Gold and Gold Mining Stocks Rebound With Conviction

NEW YORK (TheStreet) -- I have a confession. I'm the guy who wrote an article back on March 4 titled "The Death of Gold and Silver Stocks".

That seems like ages ago, and in the article I lamented that Barrick Gold ( ABX) had plunged to "new 52-week lows" of around $29 a share.

Little did I know that this was not the bottom of the canyon but one of the "ledges" on the way to the abyss. In fact, if on March 4 you'd told me that by July 5, just four months later, ABX would hit an intraday low of $13.43, I probably wouldn't have believed it.

On June 28 the spot price of gold had cratered down to below $1,200 an ounce and finished the day close to $1,215. Capitulation selling of precious metals and the mining sector was ubiquitous.

Since that gut-wrenching day for the precious metal investor, gold has rebounded a sterling 11% to $1,334. The gold mining stock sector as measured by the Market Vectors Gold Miners ETF ( GDX) has surged over 23%.

The one-year chart of GDX is a picture that paints a thousand words. For those of us who have ridden this terrifying roller-coaster we are sadly reminded of what the one at Six Flags over Texas must feel like.

GDX Chart GDX data by YCharts

So the current rally off the most recent bottoms for precious metals and the producing miners is a big relief. Is that what analysts mean by a relief rally, or is this the beginning of a huge move skyward?

That is the $100 billion question. For those daredevils who bought GDX and some of the gold mining stocks about 17 days ago, the collective sighs are being heard around the world.

But the questions remain. The answers to these questions are tricky at best.

What I can offer you are some of the interesting facts about the gold mining stocks that are unequivocal and available for subjective interpretation.

Fact #1: Precious metals and the mining stocks are easily manipulated by both short-selling and those who swing both directions, both short and long. With futures contracts and derivatives it's done regularly.

Fact #2: One of the big reasons the precious metals stock sector is so easily manipulated is that compared to other sectors in the stock market it's a tiny little pygmy among towering giants.

Casey Research wrote a story on July 22, the same day gold rose 3% and silver soared 5%, titled "Gold Sector: A Small Fish in a Big Pond .

In this account author, Andrey Dashkov wrote, "In a recent article, we found only 31 primary gold producers with a market cap over $1 billion. This seemed rather small when one considers just how many stocks trade around the world, so we wanted to compare this to other industries."

Then he offered the following chart which shows how miniscule the sector really is. Here's how the number of gold producers compares to other sectors.

Courtesy of Casey Research

Great gabs of gargantuan gold mines! Gold producers with a market cap of at least $1 billion are such a small subset of the Metals and Mining group, a sector that comprises only 229 companies.

The Metals and Mining sector is a part of the Materials sector that consists of 600 stocks, including companies producing chemicals, construction materials, containers, forest products and the like.

Dashkov then ponders the question, "What about the market value of the different sectors? They also vary widely, though the Financials group dwarfs them all." He then offers the following chart.

Courtesy of Casey Research

The conclusion is self-evident. The gold producers and the entire Metals and Mining sector are an infinitesimally small group. If investors start pouring big bucks into this sector, you know what'll occur.

Take, for exampl,e one of my favorite stocks in this group that mines both gold and silver. Goldcorp ( GG) is a company with a market cap of less than $24 billion.

On July 22 GG rallied 6% in one session hitting an intraday high of $29.29. Since its 52-week low of $22.22 on June 26th shares of GG have rallied almost 32%. This leads to my last, relevant fact.

Fact #3: Short "squeezes" can and do happen with this very small, highly manipulated group of stocks. If what has occurred to the mining stocks since March was a massive shorting operation then the current rally is beginning to look like an equal-and-opposite reaction.

When those who are short the gold- and silver-producing stocks believe that this sector has bottomed they often begin their buy-to-cover maneuvers to protect their gains and limit their losses.

The result is like squeezing a tube of toothpaste from the bottom and the prices squirt powerfully upward. Two of the "Big Three" gold producers mentioned in this article saw big gains in volume since late June and early July.

On Monday only Newmont Mining ( NEM) didn't experience higher-than-normal trading volume. I'm suspicious as to why NEM didn't experience above average volume.

Below is a one-year chart of both GG and NEM for your viewing pleasure. If this is a recovery rally that has legs these two members of the mining titans has a long way to go.

GG Chart GG data by YCharts

In case you're wondering, I personally don't think this is the big rally that downtrodden investors have been seeking. At least, not yet -- even though technicians are excited that GDX is closing in on its 50-day moving average (MA) of around $26.66.

Before I add to any existing positions I want more evidence. I'd not only want to see the 50-day MA breached but I want to see GDX break through the resistance at the 100-day MA of about $30.

Fact #4: None except the big-money, in-the-know market movers can tell us if those who own the precious metal producing stocks should be selling into this relief rally with its short-squeeze features.

All I can say with confidence is obviously the gold stocks aren't in "the tomb" yet and are showing definite signs of life. That alone is a reality worth noting and watching carefully.

At the time of publication the author is long shares of every company and ETF mentioned.

Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ¿herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.


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