The price of gold has been moving higher in 2017. The uptrend follows a big rally in early 2016 and then a huge pullback in mid-2016. While the price of gold has been putting in higher swing highs and higher swing lows in 2017—the definition of an uptrend—the gold ratios are also approaching critical levels. If the ratios don’t follow through to the upside, the price rally in gold is more likely to fail. Similarly, if the ratios don’t follow through to the upside it also shows that gold mining stocks are relatively weak compared to gold.
The first ratio to look at is the VanEck Vectors Gold Miners ETF (GDX) divided by the SPDR Gold Shares ETF (GLD). When the ratio is rising, it shows that gold miners are outperforming gold. When the ratio is falling, it shows the miners are underperforming gold. Along the bottom of the chart is the price of the gold ETF (alone). When gold rallied in early 2016, it was accompanied by very strong performance in the miners. The mining stocks move a lot more than gold, so seeing that outperformance helps confirm the rally in gold.
The ratio then peaked well before gold started its decent in the latter part of 2016. The ratio also started bottoming (double bottom) before gold started rallying in late 2016 and into 2017. While gold has been making higher highs in 2017, the ratio has not. Watch the descending trendline in the GDX:GLD ratio. If that ratio can’t get above 0.21, there is a good chance the gold rally could falter. The ratio should also stay above 0.185 to keep the uptrend possibilities in gold alive.
The next ratio to look at is the Van Eck Jr Gold Miners ETF (GDXJ) divided by the VanEck Gold Miners (GDX ). This ratio is the little companies compared to the bigger companies. It too should rally when gold is rallying, and that can be seen through the first half of 2016. The drop in the ratio was accompanied by a pullback in gold.
Overall, the ratio has been moving in a range for eight months, making slightly higher swing highs and lows. Since March the ratio has been falling while gold has moved higher. This is a minor cautionary note, as overall the ratio is still in an uptrend. If the ratio declines below 1.48, and especially below 1.41, that would be a more bearish signal.
Just as prices get stuck in ranges, so do ratios. Ultimately, the ratio moving higher, and breaking higher, is what will matter to the gold bulls over the long run.
The Bottom Line
The gold and gold miner ratios aren’t exactly confirming the move higher in gold. That said, ratios are like prices. They can be weak until they aren’t. A strong surge in the miners would help confirm the rally in the gold. The ratios can also occasionally provide an early topping or bottoming signal in the precious metal. Currently, the ratios seem weaker than they should be. If gold is heading higher, those ratios need to head higher. If they don’t, it’s a warning sign. That said, the GDX:GLD ratio is heading in the right direction: up. Breaking the descending trendline would be a strong bullish signal. The GDXJ:GDX ratio is stuck in a sideways range. It too will need to start rising to show the gold rally has gust. If it continues to fall, that too is a definite warning sign for lower gold prices to come.
Disclosure: The author does not hold a position in the ETFs mentioned.