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Using mining stocks to confirm moves in Gold

The Gold price has been ripping upwards for almost a year now. But confirming a valid bull move in Gold can be tricky. One thing that could help us confirm a bull move in Gold, is a little known technical indicator, based on ETFs. Looking for confirmation in Gold mining stocks.

Background

Gold is viewed as a safe haven and therefore part of the portfolio of many investors. It is used as protection against financial distress and inflation. The Gold market can sometimes be calm and sideways moving, as from 2013 to 2019. But sometimes Gold moves with force in new face ripping bull-trends, as in the past year.

There are several fundamental and technical indicators that could help you track the performance of Gold and be on the right side of these Gold trends. But one that is not as widely used consists of looking at confirmation from other assets, most importantly mining stocks. For example, by looking at mining ETFs, which are closely related to Gold’s performance.

Gold mining ETFs as technical indicators

Two Gold mining ETFs can be extra helpful, when trying to confirm an underlying trend in Gold. These two are Vaneck Vectors Gold Miners ETF (GDX), and Vaneck Vectors Junior Gold Miners ETF (GDXJ), which are both tracking mining companies. The first ETF tracks the bigger mining companies, while the latter tracks the smaller juniors.

Confirming an uptrend

To confirm a strong uptrend, Gold should be moving up along with the mining stock ETFs. But the ETFs should move up faster than Gold itself. The GDX ETF should move faster than Gold, and the GDXJ ETF, should ideally move faster than both the GDX and Gold. This is because the smallest companies, the juniors, should move faster than the bigger ones, for a strong uptrend in Gold to be confirmed. Because in strong uptrends people are willing to buy the riskier juniors, which verifies the strength of the trend.

Ideally the mining companies should also move before Gold moves. These moves apply to downtrends as well as uptrends, and could be helpful when trying to predict the end of a Gold bull market, as in 2011, when Gold started to roll over to the downside.

Gold is the blue line, and the overlaid orange line is the GDXJ, junior Gold miner ETF. The juniors made their top in 2010, while Gold did not top until 2011. Lately, Gold has outpaced the GDX, which might be a sign of a coming reversal and correction, since the move up is not verified by the juniors. – Chart from TradingView
To trust a new roaring bull trend in Gold the underlying metal should not move up alone, but be closely followed by the miners and the juniors. But ideally the juniors should rally first of all, then followed by the miners and lastly by Gold, as it did in the bull market leading up to 2010-2011. From the top the juniors led the way down, followed by the producers and finally by Gold. – Chart from TradingView

Outpacing

To check if the miners and juniors are moving faster than Gold, you could compare them to Gold. But another alternative is to create a ratio, which divides the miners by Gold. For example, the chart below is dividing the GDX ETF by GOLD, to create a ratio.

The GDX Gold miner ETF divided by the price of Gold. When this ratio goes up, the mining companies are moving up faster than Gold. And as seen from the chart the ratio has been rising since the middle of March 2020. Thereby confirming a viable uptrend, but is now coming closer to an old resistance area. – Chart from TradingView

Creating a ratio

When the ratio above is going up the miners are moving up faster than Gold, which is what we want to see in a strong uptrend. Because the miners are generally thought to lead Gold, since the big investors are then willing to invest in the risky mining stocks, which is thought to be a sign of strength.

When this ratio is falling the mining stocks are falling faster than Gold. And that is typical behaviour of a downtrend. That being said, if the miners starts to rally again they are in sync again. But ideally they should move before, as well as faster, than Gold.

GDXJ/GDX ratio

An even stronger trend is in place when the juniors are moving faster than the larger mining companies. The reason why the juniors move so strongly in uptrends is that people are willing to put money on the table and take higher risks. And that is a good sign for the Gold market overall. Therefore, in the strongest Gold markets, the ratio of juniors/miners should be rising.

The GDXJ/GDX ratio is often the leader, while Gold is the follower. When this ratio moves, Gold often follows. The ratio can be used as a technical chart all by itself. When you are invested in the Gold space you want to see it rise.

Using these Gold miner ETFs together helps with confirmation and makes Gold trades more likely to be successful.

When to buy?

When all of these indicators move up in unison, in the right order, it has traditionally been the best time to invest in the Gold market. But indicators are never a 100 percent accurate. Therefore, other indicators, along with common sense, should be used. And traders need to use their own judgement before making any decisions.

How?

When these confirmations happen there are a few alternatives on how to invest in the Gold space. One is to invest in the underlying Gold bullion, buy mining stocks, junior stocks, or one of the mentioned ETFs. All of these alternatives gives exposure to Gold. The general view is that the underlying bullion is the less risky, followed by the ETFs. The junior mining companies and the Gold exploration companies holds both the most upside and the most risk.

Where do we stand in 2020?

When I write this article, in May 2020, Gold has been moving up faster than the miners. Further, the junior mining companies have moved the weakest. Which indicates that we might see a divergence and a possible correction coming in Gold, in the coming months.

Conclusion

The precious metals moves in a manic depressive fashion. Countless of fortunes have been lost and made, in the blink of an eye, in this space. Because when they start to move, they really, really move. Which is why we want to be on the right side of these moves when they happen. Using the Gold stocks as confirmation is one of the tools that could help us with that.

Disclaimer: All information found on this site, ideas, opinions, predictions, commentaries are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies. I will not and cannot be held accountable for any actions you take as a result of what you read in here. Use the information at your own risk. I am not your investment advisor. Consult a licensed financial advisor before making any investment decisions.

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