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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?

One of the few sectors within the stock market that is now sustaining sizable losses is the gold mining stocks sector. The sector has lost more than 30% over the past year and is already down over 24% since the beginning of 2013. Meanwhile the total world stock market has gained 9.13% during that same one-year time frame. Is the sharp downturn in mining stocks a sneak preview of significant losses ahead in precious metals?

In my firm's Weekly ETF Pick from February 14, we wrote:

"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

To read more from ETFguide, see:

Private Equity ETF Takes Global Slant

Apple's Near 40% Collapse: A Lesson in Market Psychology

Will Wal-Mart Drag Down Consumer ETFs?
Position in GDX.
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