Relative Strength In Gold Stocks Portends To Rebound

A few weeks ago we warned that the gold miners were at risk of a technical breakdown. They struggled to rebound at support, while Gold was breaking to a new low. Gold continued to decline,  but the miners held support and stabilized. Gold traded as low as $1045 on Thursday, but the miners continued to diverge in a positive fashion. The recent relative strength from the gold miners particularly in the face of new lows in Gold, coupled with the oversold condition of the metals suggests a sector rebound is developing.

The daily candle charts of GDXJ, GDX and Gold are shown in the image below. Several weeks ago Gold lost $1080 support and made a new low. The miners failed to make a new low then and continued to hold their lows as Gold grinded lower below $1080/oz. Now the miners could reach a one month high very soon while Gold could rally back to resistance at $1100/oz or slightly higher.

Before we continue with the miners let us comment on Gold’s outlook. Following the breakdown from the bearish flag formation Gold traded down to $1045/oz. We would anticipate Gold enjoying a bigger rebound if it first tested major support at $970/oz to $1000/oz. If Gold is beginning a rally from $1045 then it could be limited due to overhead resistance at $1100/oz to $1110/oz.

Another reason to doubt an extended rebound in Gold is its recent breakdown against foreign currencies. We plot Gold against foreign currencies (FC) and Gold in the image below. Gold/FC has been rallying for almost two years and had held above the 400-day moving average since last December. However, Gold/FC lost the 400-dma in November and continued to decline. This tells us that Gold’s recent weakness is broad based and not only a symptom of US$ strength. 

Turning back to the miners, if they continue to outperform Gold and Gold rebounds +$50/oz then they could rally to the 200-day moving averages. The daily charts of GDXJ and GDX are shown in the image below. GDX and GDXJ need to rally 19% and 15% respectively to reach their 200-day moving averages.

The fact that the gold miners held their lows even as Gold broke to new lows is bullish and hints that a short term rally is underway or could begin soon. Moving forward, we think the miners to metals relationship could be a leading indicator for the sector. Recall that the miners during the major bottom in precious metals in 2000-2001 bottomed several months before Gold. While we expect another leg lower in the metals and another push higher in the US$ index, we would not be surprised if the extremely oversold mining sector continued to diverge.

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Jordan Roy-Byrne, CMT

[email protected]