It's been a rocky road for gold miners in recent weeks, even though the gold futures contract is now trading just 100 points under March's seven-year high above $1,700. A volatile mid-month shakeout dropped the yellow metal nearly 250 points in just six sessions, triggering huge gyrations in the broad family of gold mining stocks and funds. Most have now recovered the majority of lost ground, but it's anyone's guess what happens next.

Interest rates may head into negative territory in coming quarters, undercutting gold's role as an inflation hedge, but fear is likely to stay elevated for months. Both elements could put stress on the world's monetary system, fostering instability that could provoke political consequences. The gold futures contract is likely to blow through 2011's all-time high at $1,912 if those disruptions undermine credit market liquidity or major currency pairs take off in hyperbolic trends. Gold miners could benefit from this disruption, coming into tight correlation with the futures contract.

Retail traders love to play gold mining funds, believing their performance will track gold's price action, but correlation between these instruments tends to grow in mild times and unravel in wild times. This happens for two reasons. First, gold miners are as vulnerable as tech stocks to economic shifts and credit market swings. Second, liquidity becomes the driving force during broad-based declines, with forced selling affecting the majority of financial instruments.

Chart showing the share price performance of the VanEck Vectors Gold Miners ETF (GDX)
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The VanEck Vectors Gold Miners ETF (GDX) sold off from $67 to $12.40 between 2011 and 2016, reacting to a gold downtrend that found support near the $1,000 psychological level. The first recovery wave for GDX stalled in the low $30s in the summer of 2016, giving way to a choppy decline that ended at a two-year low in the teens in September 2018. Buying pressure into August 2019 reached 2016 resistance, triggering a reversal, followed by a failed breakout attempt in February 2020.

The fund and major components sold off with the broad market into mid-March, ignoring the gold contract's relative strength before finding support at the 2018 low on March 16. The subsequent uptick stalled at 50-week exponential moving average (EMA) resistance last week, establishing a trading range that could persist into the third quarter. The on-balance volume (OBV) accumulation-distribution indicator dropped to a nine-month low before the reversal and attracted just minor buying interest during the bounce.

Chart showing the share price performance of Newmont Corporation (NEM)
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Blue-chip miner Newmont Corporation (NEM) is exhibiting relative strength compared to the gold mining fund and its cousin the VanEck Junior Gold Miners ETF (GDXJ), and Newmont shares could offer stronger returns in coming quarters. The stock topped out in 2010, before the futures contract and other gold miners, entering a brutal downtrend that settled in the upper teens in the first quarter of 2016.  The subsequent recovery wave stalled at the 50% sell-off retracement in August 2016, ahead of a decline that found support at $30 after the presidential election.

Successful support tests in September 2018 and May 2019 completed a double bottom reversal, ahead of steady upside that mounted range resistance in February 2020. The stock failed the breakout in March, but unlike the gold mining funds, it held above range support. This resilience has now generated a trendline of higher lows going back to 2016, setting up a potential low-risk buying opportunity on a test of this support level.

The Bottom Line

Gold miner performance has tracked the equity markets more faithfully than the gold contract in the past two months, but tight correlation could return in reaction to credit market disruptions or destabilization in the world's monetary system as a result of the coronavirus pandemic.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.