Applying Technical Analysis to Enhance Gold Miner ETF Trading Strategies
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Applying Technical Analysis to Enhance Gold Miner ETF Trading Strategies

4 Min.

Technical analysis can be used in gold trading, just like other assets. But unlike most stocks, gold-based securities track the price of physical gold and can help confirm trends when analyzed together. Using two gold miner ETFs as a technical indicator can identify and confirm uptrends and downtrends.

Basics

Gold is a staple in numerous investment portfolios, renowned for its status as a secure refuge in times of economic uncertainty. Not only do short-term traders engage in the buying and selling of gold exchange-traded funds (ETFs) and mining stocks for swift gains and losses, but they also navigate a tumultuous journey in the gold trading realm. This market exhibits periods of tranquility with minimal fluctuations juxtaposed with periods of frenetic activity.

When analyzing and engaging in gold trading or investing in gold mining stocks, it is crucial to seek validation from correlated assets. In this discussion, we will delve into the significance of this approach and its relevance in the gold market.

Analytical Tools for Gauging Gold Trends

In the dynamic world of fluctuating gold prices, accurate tools are crucial for evaluating the strength of these trends. Here, we'll delve into utilizing two distinct yet interrelated gold miner ETFs to ascertain and authenticate trends in gold prices. This juxtaposition facilitates informed decision-making when dealing with mining company stocks, gold, or gold ETFs.

Commencing our exploration by identifying uptrends, several crucial indicators come into play:

  1. Gold Price Movement: An initial sign of a robust gold uptrend is the ascendancy of gold prices, signifying a bullish market sentiment.
  2. Gold Mining Stocks: Monitoring the performance of gold mining stocks through indices such as the Vaneck Vectors Gold Miners ETF (GDX) provides a valuable metric. A stronger uptrend is indicated when these stocks outpace the rise in gold prices.
  3. Junior Gold Miner Stocks: To further refine our analysis, we observe junior gold miner stocks, as indicated by the Vaneck Vectors Junior Gold Miners ETF (GDXJ). If these smaller entities are experiencing even swifter ascension than GDX, it implies that smaller, emerging mining companies are surging ahead of their larger counterparts.

Conversely, these criteria can be inverted to discern downtrends in gold. In a bearish gold market:

  • Gold prices are in decline.
  • Gold mining stocks, particularly in percentage terms, are declining more rapidly than gold.
  • Junior gold miner stocks are experiencing more pronounced declines compared to larger mining corporations.

It's worth noting that gold and mining stocks typically exhibit correlated movements, albeit with stocks often leading the way. For instance, during periods of stagnation in gold prices, it is commonly observed that stock prices commence their ascent before gold follows suit. Once both gold and mining stocks are on an upward trajectory, it signifies a favorable outlook for both. During this phase, gold establishes higher swing lows and higher swing highs, indicative of a definitive uptrend. 

Validation of Market Trends

In considering the second point, establishing trust in an uptrend necessitates concurrent growth in gold mining stocks. Two methods ascertain this synchronization: visualizing a chart of a gold miners index showing an upward trajectory or creating a ratio chart comparing the miners index to gold's price. The latter method provides greater precision in determining if gold miners outperform gold, which is crucial for investors during an uptrend.

When the ratio (or miners) trends downward while gold is on an upward trajectory, it signals a lack of synchronization between the two markets. This complicates trading, as the ascent in gold fails to entice mining stock traders, making gold's uptrend more susceptible to failure. Nevertheless, if mining stocks embark on an upward rally, the alignment is restored, potentially leading to further gains in both mining stocks and gold prices.

As a final litmus test, evaluating junior miners against their larger counterparts is essential. During robust gold uptrends, investors often venture into smaller gold companies, deemed riskier but offering higher growth potential. The juniors/miners ratio should exhibit an upward trajectory during an uptrend. Its failure to do so may signal trouble for the uptrend, potentially leading to declines in both gold and mining stocks, encompassing both junior and larger miners.

Conclusion

In gold and mining stock trading, a crucial aspect is the synergy between miners, junior miners, and gold itself. As gold prices ascend, gold miners must outperform gold in profitability. This is substantiated by observing an ascending miner/gold ratio. Conversely, if the ratio descends or mining stocks fail to corroborate an uptrend in gold, the rally becomes increasingly prone to reversal and subsequent decline.

Gold
Trading
Exchange-Traded Funds (ETFs)
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