Is the Drop in Gold Mining Stocks a Warning Sign for Gold?
The correlation between mining stocks and gold has disintegrated since March 2012. Could this spell trouble for gold?
"Despite a modestly rising stock market, the Market Vectors Gold Miners (NYSEARCA:GDX) has lagged both the broader US stock market along with the SPDR Gold Shares (NYSEARCA:GLD) by a very significant margin. At present, GDX trades around $41.50 and is well below both its 50- ($44.41) and 200- ($46.06) day moving averages. Buy the Direxion Daily Gold Miners Bear 3x Shares (NYSEARCA:DUST) at these levels."
Since then, GDX has slid 13% and our February 14 DUST trade resulted in a +29% gain. Instead of cooling off, the slide in mining stocks has intensified. DUST aims for triple inverse daily performance to miners and will appreciate when they decline.
For investors/traders weary of leveraged ETFs, we also gave a paired bearish trade in the February 14 alert using GDX put options. This trade has already doubled by gaining 150% and a triple could be ahead.
In reality, gold's 12th consecutive yearly gain has been masked by underlying weakness. Over the past year, GLD has lost -8.5% and the only real strength in the precious metals sector has been in tinier markets like platinum (NYSEARCA:PPLT) and palladium (NYSEARCA:PALL). The next move in gold may be an unpleasant surprise for permabulls.
Although buying gold on the dips has worked like a charm in the past, history isn't prologue for the future. And with GLD posting -8.5% one-year losses, the pain in gold prices might not be over. What are the key support/resistance levels in gold that, if violated, could trigger panic selling? What are ways to hedge against this possibility?Editor's note: This story by Ron DeLegge originally appeared on ETFguide.com.
To read more from ETFguide, see:
Private Equity ETF Takes Global Slant
Apple's Near 40% Collapse: A Lesson in Market Psychology
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