I had never been much into gold stocks; I was born and bred in a growth stock methodology, so I’d never understood the appeal of the precious metal. But times have changed— Cabot Top Ten Trader has had many solid gold stock winners since February, though the group has retreated of late.
Accordingly, I’m getting a lot of questions about the gold sector these days—and what are the best gold stocks.
I figure if I’m getting questions about gold stocks, gold may be on your mind too. So today, I’ll tell you what the charts are saying for gold stocks in the short term and long term.
Let’s start with the long-term view—below is the weekly chart (since 2011) for the VanEck Vectors Gold Miners ETF (GDX), which tracks a market-cap-weighted index of global gold mining firms listed on NYSE or NASDAQ.
I have three major points.
First, GDX’s four-plus year downtrend was a true “wipeout”—the group imploded more than 80% from its peak in 2011 to its low earlier this year. It’s safe to say that all the weak hands (and most bottom-fishers) are out.
Second, sustainable bottoms are often a process, not an event, and GDX’s six-month bottom in the 12.5 area (July 2015 to January 2016) is a great sign.
And third, of course, GDX has had an excellent run during the past few months, and has been consistently living above its 40-week moving average (blue line in the chart above)—the first time it’s done that since its peak in 2011!
Simply put, the evidence is that the bear market in gold stocks is over, and thus, I’m expecting higher prices in the months (and possibly years) ahead!
So, am I saying that everyone should go whole hog into the gold sector? Not exactly. In the short- to intermediate-term, my guess is that the group has some consolidating to do.
Let’s look at the daily chart of GDX. You can see the major bottom in January, the explosive move to 21 by mid-March, and then a continued rally in April to as high as 26.
In late-April, GDX went vertical on some obvious news—at that time, the U.S. dollar was tanking (it fell about 3% in four days, which is a huge move for the currency) and a couple of good quarterly reports from big gold producers caused the bulls to rush in.
Coming after a huge advance (GDX had more than doubled off its lows), that seemed like a near-term top. In Movers & Shakers—a weekly (Friday) supplement to Cabot Top Ten Trader in which I give buy and sell advice on prior recommendations plus market advice—I wrote this on April 29:
“As the U.S. dollar has plunged over the past couple of days, we’ve seen some commodity stocks lift off. If you haven’t taken partial profits yet, we think letting go of one-third of your shares in stocks like Agnico Eagle Mines (AEM) or Barrick Gold (ABX) makes sense.”
Sure enough, GDX began to chop around before pulling back to its rising 50-day moving average (blue line in the chart above). Is that a good entry point? Yes and no. If you really want in, I wouldn’t argue with buying a small position in GDX here and using a loose (10% to 15%) loss limit.
However, I’m not convinced that GDX’s consolidation is over—for a couple of reasons. First, after doubling in three months, the sector probably needs more than just four weeks to shake out the weak hands. Second, the best entry points often come when few investors are paying attention—right now, GDX remains volatile and in the news. Ideally, the sector will calm down and tighten up—when it does, it should offer an excellent entry point.
So with the long-term trend up, the recent four-week pullback in gold stocks is probably a decent entry when looking out a few months. That said, the correction also isn’t likely over, and some tightness and quiet trading is what I’m really looking for.
As for individual stocks, the good news is that this pullback has made it easier to identify the best gold stocks in the sector. My favorite gold stock based on the recent action is actually the first gold stock I recommended in Cabot Top Ten Trader during this advance, back on February 8 of this year at a price of 33.
Agnico Eagle Mines (AEM) has the story and the chart action that tells me it’s the best gold stock in the market. The firm is a Canadian gold mining company with mines in Canada, Finland and Mexico that has been riding the renewed wave of interest in gold investments. Agnico set a gold production record in 2015 with 1.67 million ounces of gold produced at a cost of $600 per ounce on a by-product basis and all-in costs per ounce of $870 per ounce. Forecasts for 2016 production call for 1.55 million ounces of gold, almost four million ounces of silver, over 4,000 tons of zinc and 4,600 tons of copper. The cost discipline imposed on Agnico Eagle by the long decline in gold prices has paid off (the firm remained profitable throughout the bust), and now that investors have regained their appetite for gold, the bottom line should perk up going forward. Analysts see earnings booming starting in 2017 (up 116%), though even that could prove conservative given Agnico’s low-cost production.
As for the stock, AEM is just about the only gold stock that has actually been holding its 25-day moving average (red line in the chart), at least so far. Short-term, it will be subject to the push-pull of the sector, but once gold resumes its new uptrend, I expect AEM to do very well.
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