As I mentioned I might over the weekend, I’m officially adding the Gold Miners ETF (GDX) to our trade ideas. If we didn’t already own it in the model portfolios I would also be adding the Gold ETF (GLD), as well.
The fundamental case for owning the metals is very clear. The world’s central banks are hell bent on devaluing their currencies. They won’t admit it but we are now looking at the real possibility of an all-out currency war, with China and the US on the verge of jumping in feet first. When even Alan Greenspan, the former Fed chair, suggests it’s time to buy gold, you know there’s something going on.
Interestingly, investors have ignored Greenspan’s recent recommendation. Risk assets are just too fun to trade for a shiny metal that’s not doing much these days. Over the course of this precious metals bear market sentiment has soured against the asset class which provides contrarians like us with an unique opportunity.
This persistent negative sentiment is one reason why the mining stocks have become cheaper relative to the metal than any other time over the past 20 years (see the black line at the bottom of the chart below). So if the opportunity in gold is attractive, the opportunity in the miners is that much more attractive:
The lows that the ETF made last year were accompanied by divergences in momentum as indicated by RSI and MACD setting up a potential long-term double bottom:
Though it hasn’t broken its downtrend yet, it has regained its 20-week moving average. The pullback recently has also held above the key $20 level where it formed a DeMark Sequential 13 buy signal and bottomed late in 2013:
Looking at the daily chart, the recent pullback simply looks like a bull flag as the ETF works off its overbought condition, on declining volume, before making another leg higher.
Ultimately, I like the miners as a long-term holding right here but if you want to trade it, I like using $19 as a stop. That leaves enough room for a false breakdown below the $20 level and a 61.8% retracement of the recent move higher. Please also see my note on position sizing over on the trade ideas page.
UPDATE (4/29/15 – 9:58am): We are putting this trade back on using the GDXJ rather than GDX this time. The mining stocks have been acting very well despite some companies reporting some poor results this earnings season:
Newmont beat & stock soared ovr 2 days.Barrick badly MISSED Q1 EPS estimates last nite&stock still up 5.5% 2day.This is bull market action.
— fred hickey (@htsfhickey) April 28, 2015
Another big Q1 gold stock miss this AM:Detour Gold.Reaction:stock UP 5.7% to multi-month high.I'm tellin' you – we're seeing a major change
— fred hickey (@htsfhickey) April 29, 2015
I agree with Fred that this is very bullish action. If the stocks fall again over the next few weeks we will take the opportunity to add to both GDXJ and GLD. As of right now the GDJX shows constructive signs of a trend change on the weekly chart. We have a DeMark Sequential buy signal along with diverging momentum as indicated by RSI and MACD and the ETF has now moved back above its 26-week moving average. Add this bullish technical backdrop to what I believe is probably the most bullish fundamental case we have ever seen for the metals (see above) and it’s hard to find a more compelling trade in the markets right now.
UPDATE (4/30/15 – 5:18pm): Today I started a position in New Gold, Inc. (NGD). It’s one of the cheapest miners out there with a terrific management team that has been buying stock for their personal accounts. The stock trades below tangible book value and has terrific leverage to rising gold prices (once we get there), hence terrific upside for the stock price. Technically, I love the ending diagonal pattern and diverging momentum on the chart. This is a highly speculative trade so I’m not officially adding it to our trade ideas.