Gold bullion prices are still exhibiting a good long-term trend position, but gold producer stocks are not. A cautious time for investors in gold stocks like Eldorado Gold.
The Stock: Eldorado Gold Corp. (ELD-T) Recent price: $16.12
The Trend
Although the price of gold bullion is still above its long-term trend
line, a January retreat has contributed to a slide in the share prices
of gold producers.
The S&P/TSX Global Gold index turned Stock Trends Weak Bullish at the
beginning of the year as it dropped below trend line support, and many
large-capitalization gold stocks tumbled from their year-end share
prices. Gold stocks, which were stellar performers through much of last
year, are now a drag on the TSX.
Part of the story behind fizzling gold stocks is quite simple - the
monetary disorder that fuelled precious metal asset prices is, for the
moment, being overshadowed by earnings growth in productive assets.
The share prices of industrial enterprises reflect growing optimism
about the economy. Although it finished last week in the red with rest
of the U.S. stock market, the S&P industrial index previously hit a new
52-week high for eight consecutive weeks - an impressive string.
Add a strong technology sector, fired-up energy stocks, and a
strengthening financial sector and many stocks look positively enticing
for even the most skittish investor. Look no further than the
performance of financial and industrial conglomerate General Electric
Co. , which delivered a strong fourth-quarter earnings report card last
week - its share price above $20 (U.S.) for the first time since the
financial crisis.
Flip the coin on all this bullish good news for productive assets in the
global economy and you will find the scowling face of a gold investor.
Gold stocks have a place in most portfolios, but the current drop below
trend is a warning that the conditions that spurred the sector, starting
with the financial crisis of 2008, are giving way to the dynamics of a
much improved global economy.
More aggressive traders might be tempted to look for profits in gold's
decline by investing in a bear gold fund such as Horizons BetaPro Global
Gold Bear Plus ETF, but most investors should simply look to divert
capital to other sectors.
The Trade
Eldorado Gold is of particular interest in this column because it was
profiled as a buy in October, 2009. Eldorado's shares retreated to the
40-week moving average in November after peaking at $21.35 in the third
quarter of last year, but showed signs of trend line support in December.
However, the stock is now categorized as Stock Trends Bearish - the
first of the big-cap gold stocks in the blue-chip S&P/TSX 60 index to
close out a bullish trend this year. For those investors not already
cashed out of their position, any downward move in the stock price from
the current level should be a final straw. Eldorado's long-term chart
reminds us that $15.90 is an important support level, so further price
deterioration would be an exit signal for even the tardiest market timer.
The Upside
Because this column does not advise short sales, the positive outcome is
merely that a shareholder has taken profits on their Eldorado holding or
sold it and removed the risk of further declines in the stock.
The Downside
The share price may find support and rally back to the intermediate
trend line around $17.75. A more extreme outcome is that inflation
asserts itself and gold starts climbing again.
Stock Trends analysis quantifies nicely the movement of individual stocks. I’ve found that if the technicals are out of synch with fundamental analysis, it is a wake-up call to make a decision. The Stock Trends Bull/Bear Ratio is useful in identifying major market bottoms and tops. It has always presented a good buying or selling opportunity.
