Gold Stocks: Limited Downside


Gold was hit hard last week Friday, along with gold stocks. It was only two to three weeks ago when precious metals were piercing their critical 200 day moving averages, while now the multi-year bottoms are being tested. Things can change very fast in this market.

When we compare the performance of the metal with gold stocks, we see stocks holding up quite well. Gold stocks have the habit of leading the metals in both directions. Lately, however, the move to the upside is stronger than to the downside, as evidenced by the first chart.

Gold Stocks Limited Downside Chart 1

The above chart shows the performance of gold and gold stocks since the bottom early August.

The key take-away from this chart is that the second rally in gold stocks (dark blue line) is considerably stronger than the first one, while the decline that followed brought gold stocks to the same level as the end of September when gold was trading even higher than today.

What that means, to us, is that we are in a trend of decelerating selling pressure in gold stocks. It is an important observation, as it implies that gold stocks have not much downside left, which tells that the downside in the whole precious metals complex is limited, if history is any guide of course.

We see the same observation on the longer term chart. Note that this chart goes back to the bottom of November 2014, a true washout bottom.

Gold Stocks Limited Downside Chart 2

The above chart shows the huge sell off in gold stocks in June and July of this year, related to the performance of the gold price. Since then, however, gold stocks have been holding up slightly better than gold itself, and there was no big sell off similar to the summer.

Moreover, the gold stock industry is clearly in a bifurcated market for at least 12 months now. Some gold miners are truly bullish, with strong fundamental and technical performance.

Both charts, as well as the bifurcated market, suggest that the downside in gold and gold stocks is limited, but the upside, especially in gold stocks, is not tied to any limit. Now is the time to be picking the best gold stocks.

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