WILL GOLD-MINING STOCKS FINALLY HIT PAYDIRT ? / BARRON´S GETTING TECHNICAL ( VERY HIGHLY RECOMMENDED READING )

Getting Technical
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MONDAY, JANUARY 30, 2012
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Will Gold-Mining Stocks Finally Hit Paydirt?
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By MICHAEL KAHN
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The price of bullion is rising again after a correction. But can the mining sector glitter like the metal itself?
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After five months of choppy declines and arguments by pundits that the so-called gold bubble has burst, the yellow metal just scored a technical breakout to the upside.



Action from gold's peak last September above $1923 per ounce through last months' low under $1524 was a correction in a long-term bull market. And with January's breakout, that bull market is ready to resume. Gold traded Monday at $1734.



The question I'll answer shortly is whether gold-mining stocks will join the metal in a rally.



But for a moment, let's look at the metal itself, who usually needs to perform well if gold miners have a reasonable chance of heading north. Using the SPDR Gold Trust (ticker: GLD) as a proxy, I wrote of a critical support level that needed to hold last month (see Getting Technical, "Gold's Last Stand," December 12, 2011). Twice, this exchange-traded fund dipped below the critical 154 level only to reverse course and start to climb higher (see Chart 1).
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Chart 1

SPDR GOLD TRUST ETF

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In technical analysis, a breakdown followed by immediate reversal is a powerful bullish signal.
Last week, the market confirmed this bullish change when it broke out to the upside from its five-month pattern, soon after Fed Chief Ben Bernanke reported that he would hold short-term interest rates near zero until late 2014. Midday Monday, it traded at 168.24. Chart watchers now expect the gold ETF to top 190. The equivalent in gold itself would be $2000 and that would indeed open a few eyes.



Gold-mining stocks have alas been a different story. Last year, I wrote that mining stocks, despite lagging the metal for several years, were not ready to play catch up to the commodity (see Getting Technical, "The Trend Is Gold Bullion's Friend," May 18, 2011).



Since then, the relationship has not changed much - with one small exception. Starting in December, the Market Vectors Junior Gold Miners ETF (GDXJ) started to move higher both in absolute price and relative to gold itself. In other words, junior miners -- which tend to be smaller, younger companies that are still in the exploration and discovery phase of developing gold mines -- have started to outperform (see Chart 2).
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Chart 2

MARKET VECTORS JUNIOR GOLD MINERS ETF

There are several reasons why technical analysts think junior miners look good. From momentum indicators to moving averages, the weight of technical evidence does seem to have tipped towards the bullish side. And with last week's Fed-induced rally in gold, the junior gold miner ETF also enjoyed volume support.


Real money flowed into the sector and that suggests demand is higher, too.


To be sure, the path to higher prices is not an easy one. Resistance from a giant trading range between roughly 30 and 40 is daunting (the ETF traded at 29.20 Monday). But the underlying mood has changed for the better.



The junior gold miners index itself is constructed from more than 80 stocks. Nearly two thirds are stocks traded in Canada, one fifth are traded in Australia and only about 7% are traded in the United States. Therefore, domestic investors might be better sticking to the ETF instead of trying to pick component stocks.



Keep in mind that by definition, these stocks have relatively low market capitalizations and the dollar volume of shares traded each day is much less than more large, liquid gold stocks such as Newmont Mining (NEM). Most component junior-mining stocks account for less than 3% of the weight of the junior miners ETF. Therefore, it would take a good deal of effort to assemble a portfolio representing a cross section of the index.



So, despite the naysayers, gold is starting to shine again. This time, it may be ready to take junior gold-miners with it on a ride higher.

Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.