Gold is part of many investors' portfolios, as people widely view gold as a safe-haven investment during troubled times. Short-term traders also buy and sell gold exchange-traded funds (ETFs) and mining stocks for quick profits ... and losses. Trading gold can be a roller-coaster. At times, the gold market is calm and barely moving – at other times, it sees furious action. 

When analyzing and trading gold, or the gold mining stocks, one major thing to look for is confirmation from related assets. Let's explore what this means and how it can help you in the gold market. (See also: 8 Reasons to Own Gold.)

Key Takeaways

  • Like most assets, technical analysis can be applied to gold trading.
  • Unlike most stocks, however, there are several gold-based securities that track the price of physical gold that can confirm trends when analyzed in tandem.
  • Here we show how using two gold miner ETFs together can be used as technical indicator to identify and confirm uptrends and downtrends.

Tools for Analyzing Gold

When gold prices rise and fall, there are tools that aid in determining how strong the trend is. Here, we will look at how two different, but related, gold miner ETFs can be used together to identify and confirm price trends in gold. Looking at these ETFs together aids in making decisions related to trading mining company stocks and gold or gold ETFs. (For related reading, see: Day Trading Tips for Gold ETFs.)

Let's start by finding uptrends. There are several key things to look for in a strong gold uptrend:

  • The price of gold is starting to rise or is in a bull market. 
  • The price of gold mining stocks, as measured by a gold miner's index such as the Vaneck Vectors Gold Miners ETF (GDX), is rising at a faster pace than gold. 
  • The price of junior gold miner stocks, as measured by an index like the Vaneck Vectors Junior Gold Miners ETF (GDXJ), is rising faster than GDX. In other words, the small companies are rising quicker than the larger, more established mining companies.

By the same token, these signals apply to downtrends in gold, except we reverse the expectations. In a weak gold market, the price of gold is falling, the gold miners are falling more than gold (in percentage terms) and the juniors are declining even more than the larger miners. In this article, we will focus on the uptrend, as most investors are looking to buy gold and avoid the downtrends.

Regarding the first point, gold and the mining stocks tend to move together, although the stocks often make the first move. For example, if gold prices are stagnant, it is usually the stocks that start to rise first, followed by gold. Once gold and the stocks are rising, this is favorable for both gold and the mining stocks. Gold should start making higher swing lows and higher swing highs. This is the definition of an uptrend. (For more, see: Getting Into the Gold Market.)

Gold uptrend and downtrend chart

On the left of the chart, gold starts rising and develops an uptrend. This is the first thing to look for.

Confirmation of Trends

As it relates to second point, in order to trust this uptrend, the gold mining stocks should also be rising. There are two ways to check if this is the case. Pull up a chart of a gold miners index and verify it is moving higher, or create a ratio on the chart that compares the miners index to the price of gold. The ratio is a more accurate way to determine if gold miners are outpacing gold, which is what investors want to see to confirm the uptrend.

Gold and miners ratios analysis

The chart above is a ratio created by dividing the price of GDX by the SPDR Gold Trust (GLD). When the ratio is rising, the miners index is rising quicker than the price of gold. This helps confirm the uptrend for both mining stocks and gold. When the ratio starts to decline, it means gold is outperforming the stocks, which isn't typical behavior in a strong rally. Therefore, caution is warranted. When the ratio started moving lower, gold moved lower not long after.

When the ratio (or the miners) is moving lower and gold is moving higher, the two markets are not confirming each other. This makes it harder to trade, because the upward moves in gold have not enticed the traders of mining stocks to buy, and thus the move in gold is more likely to fail. That said, if the miners start rallying, then the two are in sync again, which could lead to further upside in both mining stocks and gold prices.

As one final check, compare the junior miners to the larger minors. During strong gold uptrends, people are willing to step in and buy smaller gold companies which are typically viewed as riskier but that also more upside potential. The ratio of juniors/miners should be rising during an uptrend. If it isn't, the uptrend could be in trouble, and gold and the mining stocks (both junior and larger miners) could start falling. (See also: Strike Gold With Junior Mining.)

Gold juniors versus miners analysis

On the chart above, the junior miner stock prices are moving up much quicker than the larger miner's stock prices. The rising ratio confirms the uptrend in gold. When the ratio starts to break down, gold follows shortly after, which was also confirmed by the move lower in the GDX/GLD ratio.

The Bottom Line

When trading gold or mining stocks, look for miners, junior miners and gold to confirm each other. With rising gold prices, the gold miners should be outpacing gold in terms of gains. This is shown by a rising miner/gold ratio. When the ratio starts to fall, or if the mining stocks do not confirm an uptrend in gold, that rally is more likely to fail and reverse lower.

(For additional reading, check out: What Drives the Price of Gold?)