Gold Mining Stocks Versus Gold Price Performance

by Olivier on August 24, 2011

Just a quick reminder regarding website updates. You probably have noticed I am not updating like crazy right now. You guessed it. There is a reason for me doing so. I believe the famous poker adage nails it:

You got to know when to hold them, know when to fold them.

As far as trading is concerned, the exact same rules apply. There are times when you want to be very aggressive and times where it is best to sit on your hands. Now is a great time to be in cash and wait. Sitting on my hands doesn’t mean I am not watching the markets like a hawk. Those extreme market phases do serve a purpose. They separate the wheat from the chaff. This is the time where new leaders are starting to show their hand. My job as a trader is to identify those stocks displaying great strength early on. Great strength in such a market environment could be stocks powering higher and making new all time highs. It could also be stocks that simply refuse to go down and that are building bases while the rest of the pack gets crushed. These stocks are the potential new leaders once a new bullish market phase begins.

Most people have a really tough time grasping this concept. They simply “don’t get it” would be a far more accurate description. The root of that problem is the following: Traders typically hate leaving their comfort zone. Hence they stick to what they know i.e. old leaders, familiar names, proven winners etc. A great example would be AAPL – Apple. The monster stock leading the charge during the past years. Everybody knows everything you could possibly want to know about that company. Rest assured, traders will bet on that stock during a new market trend to the upside. Will it be the one leading the charge in a new powerful bull market? Fat chance. This is the main concept Nicolas Darvas talks about in his book. Embrace new concepts, new leaders, new stocks that grab your attention due to abnormal volume patterns or their ability to print new all-time highs. Often it is stocks that most traders are not familiar with. So keep the following in mind:

The leaders of the past bull market are not going to be the leaders in the new bull market.

A few more thoughts as I sense lots of people are having this on their mind right now:

Are the miners undervalued and will they play catch up now that the price of gold has moved significantly higher?

The best piece of advice I can give is not to have too strong an opinion. Watch price action instead. That’s all you need to know. That being said, I recently published a post where I did a HUI vs. Gold price comparison you may want to re-read.

There is a clear negative divergence. Gold has been printing new all time highs for quite some time now. The gold miners haven’t. Obviously two things can happen in such a situation. The miners do play catch up or they get killed. From a purely technical perspective a negative divergence is a red flag. It doesn’t mean the miners will get killed, but I would never rule out any negative outcome when negative divergences show up. Simply be prepared and have an open mind for all possibilities. Just recently I went through more than 500 gold and silver mining stocks using a weekly chart setting in combination with the weekly moving average 30 Stan Weinstein typically uses. I don’t like what I see. The great majority looks weak, is topping out and some have already started to roll over. Granted, there are strong mining stocks out there but this is not the environment that yields the best performance. The best performing stocks usually perform extraordinarily well when the whole sector moves up in unison. That’s not the case right now. For me to change my mind I would need more price confirmation to the upside. Until I don’t see that kind of price action, I am patiently waiting. Still, I decided to add ANV – Allied Nevada Gold to my public list tonight. This is one of the gold stocks I like best right now. Worth watching. We’ll see what happens.

Tonight’s other two public list additions are MG – Mistras Group and SZU.DE – Suedzucker. One is starting to get some serious traction in the natural gas pipeline testing business and the other one is the biggest European sugar company based in Germany. Natural Gas, Sugar and everything related to Agriculture is what I am most bullish on going forward. When I say I am bullish natural gas it is actually not natural gas itself I am bullish on. It is the stocks related to natural gas. The way I see it, there is great potential for the US to try to build natural gas related infrastructure in order to ensure energy independence for years to come. Will it happen? I have no idea. From a macro perspective it certainly has all the ingredients for a compelling argument. The charts will tell me in advance. That I know. And that’s all I need to know.

Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way. – Ari Kiev – 10 Cardinal Rules of Trading

My public list with all my charts can be viewed here:

Buenas noches!

Previous post:

Next post: