Many gold miners and explorers have been greatly disheartened in their business as the price of gold has dropped significantly this past one year, and many of them have not been able to hit a strike in their search for physical gold.
This sector generally breaks even around $1,200 an ounce, once all costs are taken into account. Many times they face difficult situations as some of the deposits are deep underground, or geographically isolated. Some are also located in tricky labor markets, like South Africa.
Many believe that “sitting on a gold mine” is not as profitable as it used to be, as miner’s earnings might be crushed by the fact that high costs match falling prices.
However, what is also true is that we are not finding enough metal to replace what is being consumed.
GOLD MINING ETFs
The ETFs one should watch are (1) Market Vectors TR Gold Miners (GDX) that tracks major public companies worldwide involved primarily in the mining for gold and (2) Market Vectors Junior Gold Miners ETF (GDXJ) tracking junior gold miners.
Many investors have shifted their capital from these mining ETFs to the physical funds such as GLD, and this has deprived investment inflows into GDX and GDXJ.
WEAKNESS ON THE CHARTS
On the weekly charts we can see the damage GDX and GDXJ have suffered this past one year. The current downtrend channel is strong and based on an Elliott Wave count we can see that the worst is not over yet.
The MACD indicator also shows a perfect alignment within its moving averages. The moment we start seeing a divergence between these two lines, we could expect a bounce, which will come in the form of a Wave 4.
BOTTOM LINE
It’s important to follow the junior miners as they are the ones who will one day lead the way. We have seen in the past how when a junior mining company strikes a “pot of gold” on their land, their share price jumps in an extraordinary way.
Although these two ETFs are currently facing continuous drops in their value, the bottom will come at some point making it cheaper for investors to re-enter the market.
Bear in mind that if a few junior miners that are indexed in GDXJ hit a strike, we might see this ETF outperforming the price of the physical yellow metal. For this to happen it is important that gold stays around the $1,400 mark to give enough margin of profit.
