The
gold miners’ stocks have largely ground sideways in the last couple
months, consolidating their big mid-summer gains. That drift is
slowly bleeding away greedy sentiment, but this sector remains
really overbought. Gold stocks’ dominant driver gold is even more
overbought, and still facing a massive gold-futures-selling
overhang. This makes October, gold stocks’ weakest month seasonally
by far, particularly risky.
The
gold stocks have enjoyed a big run since late May. Their leading
benchmark and trading vehicle is the GDX VanEck Vectors Gold Miners
ETF. Birthed way back in May 2006, its first-mover advantage has
proven insurmountable. This week GDX’s $12.0b in net assets were a
colossal 36.4x larger than its next-biggest 1x-long
major-gold-miners-ETF competitor! GDX is the most-popular metric to
track sector performance.
The
past 5 months’ gold-stock action is a case study in the value of
contrarian trading. Back in early May, GDX slumped to $20.17. That
was down 4.4% year-to-date, and you couldn’t even give away gold
stocks. I was pretty lonely beating the contrarian drum on them,
arguing about their
major upside
potential when their temporarily-stalled young upleg resumed.
But the vast majority of traders couldn’t care less.
That’s the time to buy low, when sectors are out of favor and apathy
reigns. Multiplying your fortune in high-potential gold stocks
requires deploying capital when it feels bad, and nearly everyone
else is bearish. If the gold miners have already rallied far enough
with strong inertia to stoke excitement, it’s too late to buy low.
Buying high to chase momentum sometimes works, but it is much
riskier with smaller gains.
Gold-stock prices are totally dependent on gold’s fortunes, with
miners’ profits amplifying underlying gold moves by at least 2x to
3x. As usual it was a series of gold surges starting in late
May that catapulted gold stocks much higher. At the end of May gold
surged after Trump threatened Mexico with tariffs to pressure it to
greatly slow illegal immigration across the US southern border.
That woke the miners’ stocks.
Their initial strong upside momentum was fading a couple weeks
later, until the mid-June meeting of the Fed’s Federal Open Market
Committee. There top Fed officials’ collective outlook for the
future interest-rate trajectory reversed from hiking to cutting,
a sea-change shift. That dovishness unleashed huge gold-futures
buying, propelling gold to its first
decisive breakout
to new bull-market highs in several years!
Gold
stocks exploded higher on all that newfound excitement and interest
in gold, with GDX rocketing to $28.25 by mid-July. That made for
huge 40.1% gains in just 2.5 months! This first chart showing GDX’s
technicals highlights how violent that mid-summer gold-stock surge
was. GDX had been trapped under vexing $25 upper resistance for
almost several years, but that was shattered with gold finally
breaking out.
Such
a big-and-fast move left the gold miners’ stocks very overbought.
GDX had stretched way up to 1.313x its 200dma. When prices run too
far too fast, the excitement they generate sucks in all available
near-term buying power. When those pulled-forward capital inflows
are exhausted, the sector rolls over into a pullback or correction.
So gold stocks weakened, leading into an ugly 4.8% GDX plunge on
July 31st.
That
was the next FOMC decision following that hiking-to-cutting-shift
one that lit a fire under gold and its miners’ stocks. Though the
Fed cut rates for the first time in 10.6 years, the Fed chairman
disappointed by reining in traders’ hyper-dovish expectations. In
his post-decision press conference, he declared that cut was not
“the beginning of a lengthy cutting cycle”, but a “midcycle
adjustment”. Gold fell 1.2% on that.
Gold
stocks are essentially leveraged plays on gold, so you have
to follow the metal if you are interested in the miners. And
unfortunately FOMC decisions and Fed officials’ collective outlooks
on the future rate trajectory can really bully gold around. They
also really affect the US dollar, which gold-futures speculators
look to for trading cues. I analyzed the
Fed’s big impact
on this gold bull in depth in last week’s essay.
Gold
and gold stocks were rolling over hard as August dawned, until they
were savagely whipsawed back up on another Trump tariff surprise.
He more than doubled the amount of annual Chinese imports
subject to US taxes. GDX soared a neck-snapping 7.4% from intraday
lows before Trump’s tariff tweet, and closed 5.1% higher! This
gold-stock upleg was back to the races again, flagging momentum
reversed.
About a week later GDX crested at $29.77, up a massive 47.6% in just
3.2 months. But the serious overboughtness in this sector worsened,
with GDX hitting a lofty 1.343x multiple of its 200dma. These
200-day moving averages offer a slow-moving baseline from which to
gauge technical overboughtness and oversoldness. The higher gold
stocks stretch above their 200dmas, the more near-term downside risk
exists.
GDX
started rolling over again as gold’s latest tariff-hike-sparked
surge stalled out. By mid-August GDX had slumped 6.2%, but much
residual excitement remained after such a powerful upleg. Gold was
still mostly holding the psychologically-heavy $1500 level after
finally regaining it in early August for the first time since April
2013. Gold-stock traders were rightfully anticipating far-higher
profits going forward.
With
interest and excitement high, gold-stock buying ignited again on a
minor gold up day. That built into another 10.8% GDX rally over the
next couple weeks or so into early September. The resulting upleg
high of $30.95 was this ETF’s best level in 3.1 years. But as you
can see above, gold stocks were still really stretched
relative to GDX’s 200dma. GDX was way up at 1.338x its own, showing
a very-far very-fast run.
That
proved this gold-stock upleg’s high-water mark, extending GDX’s
total gains to 76.2% in 11.8 months! The smaller mid-tier and
junior gold miners’ stocks with
superior
fundamentals to the majors did much better, with plenty enjoying
huge gains way over 100%! That is where we focus our gold-stock
trading to ride these major uplegs. But gold stocks can’t and won’t
rally forever, eventually major corrections follow.
The
writing has been on the wall on this for some time. Despite GDX’s
surges to higher highs in both early August and early September, it
has generally been grinding sideways on balance. This
Wednesday GDX was trading at $28.43, not much over mid-July’s
$28.25. GDX’s average price since then has only been $28.57. This
sector’s strong upside momentum in June and July largely stalled in
August and September.
GDX’s 76.2% upleg gain was right in line with historical precedent.
The last secular gold-stock bull ran from November 2000 to September
2011. GDX wasn’t around for the first half of that bull, so we have
to revert to an older metric to study it. Before GDX, the HUI NYSE
Arca Gold BUGS Index was the leading sector benchmark for decades.
It closely
mirrors GDX now, as they hold most of the same major miners.
The
HUI skyrocketed a stupendous 1664.4% higher over those 10.8 years,
the best-performing sector in all the stock markets that decade!
The wealth generated riding that bull was epic, showing why
contrarian traders put up with gold stocks’ outsized volatility.
During that bull the gold stocks saw
11 major uplegs
excluding the anomalous post-2008-stock-panic rebound one. They
averaged 80.7% gains over 7.9 months.
So
by early September, GDX’s 76.2% upleg was right back up in that past
range. Major gold-stock uplegs are always followed by major
corrections, which are necessary to rebalance sentiment. During
that last secular gold-stock bull, these averaged 26.1% losses over
2.8 months. That’s the magnitude of downside the major gold stocks
are facing. The fact red October is nearly upon us really ramps
selloff risks.
The
primary short-term drivers of gold and its miners’ stocks are
technicals and sentiment. They are both stretched, surging to
really-overbought levels by historical standards spawning serious
exuberance and greed. So a rebalancing selloff is highly likely
soon regardless of seasonality. Seasonals add additional
pressure on top of technicals and sentiment, acting like
retarding headwinds or spurring tailwinds for prices.
So
an inevitable and essential gold-stock selloff after a major upleg
is likely to be bigger and sharper when it lines up with weak
seasonals. Enter October, the weakest month of the year for
gold stocks! This next chart distills out gold-stock bull seasonals
in all modern gold-bull-market years. Those ran from 2001 to 2012
before a subsequent bear, then resumed in 2016 to 2018. 2019 is
excluded, as it’s still a work in progress.
Again the HUI has to be used for this long-term data-crunching, as
GDX is way too young. Each calendar year’s gold-stock price action
is individually indexed to its final close of the preceding
year, which is set at 100. Then all gold-stock price action that
following year is recalculated off that common baseline. This is
necessary to normalize all years in percentage terms regardless of
prevailing price levels, which vary widely.
Then
all years’ individual indexes are averaged together into the blue
line. If you want more background on gold-stock seasonals which are
driven by gold’s
own, I wrote my latest essay on that thread in early August.
For our purposes today, note the sharp seasonal plunge gold
stocks have tended to suffer in red October. This is the only time
when prices fall from above seasonal resistance to below seasonal
support!
Gold
stocks’ sharpest seasonal plunge of the year technically isn’t
October proper, but runs from late September to late October.
On average in these modern bull-market years, the major gold stocks
peak on September’s 14th trading day. That happened to be last
Friday the 20th this year, when GDX was rebounding out of a sharp
13.9% September correction. This seasonal plunge divides autumn and
winter rallies.
On
average it has lasted until October’s 19th trading day, which is
Friday the 25th this year. During that span, the HUI has averaged
6.9% seasonal pullbacks in these modern gold-bull-market years.
That may not sound bad, but remember it smoothes out 15 years of
data. Of those 15 years, gold stocks bucked this seasonal plunge to
rally in 5. Those averaged modest 5.1% gains, usually related to
their October lead-ins.
Going forward here, I’m going to use “October” to reference that
late-September to late-October gold-stock swoon. The gold miners
tended to buck this seasonal selloff a minority of the times when
they were flattish or weaker heading into it. When gold
stocks are down leading into October, some of their selling momentum
has been expended. That leaves technicals and sentiment less
supportive of more weakness.
In
the other 10 years or 2/3rds of the time, gold stocks plunged
12.5% on average in Octobers which is serious. This seasonal
selloff killing the gold stocks’ autumn rally before paving the way
for the winter one is only 5 weeks long. So average corrections of
that magnitude compressed into such a short span of time hammer
sentiment. They eradicate preceding greed much more effectively
than slow selloffs.
The
biggest seasonal drops tend to come after gold stocks have powered
higher leading into Octobers, when technicals grew overbought
and sentiment exuberant with relatively-high gold-stock prices.
2016 was a recent case in point. Somewhat like this year, the gold
stocks had soared heading into the market summer. Though peaking
earlier, after an initial selloff they generally consolidated fairly
high into October.
Yet
through that whole seasonal-plunge span, GDX fell 14.9%. At worst
in mid-October, GDX was down 19.1% in just a few weeks from late
September’s seasonal peak! It wouldn’t surprise me at all to again
see the major gold stocks drop 20%ish sometime in the next month
here. Based on gold stocks’ latest upleg peak in early September,
that translates into $24.76 in GDX terms. The rationale behind this
is simple.
Remember gold almost exclusively drives gold-stock fortunes. A
couple weeks ago I wrote about its ominous massive
gold-futures-selling overhang. The extreme-leveraged
gold-futures speculators utterly dominate gold’s short-term price
action. But their capital is finite, as that is a crazy-risky game
to play. Their collective bets were and have stayed excessively
bullish, nearly all-in longs and all-out shorts.
That
leaves them little room to buy more gold futures, but vast room to
sell big on the right catalyst. And because the leverage in
gold-futures trading is so extreme, selloffs soon cascade and take
on lives of their own. Thus a 6%-to-12% selloff in gold is highly
likely. Based off its latest upleg high of $1554 back in early
September, that implies a bottoming level of $1367 to $1460 also
likely in this red-October timeframe.
Normally gold slumps around October because there’s a gap between
outsized seasonal drivers. That’s when Asian buying including for
Indian wedding season winds down, but before Western holiday buying
spins up. This year gold has been heavily influenced by trade-war
and Fed-rate-cut news. On the former front, high-level US-China
trade talks are coming in mid-October. Like usual those will spawn
happy talk.
Even
though little or no progress has been made on the tough issues
between the US and China for a year-and-a-half, after all high-level
meetings officials wax optimistic. That breeds bullish
headlines for stocks, which are bearish for gold. And on the
Fed-rate-cut front, top Fed officials need to rein in traders’ crazy
expectations for more cutting before the FOMC’s next meeting in late
October. They must talk hawkish.
So
the coming few weeks are likely to see major catalytic news
motivating gold-futures speculators to unwind their
excessively-bullish bets. If that selling snowballs as usual, it
will slam gold. The major gold stocks tend to leverage gold’s moves
by 2x to 3x. So GDX is looking at 12%-to-36% downside on a
6%-to-12% gold selloff. The middle of that range is 24%, in line
with the last secular gold-stock bull’s 26.1% mean.
While the actual gold and gold-stock selloffs could prove smaller or
larger based on other developments in the markets, like how the S&P
500 fares, the odds definitely favor imminent selloffs. That
coupled with still-overbought gold stocks and general enthusiasm for
this sector is a big warning sign. It isn’t prudent to add material
gold-stock positions heading into red October’s sharp seasonal
plunge. Why risk tempting fate?
Gold-stock traders need to stay wary. Any current positions should
be protected with relatively-tight stop losses to maximize gains in
the event of a major selloff. And cash from trades already stopped
out or sold should be held, not plowed right back in. Buying high
with stretched technicals and popular excitement is risky any time,
but even more so when stiff seasonal headwinds can hasten and
intensify any selling.
If
this seasonal selloff comes to pass, late October should prove an
excellent time to redeploy at much-lower gold-stock price levels.
GDX should be much closer to its 200dma, and that is just before the
bulk of gold miners’ Q3’19 results are released. Gold-stock
earnings should rocket higher, with gold averaging $1473 so
far in Q3 which is up an amazing 12.5% quarter-on-quarter! We just
have to weather a selloff first.
To
multiply your capital in the markets, you have to trade like a
contrarian. That means buying low when few others are willing, so
you can later sell high when few others can. In the first half of
2019 well before gold stocks soared higher, we recommended buying
many fundamentally-superior gold and silver miners in our popular
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newsletters. We later realized big gains including
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upleg after red October’s seasonal selloff.
The
bottom line is gold stocks’ setup leading into their October
seasonal plunge is quite bearish this year. They recently enjoyed a
major upleg, which left this sector very overbought technically and
laden with greedy enthusiasm. That makes a healthy rebalancing
correction necessary. Gold stocks have avoided that so far,
generally consolidating high. But very-weak seasonals will add to
mounting downside pressure.
When
gold itself rolls over, it will drag the gold stocks with it. It
has been very overbought heading into its own seasonal drop between
its autumn and winter rallies. And with gold-futures speculators’
bets remaining excessively bullish, they have little capital
firepower left to buy more but vast room to sell. That selling will
ignite and likely snowball on the right catalyst, like positive
US-China trade-war talk or Fed hawkishness. |