Is Gold Rolling Over Again?

I published the chart with the two CNBC headlines in the January 19 Profit Radar Report. It just illustrates nicely how the change of price affects sentiment and vice versa. A risk trend followers hate and contrarian investors love.

We bought gold at 1,140 (as per the November 5 Profit Radar Report recommendation) when no one wanted to own it.

Now, it’s more fashionable to own the yellow metal again.

This alone is reason to be cautious, but it’s not the only one.

The gold seasonality chart below, featured in the January 25 Profit Radar Report, shows that seasonality soured around January 22.

Although it’s a couple of days old, the assessment published in the January 27 Profit Radar Report is still fully applicable.

The easy money in the gold trade has been made. More attention and mental stamina is required now. Sunday’s PRR showed seasonality is turning bearish. Commercial traders (‘smart money’) have further reduced exposure.

The chart shows that current trade is important from an Elliot Wave perspective. Gold appears to have completed a 3 wave rally. There are now two options:

Gold will trace out a wave 4 correction followed by wave 5 higher. Target for a wave 5 high is around 1,xxx (reserved for subscribers of the Profit Radar Report).

Longer-term, a complete 5-wave rally will be followed by a corrective decline and at least one more rally leg.

Shorter-term, a wave 4 correction could become a pain to manage. Waves 4 tend to seesaw over support/resistance levels, therefore using the trend channel support at 1,275 as stop loss could kick us out at the wrong time.

A 3-wave rally is indicative of a correction and would translate into a relapse to new lows. This option is unlikely, but theoretically possible.

We can either take our profits and run or commit to endure a potentially painful correction in exchange for further gains. I like to keep things simple and recommend taking profits. Lets cash in gold around 1,295 and GLD around 124.20 for a nice 13.5% gain.”

Gold has since dropped to 1,255. The SPDR Gold Shares (NYSEArca: GLD, iShares Gold Trust (NYSEArca: IAU) and Market Vectors Gold Minders ETF (NYSEArca: GDX) also peeled away from their recovery highs. I still think gold, GLD and IAU will see higher highs, but it will take some patience to get there.

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 and 17.59%.

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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: 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).