Nothing in the Hole – Gold Miners Surface Empty handed! (GDX, GLD, SLV)

We’re witnessing some very contradictory developments on the precious metals front, which we believe it important to highlight today.

But before we do, a word from a man for whom we have a great deal of regard.

Not our loyal reader, Jimmie Rodgers, but rather many-time billionaire and former Soros attaché, sinophile and renowned gold bug – a man whose calls on the commodities market have been as good as any – Jim Rogers believes the time to begin buying gold again has not yet arrived.

In a recent interview, he claims he’s still waiting on a buying opportunity and that the metal has a mind of its own: “sometimes it moves with the dollar, and sometimes it doesn’t.”

WHY-THAT-STUFF

As far as we’re concerned, the story on gold hasn’t changed. It’s a question of investor inflows and nothing more. It was investor inflows that drove the price toward $2000, and a lack of those same inflows that drove it lower these last four years to its $1140 bottom last November. Until investors get excited again about the metal, there simply ain’t nothing doing.

We should be quick to add that a great deal of gold’s recent weakness has come at the hands of a strong dollar, against which gold moves inversely. And regarding the prospects of the buck’s continued strength, there’s little reason to believe we’ll see a letup any time soon. With central banks coordinating monetary policy (now it’s time for Europe, China and Japan to stimulate), the U.S. greenback will likely be the beneficiary of a strong bid well into summer, at the very least.

Additionally, as we enter a period of rising interest rates, the dollar will also find support, all of which is bad news for the precious metals.

The Landscape Darkens for GLD

In keeping with Mr. Rogers’ outlook, both gold and silver were declining at week’s end, and technically they paint a picture of more losses to come.

Graphically, they look like this –

GLD-MOVING-AVERAGES

This is the SPDR Gold Trust (NYSE:GLD), the biggest bullion ETF in the world and the best available measure of investor interest in gold.

And what does it tell us?

  • First, all the moving averages are unfurled and trending lower, and price is situated beneath them all (in red). Bad.

  • Next, last Friday’s trade marked a new low for the move, bringing GLD to just a hair’s breadth (3%) from her bear market bottom at $109.67 (in black).

  • RSI is sub-waterline and MACD has just followed suit, indicating a bearish trend is resuming (blue boxes).

  • Finally, volume figures (in green) were well above average all last week as traders attempted and then failed to retake the all-important 137 day moving average.

And in our view, that just about ices it for gold.

The silver chart, represented by the iShares Silver Trust (NYSE:SLV) shows a similar breakdown.

Have a look –

SLV-STRONGER-CHART

There are two salient differences between SLV’s chart and that of GLD. First, silver posted a slightly stronger showing last Thursday and Friday, albeit on more restricted volume, a development that leads us to be circumspect about the move. And second, RSI and MACD indicators for SLV are slightly more submerged below the midway ‘waterline’, offering a marginally more bearish picture.

Be on the lookout!

Silver’s bear market bottom at $14.63 will likely be tested in the next week or two, and our guess is that success or failure in that trial will be determined by the action in the stock market itself. If we see the indexes pushing to new highs at the same time, it’s more than likely we’ll get a failure of support, and both gold and silver will be on their way to setting new lows.

Moreover, trade on Monday morning could also be telltale. After last week’s weakness, any move lower out of the gate, or declines in the Asian or European markets overnight could trigger a brisk round of selling when the NYMEX opens for the week.

For the bulls, on the other hand, it will take a jump over the $116 level at least, for GLD, and over $16 for SLV, in order for either metal to have a chance of regaining the traction it experienced around New Year’s and pull itself out of its current slump. Not an easy feat.

MINING-MYSTERIES

On the other hand, there’s a great deal to be said for the Market Vectors Gold Miners ETF (NYSE:GLD), which has been showing real strength of late.

She looks as follows –

GDX-STRENGTH

Unlike GLD and SLV, the miners present a mixed to favorable picture, with price action now above both the short term and 137 day moving averages (red circle). Any strength over the next few days could lead both of these MAs to begin turning higher, an eventuality that would give great hope to those who believe in the miners.

Currently situated at $20.27, and well above her bear market lows of $16.45, GDX is in little danger of breaking down like SLV and GLD. RSI and MACD have been bullish for at least two weeks (blue squares) and we can discern a clear pattern of higher highs and higher lows since price bottomed in November.

The only question mark on the chart is average daily volume, which has declined from almost 70 million shares in January to last week’s figure of just 40 million, a sign that GDX may be reaching the top of its move for the time being.

So how do we play it?

There are a number of ways to make money here, but we’re going to stick with the simplest.

Our thinking is like this – if gold and silver decline, there’s almost no chance of GDX rising. Conversely, if the bullion ETFs climb, GDX likely won’t fall, but could climb faster or slower – the rate of rise is unknown.

That said, we feel the best bet is a long/short trade using the stocks that profits as the spread between the two narrows.

It works like this –

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[mepr-rule id=”203″ ifallowed=”show” description=”wall_street_elite_members_only”]

Wall Street Elite recommends you consider the purchase of SLV for $15.47 and the sale of GDX for $20.27. Your credit per 100 shares traded is $580.

[/mepr-rule]

[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]

Wall Street Elite recommends you consider the purchase of SLV for $15.47 and the sale of GDX for $20.27. Your credit per 100 shares traded is $580.

[/mepr-rule]

Set for yourself (and your broker) a stop order to close the trade should that $580 cushion evaporate.

That way, you ensure yourself a break-even on the trade.

With kind regards,

Hugh L. O’Haynew

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