Gold Stocks Undervalued and Set to Spring Higher
After a sharp August pullback, gold stocks look refreshed and set to shine once again, charts say.
By Michael Kahn
It is very interesting that the decline erased exactly one third of the prior 2016 gain for the VanEck Vectors Gold Miners ETF. That is a textbook correction in my book (see Chart 1).
To be sure, there are contrary technical factors that should be on everyone’s minds. First, the bounce so far has not been able to take the ETF back above its 50-day moving average.
And second, there is the double-edged sword of gold itself. The metal held quite steady for the past two months yet gold mining stocks fell with ferocity. Stocks tend to lead their commodity so this could be a negative for both. But on the other hand, the rising trends for gold, silver and platinum remain intact.
I will give the benefit of the doubt to the trend any time.
Plus, there are many other bits of bullish technical evidence to be found. For example, the VanEck Vectors Junior Gold Miners ETF, which tracks smaller capitalization stocks in the sector, sports on-balance, or cumulative volume levels on par with its July and August price peaks.
That suggests that all the money that flowed out during the August decline already flowed back in, even though prices remain depressed. Put another way, volume traded during the recovery was greater than volume during the decline telling us that bulls were more aggressive than bears. That’s demand.
Many component stocks of these ETFs echo the chart patterns above. Coeur Mining in Your Value Your Change Short position , for example, shows the sharp 2016 rally and equally as sharp August pullback (see Chart 2). It also shows two types of short-term reversal patterns that suggest a bottom was already reached.
In a nutshell, downside power waned as the bears could not press their case. And it is further confirmed by rising momentum and cumulative volume indicators from the first price low to the second.
Next, another pattern familiar to investors is the head-and-shoulders, defined by a high – the head -- surrounded by two lower but equal highs – the shoulders. Normally, this is a sign that the major rally leading into the pattern was transitioning into a decline of comparable size.
However, with this pattern the failure to break down tells us that the bulls win and prices normally head back higher. We can see variations on all of this in familiar names such as Newmont Mining and others.
Of course, there are gold stocks that do not fit this mold, including Kinross Gold and Goldcorp ( GG ). The former, for example, did not show strong performance starting in May as it traced out a triangle pattern (see Chart 3). That pattern broke to the downside last month and indicators such as on-balance volume and momentum did not show any positive signs as they did in Coeur and Newmont.
The wild card remains the uncertainty over the timing of the Federal Reserve’s next rate hike.
Don’t let the “bear market territory” comments used by the media turn you off. After all, every bull market starts after a significant price decline.