 14.63 billion and earnings slid 43% to $960 million. Perhaps more importantly, earnings and revenue guidance was lowered as well.
Caterpillar’s global dealers have been selling some of their inventory, but largely refrain from restocking CAT equipment due to lacking demand.
CAT already implemented factory shutdowns, rolling layoffs, and expense cutting programs and will continue to do so for the remainder of 2013.
A company like CAT, that operates in an economically sensitive sector and has tentacles spread out over the entire globe, provides an interesting gauge of the global economy.
Here’s a thumbnail sketch of why many are worried about CAT’s message.
Many of CAT’s customers are in the construction and mining sector. Take a look at ETFs like the Market Vectors Gold Miners ETF (NYSEArca: GDX) and you know why mining companies aren’t in a position to chauffeur mined metals in the latest model dump truck.
Many metals, such as copper, iron or silver, are used in construction or technology. Slowing demand for metals cautions of a slowing economy. Dwindling demand for construction equipment has the same effect.
Just last week, famed short-seller Jim Chanos, founder of Kynikos Associates, picked CAT as his top choice to short for a number of reasons, such as deflating Chinese real estate bubble, slowing cycles and some accounting troubles.
CAT And The Dow
Apparently there are plenty of reasons to be bearish on CAT, but how does this affect other stocks?
CAT accounts for 4.22% of the Dow Jones Industrials Average (DJI: ^DJI) and Dow Diamonds ETF (NYSEArca: DIA) and is the ninth biggest component.
As the chart below shows, there’s quite some directional harmony between CAT and the Dow Jones Industrial Average.
In fact, from 2005 – 2011 CAT and the DOW carved out major highs and lows in pretty much the same week every time.
This changed in early 2012 when CAT started heading south while the Dow kept climbing higher.
This phenomenon is not exclusive to CAT. We’ve seen a very similar lag with copper prices
(related article: Indicator Exposed: ‘Dr. Copper’ – More Quack Than Doctor)
What does this mean? There may be a very complicated and intricate explanation for this, but the most likely one is that the economy is weak, but the Fed and other central banks are strong.
Oh yes, and stocks might be in trouble … eventually.
Simon Maierhofer is the publisher of the Profit Radar Report.
Follow Simon on Twitter @ iSPYETF

Is There a Bullish Breakout for the Gold Miners ETF – GDX?

Gold mining stocks and the gold mining sector as a whole have been in free fall mode since September 2012. The Market Vectors Gold Miners ETF (GDX) is still trading 55% below its peak, but it is showing signs of life. Is this a bullish break out?

The March 6, iSPYETF article on ‘Gold vs GDX’ mercilessly ousted the fundamental profit making flaws of the gold mining sector.

To say that gold mining stocks have had a hard time monetizing their mining activity in an environment of falling gold prices is like claiming hurricane Sandy was just a stiff breeze.

The Market Vectors Gold Miners ETF (GDX) lost 60.8% from top to bottom tick, but if there’s anything we’ve learned from QE is that what comes down likely goes back up.

Based solely on technical analysis, GDX just completed the first steps of a bullish breakout.

The May 20 low has three trademarks of a tradable bottom.

  • It sports a bullish RSI divergence where price dropped to a new low, but RSI did not.
  • Prices were able to close above the black parallel channel that confined much of the previous down trend.
  • Thursday’s pop canceled a bearish percentR low-risk entry. percentR (or Williams %R) is a momentum indicator. According to my personal methodology (which is correct about 60 – 70% of the time) the immediate down trend is now broken.

It obviously will take more confirmation for the fledgling breakout to ‘stick,’ but the above-mentioned bullish factors decrease the odds of being cut by trying to catch a falling knife.

A close above the first red resistance line at 31.27 will be further confirmation that a tradeable low is in while key support is located right around 27. Use illustrated support/resistance levels to spot low-risk entries.

Low-risk entries are not no-risk entries. But going long against support, or once resistance is broken (and then used as support and foundation for a stop-loss level), significantly limits your risk and lets you know exactly when you’re wrong.

Currently prices are 5%+ away from support or resistance. Using support at 27 as stop-loss, the risk (drop from 29.40 to 27) is 8.2%. It makes sense for prices to pull back or resistance to be taken out for a lower risk entry.

The Profit Radar Report specializes in pinpointing low-risk entries for the S&P 500, Nasdaq-100, euro, dollar, gold, silver and 30-year Treasuries. There’s always an opportunity somewhere, and the Profit Radar Report helps you find it.

Weekly ETF SPY: Russell 2000 ETF – IWM

Risk is rising when leaders turn into laggards. After outperforming the S&P 500 for years, the Russell 2000 failed to confirm the S&P’s new all-time high on April 10. The stock market in general peaked the next day. Here’s an updated look at the Russell 2000 and the Russell 2000 ETF.

We’ve been using the Russell 2000 Index as a ‘thermometer’ to see if the market is getting overheated. How can any one index work as a thermometer?

As rallies or bull markets mature, investors typically find fewer and fewer stocks at a price tag that justifies buying. Mature rallies are therefore accompanied by selective buying.

Selective buying is just a fancy expression for some indexes beginning to lag and underperform. High beta indexes, like small caps, are usually the first to be left in the dust.

That’s exactly what happened in early April, particularly on April 10. The S&P 500 rallied to new all-time highs. The Russell 2000 did not.

The April 10, Profit Radar Report pointed out just that: “The stock market has arrived at a point where selective buying is cautioning of a looming high. Upcoming resistance levels and divergence spreads (i.e. Nasdaq-100 compared to Nasdaq Composite, DJIA compared to DJA, and S&P 500 compared to Russell 2000) provide a low-risk opportunity to go short.”

In other words, there is a low-risk opportunity to go short as long as the Russell 2000 remains below its all-time high (recorded on March 15).

The purple bar in the chart below highlights the difference between the April 10 and March 15 highs, seven points. The risk of going short on April 11 was seven points. So far the Russell 2000 has fallen as much as 48 points. This is a risk/reward ratio of almost 7:1 in your favor.

On Thursday the Russell 2000 closed right above important triple support. Although RSI (bottom of chart) did not yet confirm the new price low, it failed to provide an obvious bullish RSI divergence. This suggests that any bounce at current support will lead to at least one more leg down.

A move below 890 should minimally lead to a test of 868, possibly lower.

The second chart shows the same support levels for the iShares Russell 2000 Index ETF (IWM). IWM already closed below the two ascending trend lines. Once price drops below support it turns into resistance (that’s why the trend lines are colored red).

IWM may foreshadow what’s next for the Russell 2000, but when it comes to trading/investing, I base my technical analysis on the purest representation of the respective asset. The purest representation of the Russell 2000 is the Russell 2000 Index, not the Russell 2000 ETF.

Nutshell summary for IWM: Based on trend line support for the Russell 2000 Index, small caps are likely to find support around current prices, but should ultimately move lower before embarking on a more sizeable rally again.

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April 12: GDX broke through support with a vengeance. A new low is likely before we’ll see a significant rally.

April 5: XRT closed below trend line support and registered a failed bullish percentR low-risk entry (lingo for: the up trend is likely broken). XRT is still trading above support at 68.70.

March 22: AAPL’s break above trend channel was a fake out break out. The March 31, Profit Radar Report stated that: “Apple failed to bounce from parallel channel support (on the log scale chart) and closed below. Our stop-loss was triggered and the option of much lower prices is now on the table. I’d like to see further confirmation, but the potential target for Apple may be as low as 353. Support at 425 – 405 could soften or halt the decline.”

March 15: XLF trades as high as 14.65, which was right in the 18.52 – 19.66 resistance cluster that was likely to halt XLF’s rally.

March 7: The Nasdaq-100 (corresponding ETF: QQQ) had two open chart gaps: 2,806 and 2,860. Although it seemed unlikely at the time, the Nasdaq-100 closed the gap at 2,860 on April 10 before declining well over 100 points.

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Weekly ETF SPY: Gold Miners (GDX)

Anytime a stock or ETF drops 50% in a short period of time, it’s tempting to bet on a bounce. Such a bounce may be forthcoming for GDX, but to avoid being cut by the proverbial falling knife, it’s prudent to wait for a move above resistance.

If you think gold’s performance has been disappointing, look at gold miners.That’ll cheer you up (assuming you don’t own gold mining stocks).

The Market Vectors Gold Miners ETF (GDX) tumbled over 50% since its September 2012 all-time high. Is there enough ‘blood in the streets’ to buy GDX?

My March 6 comparison between gold and GDX mercilessly ousted fundamental profit making flaws of the gold mining sector. Today’s article will look at the technical picture. Could the steep decline be a buying opportunity?

After a 50% haircut, trend following technicals are obviously pointing lower and fishing for a bottom here is like catching the proverbial falling knife.

However, based on RSI, the selling intensity is subsiding and GDX has reached the bottom of a trend channel that contained the last leg lower. This could halt or stop the bleeding.

Where the final low will be remains to be seen, but going long with a stop-loss just beneath channel support or after GDX drops below channel support and closes back above would be a low-risk opportunity for aggressive investors looking for a favorable risk/reward trade.

Low-risk doesn’t mean no risk. There is risk, but it’s well defined by the trend channel.

Longer-term, the GDX meltdown provides fertile soil for a buying opportunity. But conservative investors should wait for the ‘seed to sprout’ before buying.

A break above resistance would be the first signal that the green shoot is ready to mature further. GDX resistance is provided by the red lines and black parallel channel.

A move above the trend channel will be more meaningful, but even breaking above red line resistance can be used as a buy trigger with a stop-loss just below the trend line (or parallel channel).

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Gold vs GDX – Is The Price Divergence Bullish or Bearish?

The precious metals sector is one of the worst performers of the year with gold mining stocks losing three times as much as gold prices. Why did gold miners get hit so hard and can this be bullish going forward?

Gold mining stocks represented by the Market Vectors Gold Miners ETF (GDX) have lost 35% since September last year. Over the same period of time gold prices have shed ‘only’ 13%. Is the GDX decline bullish for gold?

Gold Mining Basics & Disadvantages

Gold mining (and mining in general) is a tough business for several reasons. The mining business is capital intensive. It takes expensive equipment to replace ‘inventory.’

In fact, the goal and business model of every mining company is to sell the most valuable asset on its balance sheet. It’s hard to create consistent value that way.

Unlike brewers (think of your favorite beer) for example, miners don’t get any excess return from branding. It’s not that gold mined by Barrick Gold fetches more than gold mined by Newmont. Gold is gold and commodities are anonymous.

No Progress in the Best Environment Ever

Gold miners have enjoyed the best possible environment for mining and selling gold. Political and financial uncertainty have sent gold prices soaring from $250 to well over $1,500/oz, but Barrick Gold shares trade at their 1996 level today and shares of Newmont Mining (NEM) are at the same level as in 1987.

Barrick Gold and Newmont Mining are well-managed companies. They are industry titans and combined account for over 20% of the Market Vectors Gold Miners ETF (GDX), but … mining just is a tough sector to create shareholder value in.

The first chart illustrates gold miners’ struggle to keep up with gold prices. Newmont Mining is trading below its 1997 peak. Gold prices on the other hand have soared more than 600% since the early 1990s.

Obviously, it is possible to make money with miners. From 1998 (or 2000) – 2011 Newmont Mining shares gained over 460%. However, it took a frenzy drop into the 1998 low and a frenzy rally to the 2011 high to deliver such handsome gains.

Short-Term Gold/GDX Correlation

The second chart below plots the percentage change of gold prices since the September 2011 high against the percentage change of GDX.

Again, GDX has been hit much harder. Gold is down 17%, GDX lost 37%.

Is that performance discrepancy bullish or bearish for gold prices and GDX?

Now is not the time to join the sell gold/GDX crowd. The decline accelerated back on February 10, when the Profit Radar Report predicted that: “A break for gold below 1,663 will result in a move to 1,635, and a drop to at least 1,620 – 1,600 would be welcome to shake out some of the weak bulls.”

Much of the damage has already been done and the recent drop no doubt spooked goldbugs. It also catapulted many fair weather gold ETF investors (SPDR Gold SharesGLD and iShares Gold Trust – IAU) investors back to the sidelines.

I would view a more deliberate test of gold support around 1,530 accompanied by a bullish RSI divergence as a buy signal (with a stop-loss below support).