This indicator says gold has turned a corner

Investors have been piling in and out of gold miners

I’m not what you’d call a technical trader.

That’s not to say I don’t use a few technical tools to time my trade entry and exit points, of course. Consciously or not, most investors take price moves into account. And so they should.

But there’s a simple, technical sign that we really can’t ignore when making our trades. And that is volume – ie, how many investors are piling in, or piling out, at any given time.

Now, many people (especially us here at The Right Side) have picked up on the current price action in gold, and in particular, gold miners. But what many haven’t considered is the record volume going through the sector right now.

And this high volume of trades makes me feel pretty good about gold’s prospects…

Momentum can be dangerous for markets

Now, there are several ways to measure volume, but the most fundamental is simply the number of shares traded on a given day.

It makes intuitive sense that a price change driven by a large number of transactions (ie, high volume) is important. Volume indicates market conviction. Many would argue that the recent five-year bull market in shares is of low conviction. Why? Because it’s built on low volume. Traders have begrudgingly bought shares in moderation, because they doubt the rally’s longevity.

This can work both ways. Consider the escalation leading up to the dotcom crash – as the market gathered momentum, so trading volumes built into a frenzy, peaking just as the market did. When the crash happened, it came with record volume of trades. And there’s one area of the market that isn’t lacking any conviction right now.

Gold miner trades go through the roof

The recent pick-up in gold miners means trading volumes are higher now than at any point during the entire bull market.

Regular readers may be familiar with the Van Eck Market Vectors Gold Miners ETF (AMEX: GDX). It’s a massive New York-listed fund which follows the world’s 36 largest gold and silver miners.

Investors (and speculators for that matter) increasingly use exchange-traded funds for a cheap and convenient way of getting exposure to their favourite sectors. I often use it as a bellwether for the industry as a whole.

Five-year view: The fortunes of gold miners

5 year view: The fortunes of gold miners chart

(Source: Digital Look)

The price action above confirms what we knew already – the last couple of years have been lousy for miners. From a high of $65, the fund dropped to its $20 low around Christmas time.

But what I really want to draw your attention to is the volume indicator at the base of the chart.

During a bull run, the volume figures gradually tick up. And that makes sense. As momentum in the share price builds, so it attracts more investors – the emotion of greed generates volume. But notice how during the 2009 to 2011 bull run, volumes were pretty tame, even as the market was racing away.

The thing is, as greed gives way to fear, volumes tend to suddenly spike. Notice too how it was during the days of the nasty gold bear that volume really began to pick up.

And just look at volume during last Christmas’s smash on the miners! Record volume – simply unheard of – trashed the index’s share prices.

Why gold volumes are staying high

But what is of particular interest to me in the chart above is the fact that volumes have remained high during the market’s recent rebound.

The record volumes in this fund have been maintained even as the market re-entered the bull phase. This is pretty much unheard of. You and I both know how a fresh bull is said to climb the proverbial wall of fear, the turnaround isn’t supposed to be built on record volume.

So, what’s the verdict? Well, I’m reading this as a sign of conviction in a new bull phase. Of course, the other way to read it would be a mad speculative bubble.

You’ll have to make your own mind up on how you read this particular market. But whatever way you look at it, one thing’s for sure. There’s massive activity in gold miners right now.

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