BHPLF - GDX: Metal Mining Stocks Breaking Out; Focus On Gold Miners (Technical Analysis)

2023-12-27 11:56:01 ET

Summary

• Metal miners are starting to break out of long-term bases, with precious metals showing the highest potential for outperformance.
• The immediate catalyst for gold miners to rise is the price of spot gold, which stands on the cusp of breaking out to new highs against the USD.
• Given the strength in spot gold, I think there is a lot of catch-up potential in gold miners versus the metal miner space. My focus is on the GDX ETF.

Ongoing rotation into metals & mining stocks

With the breakout higher in small caps, I wrote in recent articles in December and November that we must be alert to sector rotations in the equity market.

This is because sectors like financials, industrials, healthcare and technology make up the largest weights within the small-cap universe, using the Russell 2000 (IWM) ETF as a proxy.

These sectors have roughly the same weights too, unlike the S&P 500 (SPY) and Nasdaq 100 (QQQ), which are more technology-heavy.

Now, it has come to my attention that metal miners are starting to breakout of long-term bases. The SPDR Metals & Mining ETF (XME) holds metal mining stocks in the steel, coal, copper, and precious metal sectors. Within this space, I believe precious metals have the highest potential to outperform, based on their technical charts.

In this article, I will go through the technical charts of the XME ETF, followed by sub-sector ETFs in steel, copper, and precious metals.

Looking at the weekly chart of XME, we may observe that the price has just broken out higher from a 1.5-year base. As the saying goes, "the larger the base, the higher in space". This breakout could well fuel a multi-month rally in metals and mining stocks, in my view.

Weekly Chart: XME

Looking at XME's industry allocation, we can see that steel makes up the largest weight within the ETF, followed by precious metals (gold and silver), coal, aluminum, and copper.

Steel miners

Delving into some of the sub-sector ETFs, starting with steel, we may observe that the VanEck Steel ETF (SLX) has recently broken out higher from a 2.5-year base.

Weekly Chart: SLX

The buoyant prices of steel miners were partially influenced by M&A activity within the sector. Nippon Steel agreed to buy US Steel ( X ) for $14.1 billion a few weeks ago, with the latter the fourth-largest holding within the SLX ETF.

Big holdings within the SLX ETF like Nucor (NUE) and BHP Group (BHP) are also on the verge of breaking out higher from large multi-month bases at the same time.

Weekly Chart: NUE

Weekly Chart: BHP

Copper miners

Copper miners, as seen from the Global X Copper Miners ETF (COPX) have been basing since 2021. Prices of copper miners have clearly lagged those of steel miners, given the latter group has broken out ahead of the former, but prices are acting well.

Stocks with significant weights within the ETF such as Freeport-McMoRan (FCX) and Southern Copper (SCCO) are breaking out higher, and will help push the ETF higher.

Weekly Chart: COPX

Weekly Chart: FCX

Weekly Chart: SCCO

Precious metal miners are my focus

The sub-sector which I am most excited about is that of precious metal miners.

This is primarily because of the technical pattern in spot gold. Looking at the weekly chart, we may observe that gold is on the cusp of breaking out higher from a massive 3.5-year base against the USD.

Weekly Chart: Gold

Gold bulls got ahead of themselves in the week of 4 December, where gold sprinted to heights of $2148, before swiftly reversing and collapsing on the weight of over-exuberance.

While many may view this swift reversal as a danger sign, my view is that the buy setup has now improved.

This is because many bulls were likely flushed out with that intra-week reversal of -7%. With fewer eyes on and less optimism surrounding spot gold, prices have stealthily crept higher in the weeks following the reversal.

I think there is a very good chance that spot gold surprises the market by making new 52-week highs in the coming days / weeks.

Gold's strength is such that it is sitting not only at all-time highs against the USD but also other major currencies, which I will not cover in this article.

With the Fed now on the dovish side, leading to a weaker USD, there is extra impetus for gold and other metals to rise. The Fed, in a surprise turn of events, raised the possibility of 3 rate cuts in 2024 .

I am personally long spot gold and am closely looking for buy setups in gold miners. It is no exaggeration to say that gold miners are extremely beaten down versus other metal miners.

Looking at the ratio of the VanEck Gold Miners ETF (GDX) vs XME, we may observe that the ratio is trading at 15-year lows. This area has acted as support on 4 occasions in 2008, 2013-2014, and 2018. This raises the possibility of a bounce here, which will mean gold miners outperforming other metal miners.

Monthly Chart: Ratio of GDX vs XME

Looking at the weekly chart of GDX, prices have been contained by downtrend resistance dating back to 2020. Despite not yet breaking above this resistance, GDX has been making higher lows since September 2022. If gold prices breakout higher against the USD, it is highly likely we see GDX breaking above this downtrend resistance.

Weekly Chart: GDX

GDX is my choice vehicle to gain exposure to the gold miner space, as it takes out the individual company risk of holding specific mining stocks, thus weeding out event risks like earnings, share issuance, and capital raises.

The ETF will most likely see less upside than a good portion of gold mining stocks if the sector lifts off so that factor should be considered too. Amongst the gold miners, I like the chart of Wheaton Precious Metals ( WPM ), which looks on course to breakout from a 3-year base.

Weekly Chart: WPM

Below is a snapshot of some of GDX's largest holdings, for your reference.

Another reason why I like the potential in GDX is that despite prices being contained by downtrend resistance since 2020, as mentioned earlier, GDX has actually been steadily building higher lows since 2015.

We can also observe from the monthly chart below that prices are fast reaching the apex of a triangle pattern, where prices have to choose which direction they want to breakout. On the balance of probability, I think prices breakout higher.

Monthly Chart: GDX

If they do, there can be good upside potential, given that prices are more than 50% below their all-time highs in 2011.

Overall, the resurgence in small caps has led to strength in sectors away from familiar technology, such as metal miners.

While steel and copper miners are faring better than gold miners, my focus is on gold miners because of the strength in gold prices. Gold looks very likely to breakout higher against the USD in the coming days / weeks.

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