Is The Relative Strength In Gold Miners To Gold Significant?

It has been a tough spring and summer for precious metals. Gold failed to breakout when it had the chance and it closed the second quarter in an ominous and weak fashion. It was the lowest monthly close in more than a year. Silver has performed better but only because it has not declined to the degree Gold has. The one technical positive for the sector is the positive divergence in the miners. They did not make new lows in the second quarter. That is encouraging but only time will tell us how sustainable and significant that might be.

As the chart below shows, the gold stocks held up quite well as Gold broke below its spring low (around $1300/oz). Gold declined 5.5% in the second quarter yet both GDX and GDXJ gained 1.5% and 1.7% respectively (while the HUI was down marginally).

(Click on image to enlarge)

Gold, HUI, GDX, GDXJ

That relative strength is certainly encouraging, but does it indicate the sector is about to explode higher?

Recent history shows two other examples of a positive divergence with respect to gold stock performance against Gold. In the summer of 2014, the various gold stock indices relative to Gold made higher highs while Gold didn’t even come close to its earlier 2014 high. That resolved terribly if you were a gold bull. However, at the end of 2016, the gold stocks relative to Gold did not make a new low while Gold did. That resolved wonderfully for gold bulls.

(Click on image to enlarge)

Gold, Gold Stocks vs. Gold Ratios & GDX A/D 

The GDX advance-decline line (plotted at the bottom of the chart) argues that the sector is unlikely on the cusp of another 2016 upside explosion. Over the past few months, it has declined while the gold stocks relative to Gold have trended higher. The current relative strength in the gold stocks would be much more encouraging if it was matched by the same type of positive divergence in the advance-decline line.

Ultimately, there are two ways the current setup will resolve.

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