Gold Stocks Tumble, GDX Hits 16-Month Low – Time to Buy?

GOLD STOCKS NEWS – Gold stocks tumbled Wednesday as the Market Vectors Gold Miners ETF (GDX) fell as much as $1.84, or 3.5%, to $50.03 per share in early afternoon trading.  The sell-off in gold stocks and the GDX was driven by further weakness in precious metals and U.S. dollar strength.  Gold stocks in Canada posted steep declines as well, with the S&P/TSX Global Gold Index off by 4.4% at 350.94 alongside the GDX.

COMEX gold futures slid $34.60, or 2.2%, to $1,560.90 per ounce as the U.S. Dollar Index jumped 0.9% to 80.532.  The euro currency fared particularly poorly against the dollar, as it dropped 1.0% to 1.2937.

Notable gold stocks moving lower included GDX components AngloGold Ashanti (AU), Gold Fields (GFI), and Randgold Resources (GOLD).  AU slid by $1.31, or 3.1%, to $41.12 per share, GFI by $0.54, or 3.5%, to $15.06 per share, and GOLD by $1.91, or 1.9%, to $100.47 per share.

Gold stocks have continued to bear the brunt of selling pressure in the precious metals space this month, as the GDX is now lower by 17.2% in December.  In doing so, the gold stocks ETF is on pace for its second-worst month ever – behind only the 38.0% plunge in October 2008.  In addition, with today’s weakness in gold stocks the GDX reached its lowest level since August 25, 2010.

On a year-to-date basis, the GDX is now down 18.9% – surpassed only by the 26.1% annual decline that also occurred in 2008.  Gold stocks have also continued to drastically underperform the price of gold, which despite today’s sell-off remains higher by 9.8% in 2011.

While the sector has endured a very challenging year, there are several factors suggesting that now is a time to be turning bullish rather than bearish on gold stocks.  First and most obviously, the sector is quite oversold on a near-term basis and could be due for at minimum a bounce-back rally in the short-term.

Secondly, gold sentiment has plummeted to near its lowest levels during the course of the 11-year bull market, as the Hulbert Gold Newsletter Sentiment Index (HGNSI) revealed last week.  At that time, HGNSI founder Mark Hulbert contended that “gold is due for a strong rally.”  While thus far Hulbert has been incorrect, he noted that based on several decades of data, “At the 95% confidence level that statisticians often use to determine if a pattern is genuine, gold bullion tends to do better following low HGNSI levels than high ones.”

Third, many individual gold stocks are trading at historically low levels compared to the yellow metal itself.  In mid-November, long-time gold fund manager John Hathaway noted that “the current market environment presents unique opportunities to invest in precious metals-related equities, many of which are trading at historically wide spreads to bullion prices.”  This statement was made when the sector was substantially above current levels, suggesting Hathaway’s argument would hold even more weight now.

Lastly, the large majority of catalysts that have propelled gold to 11 straight years of gains remain in place.  As GoldAlert discussed this morning, several of these factors include an ongoing negative real interest rate environment, further net buying by central banks across the globe, and that most institutional and retail investors remain substantially underexposed to gold-related investments as a percentage of their total portfolios.