Sectors To Watch: Are Gold Mining Stocks Losing Their Luster?

| July 30, 2012 | 0 Comments

GDX OptionsGold mining stocks have had a rough year.

Over the last 12 months, Market Vectors Gold Miners ETF (GDX) has fallen 34%.  But the ETF has bounced back lately.  GDX has rallied 11% from the 52-week low of $39.08 it reached in May.

The main reason for the miners’ poor performance has been falling gold prices.  The shiny yellow metal’s down 15% from its highs.

Gold’s poor performance has caught many investors off guard.  Wasn’t it supposed to be a safe haven from economic uncertainty and devalued fiat currencies?

Unfortunately, gold mining stocks have fared even worse than the metal.  They’ve been hurt by falling prices as well as rising production costs and weaker than expected production.

Underperforming gold is a recurring theme for the gold miners.  According to the Wall Street Journal, physical gold has outperformed gold mining stocks in six out of the last seven years.

Despite the challenging fundamentals, some investors are turning bullish on gold miners.  Take a look at this four year chart of GDX.

  Market Vectors Gold Miners ETF Chart

As you can see, the gold miners ETF has retraced 50% of the gains from the 2008 low to the 2011 high.  This is an important technical level.  The bigger the retracement, the more likely the uptrend will falter.  And the gold bulls know this. 

The last two times GDX has dipped to the 50% retracement level, the bulls have been out in full force buying gold mining stocks.  As a result, GDX has put in a double bottom right at the 50% retracement.

Simply put, this is a bullish chart for gold mining stocks.

At this point, GDX’s bullish chart and bearish fundamentals are at odds with one another.  In my opinion, the bulls will win out in the short term and the bears will win out in the long run.  But one thing’s for sure, I don’t see GDX holding at this price. 

Take a look at using a straddle or a strangle on GDX to profit from the conflicting fundamental and technical story.

Good Investing,

Corey Williams

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Category: Sectors To Watch

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.

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