How can gold drop by more than 1% while gold mining shares actually trade higher that day? Everything that we've learned about gold and mining stocks tells us that this can't happen, right? After all, Barrick and Newmont etc. are pulling gold out of the ground every day so if gold drops 1% then their 'inventory' is worth 1% less which means that their value as a company should also decline, right?

Well, in theory this is correct. However, theory and practice can sometimes be miles apart. It's been clear to me for a few weeks that there has been a quiet but persistent bid in the gold miners. A bid that hasn't necessarily cared too much about the day to day gyrations of the gold price itself.

Yesterday was one of the more stunning examples I can recall of the miners diverging from gold in a significant way. NUGT the 3x levered GDX vehicle traded more than 80 million shares (mostly during the first hour of trading) and appeared to help GDX close positive on the day. Why this happened I don't know.

Another example that comes to mind was late-February 2017 when GDX and GDXJ got hammered even while gold was relatively stable. As it turned out this was the beginning of the GDXJ rebalancing which would go on to weigh heavily on mining shares for the next few months.

GDX (November 2016 - July 2018)

I believe such divergences are worth paying close attention to but we will still need to see the gold price actually move higher in order to get a sustainable uptrend in the gold mining sector. Gold is at a crucial moment on the weekly time frame; if gold closes the week down below $1240 it would confirm a breakdown from the ascending triangle on the weekly chart, whereas, a rally back above $1260 could set in motion one of the more epic failed breakdowns I've ever witnessed. It should be an interesting next couple of days.

Gold (Weekly - 7 Years)


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