Gold Mining Stocks Catch a Bid
The news that the U.S. economy grew 6.5% in the second quarter—its fastest pace since last fall—was all that traders needed to hear. Stocks were subsequently up across the board, led by semiconductors, banks and broker/dealers, and with strong participation in other industries.
Most surprising to some observers is the outsized performance in basic materials. Led by steel market strength, the SPDR S&P Metals & Mining ETF (XME) rallied 5% on Thursday and was a clear leader among the major industry groups. That has certainly helped our portfolio and potentially paves the way for a return to strength across the metals arena (thanks to the sharp drop in the dollar index).
Not just industrial metals, but precious metals have also caught a strong bid in the wake of the dollar’s decline. Gold and silver stocks alike are on the rise this week, with the benchmark PHLX Gold/Silver Index (XAU) rising 3% Thursday. This marks the first time in over a month that the XAU has closed decisively above its 25-day moving average, indicating that at least one layer of overhead supply has been absorbed by the returning buyers.
The reason for the mining stock rally is as much technical as it is based on the dollar’s latest weakness. In the last few days, our leading indicator for the gold stocks—the 4-week rate of change in the new highs and lows for the most actively traded miners (below)—has reversed its decline and is in rally mode. As the new highs and lows indicate the incremental demand for equities, any additional improvement in the momentum of the highs-lows bodes well for the gold stocks.
In light of the short-term technical improvement in the mining stocks, I think we should probably have a little more exposure to the sector than we do at present. Accordingly, I’m going to place leading senior miner Barrick Gold (GOLD) on a buy after its recent show of strength. I suggest using an initial stop-loss slightly under the 20.50 level (intraday) for this trading position.
I’ll have more to say about Barrick in next week’s regular update issue. (Keep in mind that Barrick’s second-quarter earnings are due on August 9.) BUY A HALF