Will Gold Resume its Uptrend?
Since reaching $1375 high of July 3rd, 2016 gold has given up more than 50% of its recent gains. Gold was hovering near its $1200 support level after 2016 US presidential elections which was broken on November 23rd, 2016. Currently I am watching for the next support at $1173 which is 61.8% Fibonacci retracement level from $1375 high, see the weekly OHLC chart. If gold bounces off from $1173 level, it will need to break $1200 resistance to resume the recent upward move.
I am however still inclined towards upward move because the gold price is still above the uptrend line from 1999 lows, which currently stands at $1094 level.
Also, we can see in the monthly chart that during the correction from 2011 highs, for most of the months each year, gold kept trending downwards. However, the price movement in 2016 seems to follow the bullish trend because gold has traded higher and higher for seven consecutive months of the year. We may see the correction in gold price to continue in December 2016 too, but it will eventually trade higher in the upcoming years.
Gold vs Gold Mining Stocks
Ratio of Market Vectors Gold Miners ETF (GDX) to gold is used to to determine the . The charts below shows the trend for GDX and GDXJ (Market Vectors Junior Gold Miners ETF). GDX is 32% lower than its recent highs where as GDXJ is about 33% lower from its recent highs. Both GDX and GDXJ lost 52% of their gain since Jan 2016.
Gold corrected by about 55% from 2011 high until November 2016 where as gold miners were down by 80% to 90%.
Despite the severe recent correction in gold price since July 2016, gold mining sector is still looking much stronger than gold bullion. GDX is is up 64% from its lowest value in January 2016 where as GDXJ is up by 97% as shown in the chart below. Gold, however, is about 13% higher from November, 2015 bottom.
GDX is currently trading at $20.5. Experts have recommended gold-mining stocks when GDX is trading between the 19.80-22.10 region with the potential of 100% or higher gain in the next 12 months. You can read the full article here but I am quoting the key points below:
Right now, I believe we are being given another low-risk opportunity to buy gold mining stocks and potentially double our investment again over the next year.
In using the VanEck Vectors Gold Miners ETF GDX, -4.92% as the representative chart for this market, I view the rally off the lows earlier this year as a wave i in the initial phase of a new bull market. That would mean this current pullback would be classified as a wave ii. Targets for these second waves are often the .500-.618 retracement region of the prior wave i rally. That places our bottoming region between the 19.80-22.10 region in the GDX.
As long as this region holds as support, I am looking for wave iii alone to be taking us to at least the 51.00 region in the GDX over the next year, with the potential to even extend toward the 60.00 region.
Gold mining stocks prices are a good indicator of gold price movements. As mentioned in an article at kitco.com:
Gold-mining stocks will normally outperform gold bullion by a wide margin during the first 2 years of a new cyclical gold bull market. This is due to the fact that the cost of mining gold follows the gold price with a lag of 1-2 years. Due to this and depending on the length of the preceding gold bear market, the cost of mining gold will probably be in a downward trend at the start of a new cyclical bull market in gold bullion and will probably continue to fall during the first 1-2 years of a new bull market in gold bullion. A rising trend in the gold price combined with depressed stock valuations and falling production costs equals substantial profit-margin expansion and large gains in stock prices. Consequently, if gold made its ultimate bottom last November then the HUI should achieve a large percentage gain over the next 18 months in both nominal price terms and relative to gold bullion.
Since we are seeing strong bullish trend in the gold mining sector, gold will also recover its losses and resume uptrend. The article Like Gold?If So, Buy Gold-Mining Stocks – Kiplinger confirms this logic.
“If you expect gold to be strong, mining companies should reflect that strength and do a little better.”
I have not sold any of my existing gold-mining stocks and overall my gold mining portfolio is more than 80% higher since November 2015 lows. I have been adding undervalued mining stocks gradually to my portfolio and will keep doing that as I foresee great returns in the future.