As mentioned on a number of previous occasions, I have always been a keen follower of gold stocks – ever since I started my investment career as a mining analyst more than 25 year ago.
I posted a short article two weeks ago, suggesting one should keep a close eye on the relative strength of the miners versus the metal as stocks often lead bullion. Since then the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ) have broken through overhead resistance on strong volume and marched on to new highs for 2010, emerging as new market leaders.
Source: StockCharts.com
The chart below has been constructed by dividing the Market Vectors Gold Miners ETF (GDX) by the streetTRACKS Gold Trust (GLD). A rising trendline indicates outperformance by gold stocks against bullion, whereas a declining line shows the metal having the upper hand. After a period of underperformance until October 2008, the miners outperformed bullion for about 12 months before drifting lower until January this year. The curve for mining stocks then turned upwards and led the metal higher. This is a very positive sign for gold stocks.
Source: StockCharts.com
In addition to the nascent outperformance by gold stocks, the Gold Miners Bullish Percent Index shows 71% of the 32 stocks in the Gold Miners Index are now in point and figure uptrends. While it is a positive sign for a group when the majority of its stocks are in uptrends, readings of more than 70% indicate the first signs of a short-term overbought situation.
Source: StockCharts.com
I remain bullish on gold bullion and gold miners (GDX and its younger brother GDXJ), but repeat my usual advice that the yellow metal and gold-related instruments should only be bought at times of pullbacks, which will invariably happen after the strong rallies of these notoriously volatile counters.
