The recent gold price rally to new highs hasn't been impressive when compared to silver's sharp rally; but then again, the race may not always go to the rabbit. And it is this thought that has prompted us to consider the horridly lagging gold stocks (GDX). They haven't been able to get out from under their own weight, and they stand not too far off their respective 200-day moving averages, and haven't moved to new highs with gold. This is a rather large divergence, and one we don't believe shall remain in place for very long as gold shares (GDX) appears poised to breakout sharply versus gold prices.
Turning to the weekly GDX:GOLD ratio chart, we find the sharp rally off the late-2008 lows to have consolidated in bullish pennant fashion for the past two-years. This is quite some period of time to consolidate, and classical technical analysis will tell you that the longer the consolidation...the more powerful and extended the breakout. As such, we'll be monitoring this chart carefully for a breakout similar to that seen in 2003 that pushed the ratio from .05 to it highs at .07. Our penannt target measurement is a rough one, and we'll call it the highs at .07 again...with a chance at new highs. But before ending, we should note one important caveat: we've simply noted that GDX appears ready to breakout against GOLD...we don't have a view on GOLD...therefore GOLD could very well move sharply lower, while GDX simply stands in place. It's certainly a risk, but we will consider buying GDX while it is above its 200-day moving average and cut our losses below it.
