The
gold miners’ stocks have been drifting sideways to lower in recent
weeks, fueling bearish sentiment. With their short-term upside
momentum stalled, the great majority of analysts and traders seem
worried about a deepening selloff. But this young gold-stock upleg
is very much alive and well, with lots of room to run yet.
Bull-market uplegs naturally flow and ebb, and today’s has been
nowhere close to overbought yet.
Bull
uplegs have a normal life cycle, which can be tracked with sentiment
and technicals. They are born in deep despair, after major
corrections bottom in deeply-oversold conditions. Those reveal
likely selling exhaustion, paving the way for new buying. That
pushes gold stocks higher, gradually shifting sentiment back towards
bullish. The longer and higher an upleg rallies, the more it
attracts mounting capital inflows.
The
resulting bigger gains accelerate the buying, ultimately driving
sentiment through greed into euphoria. But that frenzied gain
chasing soon burns itself out, enticing in too much near-future
buying too soon. In the process it forces gold stocks nearly
vertical, leaving them extremely overbought. Then mature uplegs
top, as traders interested in participating are effectively all-in.
Corrections ensue, resetting this key cycle.
These bull-market waves of uplegs and corrections are very lucrative
to trade, giving speculators and investors multiple relatively-low
entry points and relatively-high exit points. Actively buying low
then later selling high through a secular bull greatly increases
potential gains. That’s certainly evident in our current
gold-stock bull, as seen through the lens of the leading GDX VanEck
Vectors Gold Miners ETF benchmark.
Born
back in mid-January 2016, this bull has seen four complete
upleg-correction cycles so far. This current young upleg today is
this bull’s fifth. At best as of its peak-to-date in early August
2020, GDX had powered 256.7% higher over 4.5 years. While those are
great bull gains, they were handily bested by this bull’s total
individual uplegs. In GDX terms they weighed in at +151.2%, +34.6%,
+76.7%, and +134.1%.
That
adds up to 396.6% potential gains from trading uplegs and
corrections, 1.54x better than buying and holding! And if this
in-progress young fifth upleg’s small gains so far are included,
those numbers grow to 425.0% and 1.66x. While these maximums are
theoretical since it is impossible to buy and sell exactly at
bottoms and tops, whatever percentage of entire uplegs actually
captured still trounces buying and holding.
The
hard work of buying low and selling high to ride bull-market
upleg-correction cycles comes in timing trades. That
requires lots of experience, expertise, and a resolute contrarian
bent. Gold stocks must be bought when the vast majority of traders
are scared because they just suffered major corrections. And they
have to be sold when most traders are euphoric since they recently
soared after powering higher for months.
Gold-stock sentiment today remains far from exuberance. Most
analysts and traders are apathetic at best, with bearishness
creeping back in the longer this sector consolidates sideways. This
lack of widespread greed is a bullish sign, indicating this upleg
still has a long ways to run before it matures. If you want to
remember what herd euphoria looks like, read commentary published in
early August as GDX peaked.
Back
then it was a frenzied gold-stocks-to-the-moon mentality, which is
typical when uplegs go terminal. Today this small contrarian sector
is off the radars of most traders, they simply don’t care. They
won’t until this young gold-stock upleg rallies long enough and high
enough to command more attention. GDX has only climbed 28.4% at
best so far over 2.5 months, which is still small compared to
bull-market precedent.
Those previous four uplegs of this bull averaged stunning 99.2% GDX
gains over 7.6 months! This big-and-fast upside is why traders put
up with this volatile sector. And in the secular gold-stock bull
before that, the old HUI gold-stock index predating GDX enjoyed
literally a dozen uplegs averaging 87.5% gains each over 7.8
months! The gold-stocks have a multi-decade history of quick
near-doublings multiplying wealth.
Circling back to our current fledgling upleg still mired in
indifference, it looks as young technically as it does
sentimentally. In order to actively trade upleg-correction cycles
by buying low then selling high, “low” and “high” have to be defined
in real-time. That’s no mean feat, as it requires fighting the herd
to do the opposite of popular consensus. Almost two decades
ago I developed a trading tool to aid this battle.
It
is called
Relatively Trading, empirically defining when prices are
relatively low or relatively high within longer-term secular
trends. That “relative” qualifier is essential, as prices gradually
climb on balance in ongoing bull markets. So what is low or high
for GDX today is very different from those levels a couple years
ago. Some baseline is needed to measure from, but it can’t be
static since price levels slowly rise.
After years of testing various measurement baselines followed by
more years of actually trading on them, the 200-day moving
average won out as an ideal one. The average closing price of
the last 200 trading days moves at a tortoise-like pace, it is
immune from the often-large day-to-day volatility common in gold
stocks. Yet 200dmas still gradually climb to reflect higher
prevailing price levels through ongoing bulls.
All
relativity trading does is recast GDX closing prices as multiples
of their 200dma, so the math is very simple. The Relative GDX
or rGDX indicator is just GDX’s daily close divided by its 200dma.
In the middle of this week, those ran $38.00 and $36.70
respectively. That yields a relative multiple of 1.035x, GDX is
trading 3.5% above its 200-day moving average. The magic comes in
charting these over time.
A
Relativity chart effectively flattens 200dmas to horizontal at
1.00x, and prices meander around that key baseline in
perfectly-comparable percentage terms regardless of prevailing price
levels. rGDX multiples tend to form horizontal trading ranges
through secular bulls. Corrections bottom when GDX sinks low
relative to its 200dma, and uplegs top when it soars comparatively
high. The latter isn’t happening yet.
This
Relative GDX chart superimposes the actual ETF along with its 50dma
and 200dma over that rGDX multiple. I define Relativity trading
ranges over the last five calendar years, during which the rGDX’s
ran between 0.80x and 1.50x. Corrections bottom at
extremely-oversold conditions near the former, while uplegs top at
extremely-overbought levels around the latter. Today’s upleg is
nowhere near overbought yet!
At
this young upleg’s last interim gold-stock high in mid-May, GDX had
only climbed to 1.074x its 200dma despite a sharp surge breaking out
above it. Those rGDX levels have largely held since, with this
gold-stock ETF grinding sideways to lower. The rGDX edged up to
1.075x in early June, but hasn’t made any meaningful progress for
several weeks now. Overboughtness has yet to flare in this entire
gold-stock upleg!
That
means it isn’t mature yet, having lots of room to run much
higher before giving up its ghost. When today’s upleg was born in
early March, fear and despair were rampant as GDX was hammered down
to just 0.825x its 200dma. That was an extremely-oversold rGDX
read, perfect conditions to birth a new bull upleg. Such super-low
gold-stock prices relative to their benchmark’s 200dma heralded a
major bottom.
While the exact timing and level is never knowable in real-time, we
attempted to straddle that bottoming by aggressively adding great
fundamentally-superior gold-stock trades in our newsletters. I
wrote an essay in mid-February explaining why
gold stocks
retesting lows was a great time to buy in low. Then in early
April after earnings season, another essay showed that bottoming had
happened so a new
upleg was underway.
We’ve kept full trading books in our monthly and weekly since, which
had stock unrealized gains running as high as +78.0% this week!
This Relativity Trading system absolutely works, flagging when bull
uplegs are topping and subsequent corrections are bottoming. The
rGDX reveals when sector overboughtness or oversoldness stretches to
such extremes that a major imminent short-term trend reversal is
highly likely.
Most
of this baby gold-stock upleg’s gains so far are just a
mean-reversion bounce out of early March’s extremely-oversold
lows. While GDX did surge to break out above its 200dma into
mid-May, it never got anywhere near upleg-slaying levels of
overboughtness. That 1.074x rGDX read was really low compared to
bull precedent. GDX’s previous upleg crested way up at 1.448x its
200dma, far higher than recent levels.
That
was a monster mean-reversion one exploding higher out of March
2020’s stock panic spawned by governments’ COVID-19 lockdowns. That
wildly-unprecedented anomaly truncated the upleg before that
prematurely, but it still peaked at a 1.153x rGDX. Those sector
uplegs clocked in at massive +134.1% and +76.7% GDX gains
respectively, which again highlight how small our current upleg is
at just +28.4% at best.
And
this bull’s maiden upleg in the first half of 2016 was even bigger,
ballooning to an enormous +151.2% over 6.4 months! That was another
mean-reversion one out of extremely-oversold conditions, born at an
rGDX of just 0.781x. That wasn’t much lower than early March 2021’s
0.825x. That initial upleg of this bull topped at an extreme 1.567x
rGDX, after soaring to a radically-overbought 1.646x leading into
that crest.
Gold-stock uplegs need to mature before they roll over into
corrections, and that is evident through both excessive popular
greed and GDX soaring nearly vertically to extremely-overbought
levels. Neither has been seen yet in this current young upleg.
Thus it likely still has a long ways to run higher yet. And if it
gets anywhere near this GDX-bull-market average of 99.2% gains, the
lion’s share of the upside lies ahead.
That
doesn’t necessarily mean recent weeks’ high consolidation
deteriorating into a pullback is over. We are in the summer
doldrums in early June, the weakest time of the year seasonally
for precious metals. GDX could easily retreat back to its 200dma,
which was running at $36.70 mid-week. Individual bull uplegs flow
and ebb, taking two steps forward before sliding one step back.
That helps keep sentiment balanced.
In
addition to this upleg not yet spawning significant greed and
remaining far from overbought, a major buy signal is just
triggering. I discussed it last week in an essay on the
mounting
gold-stock gains. It is called a golden cross, which
triggers when GDX’s 50dma climbs back above its 200dma after a major
correction. The last time this powerful technical buy signal
triggered was earlier in GDX’s last upleg.
That
was again that +134.1%-over-4.8-months post-panic monster, which ran
until euphoria waxed extreme catapulting this dominant gold-stock
ETF way up to 1.448x its 200dma. Nothing remotely close has yet
happened during this current upleg, buttressing the case it still
has much room to run. Not even these
summer doldrums
are likely to hold back gold and gold stocks for long, as evident in
recent summers’ action.
Last
summer between the end of May to early August, GDX soared 28.9%.
And a year earlier between the end of May to early September 2019,
GDX rocketed up 43.4%! So gold stocks have attracted much capital
in recent summers on gold powering higher, contrary to normal weak
seasonals. Gold’s fortunes are always the dominant driver of gold
stocks’ near-term price action, and gold’s setup today is very
bullish.
Speculators still have lots of room to buy gold futures before they
exhaust their capital firepower. And investors are increasingly
returning to gold
after fleeing during and after its recent extended correction.
I analyze the latest data on both these critical gold-driving fronts
in all our newsletters, and digging in here is beyond the scope of
this essay. But gold’s young upleg remains highly likely to keep
rallying on balance.
Gold
demand is naturally growing as inflation soars, fueled by the Fed’s
colossal money printing since March 2020’s stock panic. This
central bank has already nearly doubled its balance sheet in that
short span, nearly-doubling the US-dollar supply! Vastly
more dollars flooding the system are bidding up the prices on
everything, including gold. Its own supply only grows on the order
of 1% a year through mining.
As
gold’s own bull marches higher on strong fundamentals, the major
gold stocks of GDX will amplify its gains by 2x to 3x like usual.
They are already earning money hand over fist with these high
prevailing gold prices, as was evident in their
great Q1’21
results. So the gold miners’ fundamentals also support
much-higher stock prices. All the stars are aligned for this
young gold-stock upleg to grow much larger!
If
you aren’t fully deployed yet, that buy-relatively-low window hasn’t
yet closed. The gold stocks aren’t as cheap as they were straddling
early March’s correction bottoming, but their prices will soar much
higher as this upleg matures in coming months. Our newsletter
trading books are currently fully of excellent
fundamentally-superior gold stocks, which should see ultimate upleg
gains well outpacing GDX’s upside.
At
Zeal we walk the contrarian walk, buying low when few others are
willing before later selling high when few others can. We overcome
popular greed and fear by diligently studying market cycles. We
trade on time-tested indicators derived from technical, sentimental,
and fundamental research. That has already led to unrealized gains
in this current young upleg as high as +78.0% on our recent
newsletter stock trades!
To
multiply your wealth trading high-potential gold stocks, you need to
stay informed about what’s going on in this sector. Staying
subscribed to our popular and affordable
weekly and
monthly
newsletters is a great way. They draw on my vast experience,
knowledge, wisdom, and ongoing research to explain what’s going on
in the markets, why, and how to trade them with specific stocks. Subscribe
today while this gold-stock upleg remains young! Our
recently-reformatted newsletters have expanded individual-stock
analysis.
The
bottom line is this young gold-stock upleg still has much room to
run. At best so far it is still small by sector standards, at just
over a quarter of this bull’s near-doubling upleg average.
Sentiment remains apathetic if not bearish, as gold stocks haven’t
yet surged high enough to stoke significant bullishness. And GDX is
still far from overbought relative to its baseline 200-day moving
average compared to bull precedent.
Thus
this gold-stock upleg remains young, with the lion’s share of its
gains still yet to come. This sector will follow gold higher,
amplifying its gains because of the miners’ inherent profits
leverage to gold. The yellow metal itself is also in a young upleg
powering higher on extreme monetary inflation. The more the
resulting surging price levels become apparent to traders, the more
they will pile into gold and its miners’ stocks. |