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.