Saturday, September 3, 2011

Precious Metal Stocks Breakout - GDX/HUI

I am VERY encouraged by the action last night (US trade) in the precious metals sector.

In early August I posted about how Gold stocks were the cheapest they'd been compared to the price of Gold since early 2009:

Gold Stocks – Cheapest since early 2009

In the above post I said:
There are still many potential risks (the bandaid fixes that are being applied to Europe, US and elsewhere are not going to permanently stop the bleeding), but in my opinion there is a case to go long Gold stocks at this point. This should not be considered any more than a trade at this stage and obviously you would be best not taking a position unless you were confident to read the market yourself as given recent volatility it could be a trade you need to exit quickly and decisively if things took a turn for the worst (market turns down again or Gold returns to earth)
A week after the above post I reviewed the possibility that Gold stocks may be putting in a similar styled head and shoulder top to 2008, warning that if Gold were to significantly correct we could see the stocks hit even harder:

HUI Forming Head & Shoulders Pattern?

However, the price of Gold has remained relatively strong (only dipping back to the US$1700 level) and is looking like it wants to breakout to new highs again soon (US$2000 here we come?).

In late August I looked at the consolidation patterns that were playing out in the GDX and HUI with each having consolidated for almost 12 months. The potential for a large breakout and rally in the precious metals stocks was upon us:

Gold miners about to breakout to new highs?

We just saw both the HUI and GDX break above their resistance (at 610 for the HUI and 64 for the GDX) with both closing around 2.4% higher in US trade on Friday.

In fact rather than a head and shoulders top, we might just be seeing the breakout from an inverse head and shoulders at the bottom of a very powerful rally for the miners (this pattern is evident in both the HUI and GDX):


The increase in volume on the GDX is a very positive sign. The gap the chart has left may be filled in a correction to back test the breakout, but I would not count on it.

I mentioned in the late August post that we hadn't yet seen the juniors start to perform and that they were lagging the larger stocks. That changed this week and we saw the GDXJ outperform the GDX by around 2%. It's just a start, but a sign that speculative money might be moving back into the sector:


On the HUI:GOLD ratio we are still only seeing the miners keep pace with the metal, so although the index has broken out to new highs, against a ratio with Gold it still fell in Friday trade (with Gold putting on almost 1% more than the miner index):


As regular readers of the blog would know I have started publishing a fantasy portfolio so that you can keep track of the stocks that I think will perform well (on the Australian Stock Exchange). The latest update is here:

Bullion Baron's Fantasy Portfolio - Update

Although that doesn't include my double up on MSR at 19c tweeted on Thursday (will be looking to update table after additions to be made next week).

As I have suggested in updates to this portfolio I will be increasing positions on the breakout which we've now seen. I'm currently sitting at 50% invested and will be moving that up to 70-80% invested very early next week. I would look to tip in the final amount when we start to see the precious metal stocks outperforming the metal (e.g. looking for a break above .34 on the Gold/HUI ratio).

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  1. One might say finally :)

  2. Finally indeed. Has been pretty boring watching Gold stocks for the last 9-10 months, but suspect it's about to get a whole lot more exciting!