Newcomers to commodities investing are generally lured by stories of grand fortunes made in the gold and silver markets. Unfortunately, any trader that blindly entered into a position in either of these precious metals over the past five years has found themselves drastically underperforming the broad market indices. As you can see from the chart below, the gold and silver sector, as measured by the Philadelphia Gold and Silver Index (XAU), has fallen by more than 55% relative to increases of 40.93% and 31.23% by the S&P 500 and the Dow Jones Industrial Average, respectively.

Many traders are now wondering whether now is the time to enter or if we've yet to see the bottom. We’ll take a look at the chart of a popular gold and silver sector index, a popular exchanged traded fund and an influential mining company to see if we can gain insight into the future direction.

The Gold Bugs Index

Taking a look at the chart of the NYSE Arca Gold BUGS Index, also known as the HUI Index, you’ll notice that the 50-day moving average (blue line) is currently in the process of crossing below the 200-day moving average (red line). This bearish crossover is commonly referred to as the death cross and is used by traders to signal the beginning of a long-term downtrend. From a technical perspective it's interesting to note that there was a bullish crossover of the averages in March, which would usually suggest the start of an uptrend. Multiple shifts in sentiment over such a short period suggest that traders are unsure of the future direction more so now than in the past, but unfortunately for the gold bugs, any sort of rally has been quickly over-powered and the move back below the key moving averages is suggesting that the short-term direction will likely remain downward. For more, see What Is Wrong With Gold

Turning to Miners for Direction

Taking a closer look at the gold miners, as measured by the Market Vectors Gold Miners ETF (GDX), you’ll see that the chart is nearly identical to HUI mentioned above. This ETF seeks to replicate the performance of the NYSE Arca Gold Miners Index and provides exposure to companies involved primarily in gold mining. The fund has total net assets of $7.6 billion and holds forty companies, each of which can be examined more closely when trying to determine the direction of the broader sector. Several of the key holdings include Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corp (NEM), Silver Wheaton Corp. (SLW) and Franco-Nevada Corp. (FNV). For more on this topic, see A Gold Bug’s ETF Plays

Goldcorp, Others Facing Resistance

The chart of Goldcorp currently provides an interesting lesson on support and resistance to technical analysis newbies. As you can see from the chart below, the price has faced resistance at the 200-day moving average since the summer of 2013. Each bounce off of the resistance, marked by the red arrows, shows the massive amount of pressure that the bulls must overcome before the price is able to move higher again. In general, most technical traders will only look to enter a long position when the price is able to see a sustained move above the moving average, which is currently at $24.42.

The Bottom Line

Examining key gold and silver sector indices, such as the Philadelphia Gold and Silver Index and the NYSE Arca Gold BUGS Index, shows a clear downward trend. Unfortunately for the gold bugs, the charts of GDX and its holdings, such as Goldcorp, confirm that the bleeding within the sector isn’t over yet. For traders considering taking a position, the best bet might be to remain on the sidelines until it the charts start to show signs of a reversal.

Related Articles
  1. Options & Futures

    How To Buy Gold Options

    Buy gold options to attain a position in gold for less capital than buying physical gold or gold futures. If you've wondered how to invest in gold , here's a shorter-term and less capital intensive ...
  2. Options & Futures

    How To Buy Silver Options

    Buying silver options allows traders to attain a position in silver for less capital than buying physical silver or silver futures.
  3. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  4. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  5. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  6. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  7. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  8. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  9. Stock Analysis

    The Top 5 Gold Penny Stocks for 2016

    Discover five penny stock gold miners that are well-positioned to profit in 2016, providing opportunities for investors to make significant gains.
  10. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center