Sectors To Watch: Are Gold Mining Stocks Losing Their Luster?

| August 1, 2012

Gold mining stocks have had a rough year.

Over the last twelve months, Market Vectors Gold Miners ETF (GDX) has fallen 34%.  But the ETF has bounced back lately.  GDX has rallied 11% from the 52-week low of $39.08 it reached in May.

The main reason for the miners’ poor performance has been falling gold prices.  The shiny yellow metal’s down 15% from its highs.

Gold’s poor performance has caught many investors off guard.  Wasn’t it supposed to be a safe haven from economic uncertainty and devalued fiat currencies?

Unfortunately, gold mining stocks have fared even worse than the metal.  They’ve been hurt by falling prices as well as rising production costs and weaker than expected production.

Underperforming gold is a recurring theme for the gold miners.  According to the Wall Street Journal, physical gold has outperformed gold mining stocks in six out of the last seven years.

Despite the challenging fundamentals, some investors are turning bullish on the gold miners.  Take a look at this four year chart of GDX.

As you can see, the gold miners ETF has retraced 50% of the gains from the 2008 low to the 2011 high.  This is an important technical level.  The bigger the retracement, the more likely the uptrend will falter.  And the gold bulls know this.

The last two times GDX has dipped to the 50% retracement level the bulls have been out in full force buying gold mining stocks.  As a result, GDX has put in a double bottom right at the 50% retracement.

Simply put, this is a bullish chart for gold mining stocks.

Take a look at using a straddle or a strangle on GDX to profit from the conflicting fundamental and technical story. As you know, these option strategies use a combination of a put and a call to profit from a big move in the stock, but you’re not sure which way the underlying is going to move.

And at this point, GDX’s bullish chart and bearish fundamentals are at odds with one another.  In my opinion, the bulls will win out in the short term and the bears will win out in the long run.  But one thing’s for sure, I don’t see GDX holding at this price.

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Good Investing,

Corey Williams

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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