Good news for those bit by gold bug
It has been a brutal six months for owners of the gold miners with the sector losing about 26 per cent, about double the 12 per cent loss for bullion over the same time window.
The gold miners have been stunning investors with bad news over the past few months with Kinross Gold Corp. having project delays and Agnico-eagle Mines Ltd. writing off a mine.
Last week’s collapse in the shares of Canadian gold miner Centerra Gold Inc. because of a slash in its 2012 production forecast has in turn stimulated the current bearish stampede out of the sector.
From a technical prospective I believe the worst is over for the gold miners but let us first examine the conditions that may have finally killed off the last of the gold bugs.
Clearly the “buy gold” trade was over-crowed for several reasons,
Bullion is easy to own today because most of the exchange traded funds offer bullion trust units that trade in huge volumes. That means any investor can buy gold bullion in seconds with a phone call or the click of a mouse button.
It was not to long ago investors had to line up at bullion dealers to buy gold coins and gold bars.
Many portfolio managers were compelled to own gold in order to protect their portfolios. Months before the 2007-2008 financial crisis many of these “professionals” embraced the gold complex and avoided government long bonds. They were wrong. They missed the biggest bond rally in 10 years and the gold complex afforded no protection during the same period.
Natural sector rotation has placed the gold complex where it should be: lagging most of the stock sectors.
Think of natural sector rotation to be a string of sectors such as financial, consumer, technology, energy and materials all strung together in a line much like rollercoaster cars.
In a normal bull market the leading car entering the up ramp will be the financial sector followed by the consumer and health-care sectors.
As the leaders crest the lagging cars or sectors such as the materials and the gold miners begin their assent.
As a rule, the financials lead and the materials to include the gold miners lag.
So far year-to-date the sector winners have been the financials, health care and consumer groups all outperforming the broad TSX Composite. So far year-to-date the sector losers have been the materials, energy and diversified metals & mining groups all under performing the broad TSX Composite. Our chart this week is the weekly closes of the Market Vectors Junior Gold Miners (NASDAQGDXJ) plotted above the weekly closes of the Market Vectors Gold Miners ETF (GDX) The GDXJ is a basket of junior gold miners such as B2gold Corp. (BTO), and the GDX is a basket of large cap gold miners such as Barrick Gold Corporation (ABX). Because both plots represent a basket of diverse gold stocks one could assume they would be somewhat identical. What a technical analyst is looking for here is some form of price divergence between the larger gold miners and the smaller gold miners. Price divergence occurs when two lines that normally move together begin to move in opposite directions vertically. In other words during an advance each of two lines (in this case the GDXJ and the GDX) will make a series of new highs at the same time. The divergence will occur when one line makes a new high and the second line turns lower just before it posts a new high. This is called negative divergence or a bearish setup which occurred between the small cap GDXJ and the large cap GDX in late 2010 and early 2011. Note the failure of the upper plot to follow the lower plot to a new high. It was this bearish setup that signalled the pending nasty 12month bear in the gold miners. Now there is positive divergence or a bullish setup condition which is now occurring between the small cap GDXJ and the large cap GDX. Note the failure of the upper plot to follow the lower plot to a new low.
We now have bullish set up that could signal a pending bull market in the gold miners. Good news for the gold bugs and those nervous portfolio managers. Bill Carrigan, CIM is an independent stock-market analyst.