The Gold Sector Is Setting Up for a RunVIEW IN BROWSER By Jeff Clark, Editor, Market Minute Traders should be looking to buy gold stocks right here. The gold sector still isn’t cheap. But, it’s a much better “buy” today than it was one month ago. And, it appears to be setting up for at least a short-term bounce. We turned bearish on the gold sector last month, calling it “the worst time to buy gold stocks.” Since then, the VanEck Vectors Gold Miners Fund (GDX) has fallen 13%. The reason for our bearish view had to do with the relationship between gold stocks and the metal itself. You see, the worst time to buy gold stocks is after they’ve outperformed the metal for several weeks and are starting to move lower.
The best time to buy into the gold sector is after the mining stocks have underperformed the metal for several weeks and are just starting to move higher. In September, we had the former condition. Today, though, we have the latter. Take a look at this ratio chart showing the relationship between gold stocks and gold… 
When the chart is rising, it means gold stocks are outperforming the metal. When the chart is falling, gold stocks are underperforming. The absolute level of the chart tells us how overbought or oversold the sector is. Over the past year, this chart has ranged between 0.017 and 0.025. So, when the chart is near the bottom of that range, the gold sector is oversold relative to the metal, and traders should be looking for opportunities to buy. When the chart is near the top of its trading range, gold stocks are overbought. Traders should wait for a better chance to buy into the sector. But what’s more important than the absolute level of the chart is its direction. The best time to own gold stocks is when this chart is rallying. The worst time to own gold stocks is when this chart is declining. Last month, this ratio chart turned lower from overbought conditions. It started to fall. And, we thought it was a bad time to buy into the gold sector. Now, though, we have the opposite setup. The GDX/Gold ratio chart has turned higher from oversold conditions. The momentum indicators at the bottom of the chart have turned higher as well. In fact, they look similar to how they looked in July – just before GDX put on a monster rally, gaining almost 50% in about five weeks. The gold sector isn’t oversold enough to justify a rally of that magnitude from current levels. But, it is set up for a pretty good bounce. Traders should take advantage of any weakness in gold stocks over the next few days to add exposure to the sector. Best regards and good trading, 
Jeff Clark
Editor, Market Minute |
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