Since the April 2013 gold meltdown, there have been no less than half a dozen failed rallies in the gold miners – is this time different?
As can be seen in the above chart (green dotted lines), most of the recent failed rallies have been relatively steep, a classic characteristic of a bear market rally. However, the current advance has been much more gradual and has actually taken a full month to reach its current level (+16% as of Friday’s high).
This is a very positive sign for bulls; sentiment surrounding the gold sector was extremely depressed at the end of last year and some of the initial rally days (December 24th, January 2nd) were met with the usual explanations of “short covering” “dead-cat bounce” etc.
As Sir John Templeton was famously quoted, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” There is no question that pessimism on the gold mining sector is still pervasive, however, the miners have begun to rise from the ashes amid a healthy dose of skepticism.
A few key signals to look for going forward:
- Last week’s lows now become crucial support (~$22 on GDX)
- The downsloping 200-day moving average and October’s high now become important upside reference points
- Bulls will want to see a steady “2 steps forward, 1 step back” type of advance which eventually culminates in a so called “golden cross” at some point in the coming months (50-day moving average crosses above the 200-day moving average)
For gold mining investors, slow and steady are likely to win the race in 2014.