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Will GDX Summer Slump Give Way To Autumn Rally?

07/01/09 09:36:22 AM
by Donald W. Pendergast, Jr.

Most gold bugs already know that gold mining stocks tend to rally for an extended period during the latter part of the year. But what about this year?

Security:   GDX
Position:   N/A

Will gold mining shares rally in the coming months? Of course, the answer to that question is a resounding "nobody knows." Still, if we look at the price action of the past few years in GDX (Market Vectors Gold Miners ETF), the exchange traded fund's activity confirms that prices have experienced substantial rallies during the final four to five months of the year. The key, of course, is the timing of such rallies, all of which occurred at different weekly intervals.

In 2006 GDX gained about 30% from early October until early December. The following year, 2007, saw GDX climb by nearly 65% from mid-August until early November. Finally, GDX enjoyed another rally beginning in November 2008, nearly doubling in value in less than seven weeks. Clearly, if you want the potential for major trend moves (up and down), GDX could be your trading instrument of choice. GDX's daily chart might show a reason to expect another rally in the wake of the typical summer weakness usually found in the precious metals complex. (See Figure 1.)

FIGURE 1: GDX, DAILY. A market at a crossroads? The fundamentals for precious metals stocks appear to be outstanding, but for the moment, the short-term trend is still down.
Graphic provided by: MetaStock.
In a recent Advantage article, I suggested that GDX might rally to as much as $41 to $42 per share if it completed a successful test of its 200-day exponential moving average (EMA) near its expected cyclical turn date. Prices did rally several dollars per share, but the stock failed to reach even the $41 level before turning lower again. On June 30, GDX sold off pretty hard, closing below its 50-day exponential moving average (EMA) (red line) again, possibly on its way to yet another test of its 200-day EMA (blue line). Now is not the time to go long GDX, unless, of course, you're a scale trader -- a trader who buys into weakness in hopes of selling into renewed price strength.

The next cycle low for GDX isn't due for about three weeks, so the swing traders in the gold bug camp should just bide their time waiting for a more opportune moment to go long. Meanwhile, the long-term (CMF)(100) money flow is still above its zero line. Really, though, the fundamentals that are driving the gold markets is the factor that will likely launch any year-end rally in the gold mining stocks. Worldwide, central banks have added enormous amounts of liquidity to the money supply, even as many western nations have embarked upon massive economic stimulus/job creation/deficit spending projects that are likely to cause a 1970s-style round of consumer price inflation and tax increases to go along with it. Given what happened to the price of gold, silver, and their related mining shares the last time (1968-80) commodities surged higher, buying GDX on substantial selloffs could pay off big for those willing to hold the shares in hopes of catching the "big one" -- with a modest allocation of investing capital, of course.

Those concerned that GDX will be adversely affected by further downdrafts in the broad markets, correlation analysis reveals that GDX is only modestly correlated to the moves in the Standard & Poor's 500, with readings of 0.51, 0.41, and 0.60 in the six-, 12-, and 36-month time periods, respectively. One thing is for certain: whichever way GDX goes, its moves will tend to travel farther and with much greater volatility than that of the general market. And with such powerful fundamental forces undergirding the global gold market, gold bugs will be watching GDX closely for prime long-term buying opportunities.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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Date: 07/01/09Rank: 4Comment: 

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