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

 

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: 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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