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Short-Term Concerns for Gold Stocks

By Jeff Clark
Tuesday, October 16, 2012

It's time for a pause in the gold-stock rally – not a dramatic selloff, just a brief pause.
 
As you can see from the following chart – which compares the Gold Bugs Index (or "HUI") to the price of gold – the sector is still dirt-cheap...
 
Gold Mining Stocks Still Dirt-Cheap Compared to Gold
 
Even after the big rally over the past couple months, the gold stock-to-gold ratio is still about as cheap as it has ever been during the past decade. The only time gold stocks have been cheaper was during the panic selloff in 2008 and the May and July declines this year.
 
So the longer-term picture remains bullish for the mining sector. It's the shorter-term picture that causes concern... 
 
The price of gold has already started pulling back. Its $20 drop yesterday pushed gold back down below where it was trading before the Federal Reserve announced a third quantitative easing program. And as I mentioned last week, gold probably has even farther to fall. Gold mining stocks should fall along with it.
 
But most of the selling pressure on the stocks is likely to follow the action in the gold sector bullish percent index (BPGDM).  
 
The BPGDM is a short-term momentum indicator that helps determine overbought and oversold conditions. It reached into overbought territory (above 70) during the recent rally. And it just turned lower from overbought conditions and generated a short-term "sell" signal.
 
Here's an updated chart of the BPGDM...
 
 Updated Chart of the BPGDM
 
Gold stock traders have endured a few short-term sell signals over the past year (the red circles on the chart). But those declines have led to wonderful gold-stock buying opportunities.
 
I expect we'll get something similar this time, too.
 
Best regards and good trading, 
 
Jeff Clark




Further Reading:

Last week, Jeff noted the "smart money" taking an extreme position in gold. According to history… when this group gets too greedy, the price of gold often drops double digits. See the chart that proves it here: Why I'm Nervous About Gold Today.

In The Daily Crux
Market Notes
Big euro downtrend takes a break... currency rallies 6% in the past three months.
 
"Dividend magnet" drugmaker Abbott Labs touches a fresh all-time high.
 
Citigroup breaks out to a five-month high after announcing quarterly results.
 
More than a dozen semiconductor stocks are sitting within 1% of 52-week lows, including blue chip Intel.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1440.13 +0.8% +17.6%
Oil (USO) 34.00 +0.0% +0.4%
Gold (GLD) 168.35 -1.0% +3.0%
Silver (SLV) 31.66 -2.4% +1.0%
U.S. Dollar 79.71 +0.0% +3.5%
Euro 1.29 -0.4% -7.1%
Volatility (^VIX) 15.27 -5.4% -45.9%
Gold Stocks (^HUI) 495.32 0.0% -10.9%
10-Year Yield 1.66 +0.0% -25.6%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 144.08 +0.8% +20.1%
Singapore (EWS) 13.38 +0.7% +17.2%
S. Korea (EWY) 57.75 +0.9% +10.2%
China (FXI) 36.65 +0.7% +8.6%
Taiwan (EWT) 13.12 +1.3% +6.8%
S. Africa (EZA) 63.73 -0.1% +6.0%
Canada (EWC) 28.44 +0.3% +5.7%
Lat.America (ILF) 43.11 +1.2% +3.0%
Israel (ISL) 13.25 +1.6% -0.3%
Russia (TRF) 15.37 -0.1% -1.0%
Japan (EWJ) 9.02 +0.7% -4.2%
India (IFN) 23.11 +0.5% -5.6%

Sector ETFs
Symbol Price
Change
52-Wk
Construction (PKB) 15.97 +1.7% +42.9%
Health Care (IYH) 85.85 +1.2% +28.9%
Financials (IYF) 59.52 +0.9% +28.8%
Media (PBS) 16.77 +1.2% +28.1%
Real Estate (IYR) 64.38 +0.7% +26.7%
Insurance (PIC) 17.30 -0.9% +24.7%
Consumer Svcs (IYC) 86.62 +0.9% +25.7%
Retail (PMR) 25.21 +0.8% +24.3%
Telecom (IYZ) 25.08 -0.3% +21.7%
Biotech (PBE) 23.89 +0.0% +21.3%
Industrials (IYJ) 70.81 +0.6% +18.6%
Big Tech (QQQQ) 67.17 +0.7% +16.7%
Water (PHO) 19.35 +0.4% +16.6%
Defense (PPA) 19.95 +0.6% +14.9%
Software (PSJ) 27.54 +0.7% +13.9%
Utilities (XLU) 36.65 +0.4% +11.3%
Transportation (IYT) 89.87 +0.4% +8.2%
Basic Mat (IYM) 67.64 +0.7% +7.3%
Oil Service (OIH) 39.88 +0.8% +0.0%
Big Pharma (PPH) 41.65 +1.4% +0.0%
Nanotech (PXN) 6.14 +0.2% -1.7%
Semis (PSI) 13.31 +1.0% -3.5%
Alt. Energy (PBW) 3.99 +0.0% -29.5%

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