After blasting higher in a remarkable breakout surge, gold is
pulling back. Such mid-upleg selloffs are normal and healthy,
rebalancing sentiment to maximize uplegs’ longevity. Gold’s
pullback is naturally weighing on gold stocks, fueling some
bearishness. But since they didn’t soar to extremely-overbought
levels like gold, their downside leverage should prove modest. The
gold miners could just consolidate high.
This
is definitely atypical, as normally gold stocks amplify their
metal. The leading GDX gold-stock ETF
dominated by
major gold miners tends to leverage material gold moves by 2x to
3x. During gold’s previous upleg from late September 2022 to early
May 2023, it powered 26.3% higher. GDX’s parallel upleg in that
span ran 63.9%, making for solid 2.4x upside leverage. This
fundamental relationship holds in selloffs too.
Before today’s mighty breakout upleg was born, gold corrected 11.3%
into early October 2023. GDX dutifully sold off in sympathy,
plunging 27.7% in that span for typical 2.5x downside leverage.
Examples of this are legion, ultimately driven by gold-mining
earnings amplifying gold price trends. Traders expect the same
during gold’s current pullback, as this relationship is thought to
be ironclad. But today is rather unique.
A
few weeks ago I wrote an essay on the
overboughtness in
gold and gold stocks. Then gold had just hit $2,374, its ninth
nominal record close in just eleven trading days! Euphoria was
really mounting then, so my contrarian conclusion wasn’t popular.
“...gold is extremely overbought today, warning of high risks for a
sharp selloff.” That necessary sentiment-rebalancing process has
begun, but is moving in fits and starts.
Gold
crested two trading days later at $2,388, and drifted sideways for a
few more. Then gold was slammed 2.4% lower on no news on
Monday the 22nd, spawning flaring bearishness. Later gold plunged
another 1.9% this Tuesday to $2,292. That extended gold’s overall
pullback to 4.0% across two weeks, material but not excessive. If
gold stocks were behaving normally, GDX should’ve fallen 8% to 12%
in sympathy.
Plenty of newsletter subscribers and consulting clients have been
writing me worrying gold stocks are due for a sizable selloff.
That’s rational based on gold-stock precedent. Yet during those
same couple weeks since gold’s last interim high, GDX has
actually edged up 0.3%! The gold stocks have been holding their
own so far in gold’s pullback, consolidating high. And just one day
earlier, they had been looking way better.
During the first nine trading days of gold’s pullback, it fell
2.2%. Amazingly GDX defied that to rally 5.3%! What kind of
sorcery is this? Over 2/3rds of GDX’s counter-gold rally came on
one trading day, where GDX shot 3.7% higher. That was fueled by the
world’s largest gold miner’s Q1 results. Newmont’s stock
rocketed 12.5% higher that day after reporting its production
last quarter soared 32.3% YoY to 1,680k ounces!
Newmont has always been GDX’s largest holding, weighing in at 12.2%
midweek. So one could argue GDX has resisted gold’s pullback mostly
because of NEM’s output surge. That’s actually pretty bullish for
gold stocks though, because for years hardly anyone even paid
attention to gold-stock quarterlies. The fact enough investors were
watching to catapult NEM sharply higher proves gold-stock awareness
is growing.
But
there’s a more-important reason gold stocks are likely to remain way
more resilient in gold’s pullback than normal. I discussed this in
depth several weeks ago in that overboughtness essay. That analyzed
the following updated
gold and GDX
charts, which include my bespoke Relativity indicator. That
divides prices by their 200-day moving averages, and charts the
resulting multiples over time illuminating trading ranges.
Over
the past half-year or so, gold rocketed vertical in a massive upleg
to extremely-overbought levels. The resulting surging greed is why
a rebalancing selloff is essential. But the gold stocks have
greatly lagged gold’s advance, their parallel upleg staying
anemic leaving GDX far from challenging materially-overbought
levels. That left gold-stock sentiment fairly-bearish, so the
miners have no need to sell off like gold.
After bottoming near $1,820 in early October, gold mean-reverted
sharply higher embarking on a new upleg. That powered higher into
early December, with gold achieving its first new nominal record
close in 3.3 years. Gold had rallied a normal 13.8% in this upleg
then, and subsequently mostly consolidated high into late February.
There was a mild
pullback from late December to mid-February, which grew to 4.2%
at worst.
Throughout that entire early-upleg span, gold was nowhere near
overbought. At most it merely stretched 6.6% above its 200dma.
Relative to that key baseline, gold’s trading range in recent years
ran from 0.90x on the oversold side to 1.15x on the high side. Gold
hadn’t yet grown overbought by then simply because it hadn’t surged
fast enough. Overboughtness happens when prices rally too far too
fast to be sustainable.
But
boy as March dawned that dramatically changed! After a top Fed
official hinted at monetizing more US Treasuries, gold leapt
higher. The resulting upside momentum drove gold’s remarkable
breakout surge, which wasn’t fueled by gold’s normal drivers.
Speculators weren’t flooding into gold futures, and American stock
investors weren’t buying gold ETFs. Instead Chinese investors and
central banks rushed in.
During the next six weeks or so, gold rocketed to 19 new
nominal record
highs! Such a stunning record-achieving streak hadn’t been seen
since the summer of 2020. The
momentum buying
on gold records is powerful. The higher gold surges, the more
the financial media covers it, the more bullish traders grow, so the
more they buy gold to chase its upside accelerating its gains. This
dynamic is a self-feeding virtuous circle.
But
gold-futures speculators and American stock investors weren’t
driving it like usual, Chinese investors took the helm. They
catapulted gold 16.9% higher in just six weeks, condensing 6/10ths
of this upleg’s total gains into less than 1/4th of its lifespan!
While gold’s upleg rapidly grew to large 31.2% gains over 6.4
months, so much rallying so fast left gold extremely overbought.
That’s readily evident in this rGold chart.
At
mid-April’s latest interim high, gold was stretched a whopping
18.8% above its 200dma! Gold hadn’t been so overbought in 3.7
years, since its last record-achieving upleg was peaking in August
2020 at monster 40.0% gains. That recent 1.188x rGold read was
rarefied territory, guaranteeing an imminent selloff to work off
those extreme conditions. That has indeed started since, as gold
pulled back in recent weeks.
Writing about this several weeks ago just before this rebalancing
selloff began, I even
gave a downside
target. “Ideally that would be a pullback to gold’s 50dma,
which is now running $2,125. 50-day moving averages are the
strongest support zone for mid-upleg pullbacks. That is also
climbing about $6 per day, so a couple weeks from now gold’s 50dma
should be closer to $2,185.” Midweek it had actually shot up to
$2,222.
To
challenge its 50dma today, gold’s total pullback would need to grow
to 6.9%. But with its 50dma now shooting vertical, gold may
need to forge lower to better rebalance sentiment. $2,200 is a
decent target, which would extend this pullback to 7.9%. Once a
selloff from upleg highs exceeds 10%, it is a correction formally
slaying that upleg. While a correction-magnitude selloff is
possible, a smaller pullback is more likely.
I
explained why a couple weeks ago in an essay on
gold’s remarkable
breakout. Again those Chinese investors and central banks have
done most of the heavy lifting driving gold sharply higher. That
has left the usual gold-futures speculators and American stock
investors with lots of remaining capital firepower for buying.
They are going to start chasing gold’s upside momentum soon, their
buying accelerating the gains.
So
odds are gold’s powerful upleg won’t fail before specs
exhaust most of their probable gold-futures buying and American
stock investors flood back into GLD and IAU shares in a big way.
But all uplegs surge two steps forward before retreating one step
back in rebalancing selloffs. So gold really does need to pull back
farther to work off more of that recent extreme overboughtness.
This process is normal and healthy.
But
the kicker here is gold stocks don’t need to! If gold’s pullback
grows to 8%, GDX certainly doesn’t need to amplify gold’s losses by
2x to 3x like usual plunging 16% to 24%. That’s because gold stocks
have greatly lagged gold during this upleg. Their feeble gains
barely leveraged their metal’s, and they didn’t get anywhere
near extremely-overbought levels. So unlike gold, they don’t need a
rebalancing selloff.
Since early October, the major gold stocks of GDX have merely
enjoyed a 34.2% upleg at best. That made for terrible 1.1x
upside leverage to gold! If gold stocks can’t well outperform
their metal, there’s no reason to own them. The miners heap big
additional operational, geological, and geopolitical risks on top of
gold price trends. So gold stocks must have outsized gains to
compensate traders for bearing all these.
GDX’s recent surge was so comparatively small that the most
overbought it has grown is only 1.180x its 200dma early this
week! The major gold stocks’ Relativity trading range is much wider
than gold’s, running from 0.75x on the low side to 1.35x on the high
side. Extreme overboughtness for gold stocks doesn’t come until GDX
soars 35% over its 200dma. That would be almost $40 midweek, we’re
nowhere close.
Since gold stocks didn’t amplify gold’s breakout surge, they have
no need to leverage its pullback. They certainly could be
sucked in, but they probably won’t be. The gold miners are more
likely to consolidate high on balance, mostly drifting sideways
while gold works off excess greed and overboughtness. Since traders
haven’t rushed into miners to ride gold recently, there should be
fewer weak hands to dump them.
This
unusual phenomenon is already playing out. Again while gold
pulled back 4.0% at worst during the last couple weeks, GDX managed
a 0.3% gain. The gold stocks are consolidating high while gold
suffers a pullback! And again they were faring much better before
Tuesday’s sharp plunge, with GDX rallying 5.3% in nine trading days
where gold slumped 2.2%. So this gold-stock disconnect is real and
ongoing.
Like
always the markets are a probabilities game, nothing is guaranteed.
So GDX could plunge 2x to 3x whatever gold’s selloff ends up being.
But since gold stocks greatly lagged gold’s upleg and didn’t surge
anywhere near extremely-overbought levels, they have little need for
a rebalancing selloff. And that massive Newmont spike on better Q1
results proves institutional investors’ interest in gold stocks is
mounting.
Incidentally improving gold-stock leverage to gold confirms this.
That has been pathetic over this entire gold upleg’s span, that ugly
1.1x. But since gold’s remarkable breakout surge launched in early
March, gold has rallied 13.3% as of midweek. GDX has doubled that
with 26.6% gains in that span, for better 2.0x upside leverage.
While still low in that 2x-to-3x range, gold-stock leverage to gold
is improving with sentiment.
So
traders probably don’t need to fear gold stocks amplifying gold’s
pullback in this unusual situation. Gold-stock trades should still
be protected with trailing stop losses, which can be tightened some
just in case to lock in more unrealized gains. While capital
recovered from any stopped trades doesn’t need to be redeployed
until gold’s pullback matures, that is going to prove a great
mid-upleg buying opportunity.
Gold
stocks still have massive upside from here, especially the
smaller mid-tiers
and juniors. They have superior fundamentals to the majors
dominating GDX, better able to consistently grow their production at
lower more-profitable mining costs. Smaller gold miners also have
lower market capitalizations, making it easier for capital inflows
to bid their stocks much higher. Many could
easily still double or triple from here!
Last
week I wrote an essay
previewing the
major gold miners’ Q1’24 results, which will prove fantastic.
But the better mid-tiers and juniors will blow away anything the
majors report, potentially launching their stocks after Q1 results.
Our newsletter trading books contain plenty of great smaller gold
miners with big production growth coming as mine expansions
and new mine-builds come online, which will catalyze big buying.
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The
bottom line is gold’s pullback doesn’t need to suck in gold stocks
this time around. While gold soared to extremely-overbought levels
recently requiring a rebalancing selloff, gold stocks sure didn’t.
The gold miners’ upleg has greatly lagged gold’s, with gold-stock
prices barely leveraging its gains. Gold stocks were merely
moderately overbought at their metal’s recent interim high, with
little greed or euphoria evident.
Indeed during the couple weeks since, gold stocks have largely
defied gold’s pullback. Rallying through most of it, they are
consolidating high even at worst. This outperformance should
continue as long as gold’s selloff stays orderly and avoids
correction territory. Gold’s pullback maturing will be a great
mid-upleg buying opportunity for gold miners, so traders should be
watching fundamentally-superior smaller ones. |