Edges Grow in Oversold Gold Funds

One of the smartest things I’ve heard about gold in recent days was from a trader on CNBC’s Fast Money. He noted that when you hear that gold goes up both in inflationary markets and in deflationary markets, it’s time to get out.

At this point, though, a trader could be forgiven for wondering why anyone who wanted out of gold hasn’t already left. Shares of gold bullion-based ETFs like the ^GLD^ are deeply oversold and trading at their lowest levels since October.

And the gold mining companies are doing no better. Also at their lowest levels since October are shares of the main gold mining, exchange-traded fund, the ^GDX^. The ETF which tracks the shares of the smaller, more speculative mining stocks, the ^GDXJ^ is trading at similar lows, falling by 5% ahead of trading on Wednesday.

The gold miners have been trading around their 200-day moving average for months, oscillating wildly from extremely overbought in the spring to extremely oversold in the summer, then back to extremely overbought in the early fall before plunging back into deeply oversold territory in October and again in December. But now many of those who were the loudest cheerleaders for gold are now talking about heading for the exits.

It is impossible to know if gold is entering a new bear market. But there is no doubting how oversold the yellow metal and its ETFs have become. To put the current oversold conditions – and their subsequent snapback rallies – in context, the last time these funds were as oversold as they have become again here in mid-December, ETFs like the GDX rallied for six days in a row, gaining more than 11%. A multi-day pullback earlier that same month (October) led to a move higher in GDX of more than 9% in six days.

The Market Vectors Gold Miners ETF is on pace to open Wednesday morning with “consider buying” ratings of 9 out of 10. And while there is no guarantee that GDX will respond to oversold conditions in exactly the same manner it has in the recent past, the odds are significant enough for traders to be careful over the next few days. Traders looking to sell gold short via the ETF may want to wait for better levels. On the other hand, traders interested in adding GDX should know that current prices may be near if not at the market’s final offer – at least for the short term.

All of the ETFs in today’s report were available from research and data available through PowerRatings. To learn more, click here.

David Penn is Editor in Chief of TradingMarkets.com