We’ve seen a massive bounce off of the lows for the Gold Juniors Index (GDXJ), as many investors pile into the sector at fire-sale prices, given the sector’s robust earnings growth rates. While this significant rally has likely improved sentiment in the sector dramatically, it’s worth noting that it hasn’t done much to improve the technical picture of the miners. This is because while gold (GLD) has been stair-stepping higher and is now within a stone’s throw of its all-time highs, the Gold Juniors Index is still trading in the bottom half of a trading range it’s been busy building for nearly a decade. This significant underperformance suggests that gold may have a difficult time getting through the $1,800/oz range on its first test. Based on this, I see no reason to be chasing miners at current levels, as I believe the risk outweighs the reward at $33.00 on the GDXJ.
As we can see from the above chart of gold (orange) vs. the Gold Juniors Index (GDXJ), we have the tale of two different assets here, with one in a clear bull market, and the other stuck in the mud for the time being. The gold price, which has found a relentless bid with inflation back on the table, broke out to new multi-year highs last year and has been in a steady uptrend with almost no interruptions since its Q2 2019 breakout. Meanwhile, the GDXJ is sitting at the same levels it was when gold broke out and has been unable to see any real traction since. This is a negative development for the miners, as it is telling us that the miners do not believe this rally in gold and that they’re uncorrelated to the metal. While negative correlations can be resolved, we have not seen a resolution to this divergence yet, and this suggests the best course action is patience or smaller position sizes in the miners. The reason for this is that the most significant moves for gold typically occur while the miners are in bull markets, and it is hard to argue that the Gold Juniors Index is in a bull market when it’s now back in the bottom half of an 8-year trading range. Instead, the index is neutral at best, and this is occurring at a time when the gold price is the strongest it’s been in years.
While those that picked up miners near the bottom of this base at $20.00 for the GDXJ may be in a position to sit tight given their low-risk entries, we’re now more than 60% off of those lows, and we’re now within a hair of a formidable resistance level for the GDXJ. This level for the GDXJ comes in at $36.00, and I would expect it to be a brick wall of resistance for the time being. This is because the $36.00 level was prior support for the miners for nearly nine months in 2019, and previous support levels often morph into new resistance levels when we have significant technical breakdowns. Given that the next strong support level is more than 40% lower at $18.80 and the next resistance level is lying just overhead, I see this area as a terrible reward to risk spot for adding new miners. This doesn’t mean that these miners can’t push a little higher short-term, but I would be more inclined to be a seller at current levels than a buyer.
There is no guarantee that this pathetic performance in the GDXJ has to slow up the price of gold here, but the underperformance is anything but a bullish signal. Based on this, I would view any rallies that cannot get through the $36.00 level to be noise, and a spot to be taking some profits. I continue to hold my position in GLD from $136.80, but have zero plans to start any new positions in the GDXJ or individual miners here. Based on the structure of this recent rally, I believe there’s a 30% chance that the GDXJ could return to the $20.00 – $24.00 level before July, and this would be a much better opportunity to add new positions.
(Disclosure: I am long GLD)
Want more great investing ideas?
The Fake Rally is Over! – Why the bear is still in charge. Along with the right investment strategy to generate profits while stock prices head lower.
How to Make Money in a Bear Market – Learn more about this vital webinar with famed investor Marc Chaikin.
Reitmeister Total Return portfolio – Discover the portfolio strategy that Steve Reitmeister used to produce a +5.13% gain while the S&P 500 fell by -14.97%.
The VanEck Vectors Junior Gold Miners ETF (GDXJ) was trading at $32.60 per share on Tuesday afternoon, up $0.04 (+0.12%). Year-to-date, GDXJ has declined -4.48%, versus a 2.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups. Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year.