Thu, Sep 8 2011 11:35 AM ET
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MARKET VECTORS GOLD MINING INDEX HITS NEW
HIGH -- RECENT GOLD BREAKOUTS INCLUDE
NEWMONT MINING AND ELDORADO GOLD -BARRICK MAY BE NEXT -- CORRELATION
COEFFICIENT SHOWED GOLD STOCKS REL-LINKING
WITH GOLD DURING JULY -- GOLD MINING BPI
STILL RISING BUT IS NEARING OVERBOUGHT
REGION
By John Murphy
GOLD MINERS INDEX HITS NEW HIGH... My Market Message last Friday
morning showed the Market Vectors Gold Miners ETF (GDX) on the verge of a
bullish breakout to a new record high. Chart 1 shows that bullish breakout taking place
this week (see circle). And this has happened while gold and silver prices pulled back
earlier in the week. The reason for the stronger performance by mining stocks is revealed
in the GDX/GLD relative strength ratio above Chart 1. The RS line has been dropping
since the spring as gold stocks have lagged way behind rising gold prices. The upturn in
the ratio, however, over the last month suggests that mining stocks may actually start
doing better than bullion which may have gotten too rich for the average investor.
(click to view a live version of this chart)
Chart 1
NEW GOLD BREAKOUTS ... We've shown a number of gold stocks already trading at
record highs including Yamana Gold (AUY), New Gold (NGD), Randgold (GOLD), and
Royal Gold (RGLD). Today I'd like to show more recent breakouts and a couple that may
be about to take place. First the new breakouts. Charts 2 and 3 show Newmont Mining
(NEM) and Eldorado Gold (EGO) having just cleared their late 2010 highs to reach
new record. Some others are very close to doing the same.
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
THREE NEAR BREAKOUTS... Two other gold stocks are in the process of
challenging their all-time highs. Charts 4 and 5 show Barrick Gold
(ABX) and Goldcorp (GG) testing their previous highs. Given the upward direction of
the group, an upside breakout in both gold stocks appears likely. Chart 6
shows IAMGOLD (IAG) just breaking through its July peak near 22. A decisive close
above 22.20 would put IAG on track to challenge its spring high as well.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
GOLD AND GOLD STOCKS RE-LINKED DURING JULY ... I wrote on this subject
on July 21, but it's a good time to repeat it. Because there's a valuable lesson to be learned
about the relationship between gold and mining stocks. Chart 7 overlays the price of gold
(solid line) over the Gold Miners ETF (price bars) since the start of the year. The black
line below the chart is the 50-day Correlation Coefficient which measures the strength of
the relationship between gold and mining stocks. The drop in the CC line during May
meant that the relationship between the two weakened considerably and even turned
negative temporarily during June. The chart shows gold stocks falling sharply during
those six weeks while bullion held relatively steady. Clearly, bullion was the better place
to be at the time. At the start of July, however, gold stocks started rising with bullion
which pushed the Correlation Coefficient line back into positive territory. That carried
two messages. One was that bullion and mining stocks were rising together again which is
usually a bullish sign. The other was that gold mining stocks were a safer buy. My July 21
message ended with the following quote: "The rising CC line in early July suggested that
it was a good time to get back into gold stocks."
(click to view a live version of this chart)
Chart 7
GOLD MINERS BULLISH PERCENT INDEX STILL RISING... The chart below
shows the point & figure version of the Gold Miners Bullish Percent Index
($BPGDM). The index measures the percent of gold stocks that are in p&f uptrends. Of
course, the best time to buy miners is when the index is just turning up from oversold
territory which was the case in early July (more on that later). Since then, p&f buy signals
took place at 52 during July and 58 during August. The good news is that the index is still
rising and appears to have further to run. The bad news is that it's nearing overbought
territory. The index is testing its April high at 80 and an upside breakout appears likely.
Previous peaks have taken place ranging from 86% to 92%. That suggests that the mining
group has a bit further to go before running into an overbought condition. The first hint
of that happening would be a three-box reversal to the downside from those higher levels.
Back in July, we were watching for an upturn from oversold territory. [My July 6
Message included the headline "Gold Miners Bullish Percent Index in Oversold
Territory". The index had fallen to 28%. The message went on to include the following
alert: "The indicator would have to climb to 6% from its recent low at 28% to signal a
possible upturn. In other words, a $BPGDM reading of 34% would be an added incentive
to start mining for gold and gold shares again". The index hit that initial buy point on
July 12.]
(click to view a live version of this chart)
Chart 8