Golden Opportunities

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While bullion price action was lackluster last week, gold mining stocks, tracked by the Market Vectors Gold Miners (GDX) exchange-traded fund, sparkled. The stocks in the ETF's underlying index have been battered for months, but they reversed course and rose an impressive 18% last week...

...COMEX spot gold finished 2% lower at just under $717 an ounce and near the week's lows. The deeply oversold market tipped some technical indicators toward the bullish side, but a close above $796 would still be needed to establish the presence of a short-term low. For the active December contract, add a couple of dollars to that price threshold.

The gold market's been liquidating at an increasingly torrid pace over the past month. As the per-ounce cost of gold shed nearly $150, net long interest in COMEX futures held by hedge funds and other large speculators was pared by more than a third. That bearishness, however, shows some signs of exhaustion. Commercial net short positions have been whittled by more than 41% as hedging interest seemed to dry up like water droplets in a hot skillet in the past two reporting weeks.

The interest picture, in fact, looks a lot like August 2007, and we all know what happened to gold prices then. That said, follow-through this week will be pivotal for gold bulls.

While bullion price action was lackluster last week, gold mining stocks, tracked by the Market Vectors Gold Miners (GDX) exchange-traded fund, sparkled. The stocks in the ETF's underlying index have been battered for months, but they reversed course and rose an impressive 18% last week, forcing the bullion-to-mining stock ratio below its 20-day moving average for the first time since September. That's another reason this week should be decisive. Are miners finally cheap enough to attract sustainable buying interest? We'll see. And we'll touch on this subject again a little later...

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