Subscribe to DSC Newsletter

Quantitative Finance: Analysis of Gold Mining ETF

5 Reasons Why the Market Vectors Gold Mining ETF Could Be The Next Monster Trade

One of the most hated commodities in 2014 has been gold. As most of you know, gold is also viewed by many people as a currency. After all, gold cannot be printed or created by a click of a button like most fiat currencies. For the first time in a long time, the leading gold mining stocks are looking primed for a sharp move higher. Listed below are five key reasons why gold mining stocks look poised for a major rally in the near term. 

1. The leading gold mining stock stages a sharp upside reversal day on October 8th, 2014. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) surged higher on 114 million shares after making a fresh three year low. When high volume reversal days occur from new multi-year lows it is a bullish technical chart formation. An upside reversal in the Market Vectors Gold Miners ETF tells the chart reader that someone wanted gold down there and indicates conviction buying. This pattern will generally lead to near term upside.

2. It should be noted that gold and gold mining stocks have been trading inversely to the USD/JPY currency pair. As the USD/JPY sells off or pulls back this should benefit the precious metals and the gold mining sector. Recently, the USD/JPY has pulled back from the $110.00 level to $107.33. Traders and investors should note that gold has started to rally as this currency pair has sold off. Please remember, the USD/JPY has been the carry trade that has fueled the U.S. equity market since early 2012. 

3. Many of the leading gold mining companies have to hedge their bets as a gold producer. In other words, the leading gold mining companies are often shorting gold (betting against gold) to protect themselves in a declining gold market. Should the leading gold mining companies start to close out those hedging positions it could actually inflate the price of gold in the near term. Remember, in 2010 and 2011 there were very few gold mining companies hedging their bets as gold was soaring to new all time highs. 

4. Should consolidation start to take place in the industry group it should lead to higher prices for the leading gold mining stocks. Recently, the leading gold company Newmont Mining Corp (NYSE:NEM) was in talks to be bought out by Barrick Gold Corp (NYSE:ABX), but talks stalled out. With such cheap money still available in the market place it only makes sense that gold mining companies would be looking to merge and consolidate. Traders can easily see how well the airline stocks have done once they consolidated that industry group. 

5. Foreign countries such as China and India are reportedly buying tons of gold. It should be noted that China and India are two of the largest countries in the world. Each country has a population of more than one billion people. This one fact alone could keep a bid in gold for quite a while. It should also be noted that the recent weakness in the European Union and the downgrade of France could have people running for a tangible currency. 

Nick Santiago

Views: 441


You need to be a member of AnalyticBridge to add comments!

Join AnalyticBridge

On Data Science Central

© 2021   TechTarget, Inc.   Powered by

Badges  |  Report an Issue  |  Privacy Policy  |  Terms of Service