Yesterday saw a $30 drop in the price of gold while the US stock market averages popped up and rallied towards short-term resistance. The GDX gold stock ETF also pulled back 2.47% for the day after closing above $30 the day before for the first time in over two years.
This drop has brought out another round of people calling for a big correction. An article on Kitco.com with the headline Gold And Silver Prices Get Slammed – Is It Over? pretty much sums up the sentiment among people involved in the precious metals market. The author of the article is not predicting a big drop, but is uncertain of what is going to come next. The worry people have is that if the stock market continues to rally then gold will collapse.
However, gold and the GDX ETF have been outperforming the stock market all year even though the stock market made a new 52-week high in July,
The reality is that the daily swings in all of the markets are greater than they have been in months past and grab people’s attention along with the daily headlines, but a simple look at the on balance volume indicator for the GDX ETF shows that heavy accumulation is the real story.
Take a look at this 60-minute chart of the GDX VanEck Vector Gold Miners ETF trading on the NYSE.
The on balance volume indicator on the bottom of this chart made a new high Thursday on this hourly chart and actually ticked up in the last hour of trading yesterday. The hourly stochastics on the GDX is now below 20 to give an oversold reading.
If this is a bottom for GDX then it could be bought now with a stop loss placed under $28.00 – and so can leading mining stocks. The on balance volume indicator is calculated by adding up the volume on up bars and subtracting it on down bars. It rises when there is bigger volume on up bars than down bars on the charts.
It goes up when there is simply accumulation. So this indicator shows no distribution that would signal a coming real drop in the GDX ETF.
Compare this with the S&P 500 itself and what it has done in the past month.
While the S&P 500 has popped up in the past two sessions and is poised to gap up again this morning the on balance volume indicator has not confirmed the move at all and has been trending down for the past few weeks while the S&P 500 has traded in a range with resistance at its 50-day moving average and support at its 200-day moving average.
With all the drama in the headlines and swings in the market such as last Friday’s 700 down day in the DOW and yesterday over 300 points up the chart shows that after the initial drop after the July Fed meeting the US stock market averages have been going up and down in a range. That is their true story for August.
This sideways pattern has yet to be resolved and the S&P 500 may still break it to the upside, but this on balance volume indicator shows a stark contracts between accumulation in the GDX ETF and distribution in the S&P 500 in August.
It is not clear what the ultimate direction of the S&P 500 is going to be until it closes above resistance or below support, but what is clear is that the GDX rally has not been derailed and we should expect to see the buying that has fueled its advance to continue going forward.
It really doesn’t matter whether stock market goes up or down for gold. Gold is rising more because bond yields have been falling all over the world and the Federal Reserve is now lowering interest rates than due to moves in the US stock market.
When it comes to gold stocks there are now small cap mining stocks that are even breaking away from the price action of gold and silver. Yesterday while the GDX ETF, fell Aftermath Silver for example went up and touched a new high even. It is not the only small cap stock that went up yesterday.
Something is starting to happen in the mining stock world. There are now many individual small cap mining stocks that are not being as impacted by the daily moves in gold and silver like the big cap miners and the GDX ETF are. This is because gold above $1500 is causing them to be more viable on a fundamental basis and causing traders and investors to find value in what are undervalued gems.
This is something I plan on talking more about in a private Power Investor update this weekend. To join the group go here:
http://wallstreetwindow.com/join-power-investor/
Disclosure: Michael Swanson has a position in the GDX ETF and has bought 200,000 shares in a private placement offering of Aftermath Silver mentioned that includes 100,000 warrants with a strike price of 12 cents CAD. The shares have a four month hold from the date the offering closes. Because Aftermath Silver is a small cap stock with a market cap of less than $100 million he also is placing himself on a voluntary 30-day trading restriction period from the date of this post in which he will not buy or sell a share of Aftermath Silver stock. Some members of his private Power Investor membership group have also invested in the private placement and other members may have bought the stock in the weeks and days before this post as he made it a Top Seven Trading Position in the group in June in which he tracks his most favorite positions in a model portfolio. To join the Power Investor group yourself click here.
-Mike
