The Stock: Eldorado Gold Corp.
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 the $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 inflationary pressures assert themselves and gold starts climbing again.
Skot Kortje