While gold and the inflation trade were front and center a few months ago, this has quietly given way to headlines of fraud charges and tablet devices. In the meantime, gold has been consolidating its highly publicized move to all-time highs in an orderly manner. Recently, gold set a higher high, possibly marking an end to the consolidation. It remains to be seen whether this will lead to a breakout, but gold is nearing an important inflection point.
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In looking at gold as represented by the SPDR Gold Trust ETF (NYSE:GLD), you can see the sharp rally in late 2009. That move proved to be parabolic, and GLD quickly reversed. After a sharp drop, GLD began to consolidate in a range between $105 and $112-$113. Notice the pattern of lower lows and lower highs (shown with red arrows) as GLD consolidated. However, there was a change in March as GLD found support well above its February low. It then continued higher and cleared the highs set in March. This move broke the pattern of lower lows and lower highs, and could signal that the consolidation or correction that began in December is over. The key levels to watch are the most recent highs and lows (marked by green arrows). If GLD falls under its March low, it could be argued that the correction is resuming and GLD is headed for a retest of the $102-$105 level. A move above the April high will confirm the pattern of higher highs and signal a probable test of the all-time highs.
When gold rallies, it is usually a good idea to pay attention to the miners. Allied Nevada Gold Corp. (AMEX:ANV) has been one of the better performing miners and its chart is showing an interesting pattern. ANV also reversed in January from a rally to all-time highs, but broke the pattern of lower lows and highs much quicker than GLD did. It cleared its February high in early March and actually rallied to new all-time highs by the end of the month. ANV is pulling back from those highs and much will depend on what happens with gold. If gold turns back higher, ANV is likely to follow suit with a move to new all-time highs.
International Tower Hill Mines (AMEX:THM) is another gold mining stock that has held up well through the correction in gold. THM has been trading sideways just under its all-time highs for several months. While the term "all-time highs" should be taken in the context that THM, much like ANV, has only been around since 2007, the chart structure remains healthier than some other gold miners like Yamana Gold (NYSE:AUY) and Goldcorp (NYSE:GG). Notice THM also cleared a trading range within the larger consolidation, setting a higher high that could signal the correction is over. THM is in a place where it could form a higher low and then use that low as a vaulting area for an eventual breakout.
For traders who wish to avoid individual companies, the Market Vectors Gold Miners ETF (NYSE:GDX) is a viable alternative. This ETF tracks several gold mining stocks and can protect a trader from an adverse move specific to one company rather than the whole sector. GDX is following a pattern very similar to GLD and recently cleared a trading channel it was in and set a higher high in the process. GDX is coming into an area where it can find support near its rising 20- and 50-day moving averages and keep the new pattern of higher highs and lows intact. The key levels to watch are the recent high near $49 and the low near $43.
While the majority of gold stocks remain well off their recovery highs, the recent move in gold could have a positive impact on the sector. Gold is at an important inflection point where it could either confirm a reversal by setting a second higher high, or signal a failure by reversing lower. In either case, the impact to the gold miners will be tangible and will provide a trading opportunity in the sector. With the longer term trend still higher, chances favor a move to the upside. Each of these stocks is showing a clear level to watch, so traders can simply sit and wait for the market to prove itself. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
The author does not hold a position in any of the companies mentioned above at the time of this writing.