Key points:Â
- Precious and industrial metals stocks have rebounded over the last week
- A handful of gold mining stocks are breaking out and exhibiting relative strength
- Within the industrial metals complex, specialty metals and steel rank the highest
When the dollar falls, metals tend to rise
The U.S. dollar took a one-two punch last week. First, the Federal Reserve left its policy rate unchanged, despite growing speculation that policymakers might surprise investors with a hawkish move. Then, on Friday, the U.S. and Japan coordinated an intervention in the currency market to support the Japanese yen following its sharp decline. The combined effect was a sharp pullback in the U.S. Dollar Index (DXY), sending it back into the broad trading range that has been in place since last summer.
The weaker dollar quickly lifted both precious and industrial metals, providing a tailwind for related equities. The rebound prompted us to revisit both groups to determine whether improving technical conditions are signaling the start of a more sustainable trend.
The Gold ETF (GLD) rallied more than 4% on Wednesday, registering its highest close in six weeks. As a result, our short-term trend composite improved to 50%. However, the relative composite continues to lag at 30%. For a short-term Dual Trend buy signal to be generated, both composites must first sustain readings of 70% or higher, after which GLD must confirm with simultaneous absolute and relative breakouts.
Bottom line: conditions are improving, but additional technical confirmation is still required.
The Gold Miners ETF (GDX) also posted an impressive gain on Wednesday, lifting both its Trend and Relative Trend Composites to 60%—just 10 percentage points below the threshold required for a buy signal.
Only five stocks within our gold mining universe currently hold a bullish short-term Dual Trend signal, including three that shifted to positive status on Wednesday. Despite the incremental improvement over the last few days, the overall technical backdrop remains weak, as no stocks currently carry a bullish long-term trend signal.
Bottom line: the group has yet to establish the broad-based strength needed to support a sustained advance. Even so, let’s examine the charts of the three highest-ranked names.
Centerra Gold looks technically strong, breaking above a downward-sloping trendline and setting the stage for a potential advance to new highs.
Metalla Royalty is showing impressive technical strength after decisively breaking out of a multi-month consolidation pattern, opening the door to a potential move toward new highs.
Eldorado Gold has also broken out from a multi-month consolidation pattern and appears positioned for additional upside.
Big picture on gold
One concern for gold and silver is that both precious metals continue to unwind the extreme overbought conditions that contributed to the January downturn. While a further rally from current levels is possible — similar to the rebound that followed gold’s 30% correction in 1973 — we believe any allocation to gold or mining equities should remain minimal until there are clearer signs of technical improvement.
Said another way, this is a trade to rent rather than a position to own for now.
Industrial metals
Industrial metals have also benefited from recent dollar weakness. One of our preferred vehicles for gaining exposure to a broad basket of miners is the SPDR S&P Metals and Mining ETF (XME), which has seen its trend composite improve to 50% and its relative trend composite climb to 40%.
Bottom line: conditions are improving, but both trend and relative strength profiles remain below levels that would indicate a high-conviction setup.
Applying our Dual Trend ranking methodology to the XME constituents reveals that steel and specialty metals currently display the strongest trends within the group. Several stocks in these segments maintain both short- and long-term bullish Dual Trend signals while breaking out to new highs.
Materion Corp. stands out as compelling. The company delivered blowout earnings, sending shares sharply higher on Wednesday. A review of its revenue mix highlights exposure to several attractive industrial end markets, including semiconductors. The stock is consolidating today following the surge, but it remains one to monitor closely for potential inclusion in the Dual Trend portfolio.
For investors who prefer ETFs over individual stocks, the steel ETF (SLX) also looks constructive, although the short-term dual trend system has yet to confirm a bullish shift.
Copper hit a new all-time high today, yet the copper miners ETF (COPX) remains in a bullish consolidation pattern. Importantly, its July pivot low held above the March low, signaling improving price structure. Given the limited number of U.S.-listed copper mining companies, COPX remains our preferred vehicle for gaining exposure to the group.
Big picture on aluminum
Aluminum stocks rank poorly within the XME universe. Similar to gold, the group is still working off an extreme overbought condition and likely needs additional time to consolidate and establish more constructive bases. It is important to remember that metals tend to exhibit strong mean-reverting characteristics. Historically, the best opportunities have come when these groups are washed out and unloved, not after extended rallies when overbought conditions become stretched.
What the research tells us…
The metals complex has benefited from a sharp reversal lower in the dollar, with precious and industrial metals stocks responding positively over the past several sessions. However, the move remains selective, with only a handful of names demonstrating the type of technical strength we would consider for portfolio inclusion. With the broader market still struggling to reward breakouts and sustain upside momentum, we believe patience remains warranted while we monitor these emerging opportunities for further confirmation.
