The
gold miners’ stocks are still correcting, continuing to rebalance
both technicals and sentiment. This sector’s huge surge into early
August spawned extreme overboughtness and universal euphoria, which
are gradually being bled away. This same necessary and healthy
corrective process is underway in gold itself, which overwhelmingly
drives gold-stock price levels. This is leading to great buying
opportunities.
Gold-stock speculators and investors are growing weary, wondering
when miners’ next upleg will finally get running. Fully 2.5
months have passed since the gold stocks were rocketing higher
with gold last summer, generating great excitement. Since then this
sector has gradually ground sideways to lower, leaving traders
increasingly discouraged. More are abandoning gold stocks as weeks
drag on into months.
Corrections certainly aren’t easy to weather psychologically. Their
mission is to eradicate the universal greed at preceding upleg
toppings. That means gutting traders’ enthusiasm for a hot sector
that has just soared. Losses unfolding and deepening over time are
the only way to swing the sentiment pendulum back from euphoria to
apathy to despair. That requires the great majority of traders to
be forced to capitulate.
While much progress has been made in this hard process, it doesn’t
look over yet. Corrections generally don’t end until the opposite
extremes that spawned them are seen. Upleg toppings’ overboughtness
must yield to proportional oversoldness, and popular greed
must be displaced by fear. Only then is this sector reset and ready
to start marching higher in its next major bull-market upleg. That
opportune time is nearing.
Gold
stocks’ correction progress can be evaluated in this sector’s
leading benchmark and trading vehicle, the GDX VanEck Vectors Gold
Miners ETF. GDX’s recent technical action considered in the
essential context of its bull-market precedent offers lots of clues
about how close this correction likely is to giving up its ghost.
This first chart looks at this secular gold-stock bull through this
GDX lens, offering crucial perspective.
It
includes a construct called the Relative GDX, or rGDX. That simply
divides this gold-stock ETF’s daily closes by their 200-day moving
average, and charts the resulting multiples over time. These tend
to form horizontal trading ranges that flag when this sector
is really overbought or oversold, the times to sell and buy. This
is based on my effective and very-profitable
Relativity
Trading system if you want more background.
Gold
stocks’ last upleg was massive, rocketing 134.1% higher in just 4.8
months per GDX! Those huge gains erupted from gold stocks being
battered to
fundamentally-absurd lows during March 2020’s
pandemic-lockdown-spawned stock panic. Such a big-and-fast jump
left this sector extremely overbought and generated universal
euphoria. By early August nearly everyone expected that surge to
persist indefinitely.
But
big-and-fast gains leading to major highs are never sustainable for
long. They fuel great excitement for the rallying sector,
attracting in lots of new capital from speculators and investors
chasing that upside momentum. But since traders’ capital is finite,
soon their aggressive buying exhausts itself. As everyone
interested in buying in to gold stocks anytime in the near future
gets fully deployed, capital inflows peter out.
GDX
hit that terminal upleg-slaying phase over several weeks leading
into early August, where this ETF blasted 19.8% higher. That didn’t
feel excessive to many, but annualized to a nearly-300% pace of
gains that is wildly unsustainable! That Relative GDX multiple
traded at 1.448x the day this ETF peaked, or in other words GDX was
stretched nearly 45% above its 200dma. Mighty past uplegs
failed near those levels.
While this year’s blistering post-panic gold-stock upleg was this
secular bull’s fourth, the only other big-and-fast comparable one
was its maiden upleg. In largely the first half of 2016, GDX
rocketed 151.2% higher in 6.4 months! The rGDX was trading way up
at 1.567x when that peaked, well into the historical
extreme-overboughtness levels exceeding 1.50x. Anything around
there is the danger zone for major toppings.
I
warned about gold, silver, and their miners’ stocks
getting very
overbought in late July. When that starts to happen after
uplegs see big-and-fast gains to major new highs, the prudent
strategy is to ratchet up the trailing-stop-loss percentages on open
gold-stock trades. That helps traders ride uplegs’ gains for as
long as possible, while also locking in more of their profits when
those uplegs inevitably roll over into corrections.
Indeed the red-hot gold stocks soon started correcting, and those
tighter trailing stops realized big gains for those who
wisely ran them. GDX’s initial selloff out of its lofty
early-August peak was fast, as this key ETF plummeted 12.2% in just
four trading days! That sharp plunge exceeding the 10% correction
threshold confirmed one of those major selloffs was underway, a big
warning to traders still bullish on gold stocks.
But
GDX bounced sharply out of those initial lows, and spent the next 5
weeks or so consolidating high. As usual the gold stocks were just
mirroring and amplifying what was happening in gold. The major gold
stocks of GDX tend to leverage material gold moves by 2x to 3x.
Gold-stock prices amplify gold’s price action because that metal’s
fortunes overwhelmingly drive their profits. So as goes gold, so go
the miners.
This
sector’s high consolidation from mid-August to mid-September really
retarded this correction’s critical rebalancing work. Over 5 weeks
or so GDX rebounded 9.7% to claw back up to just 3.7% under early
August’s peak levels. I tried to warn traders not to be lulled into
complacency, writing an essay in early September arguing gold stocks
were still in
correction mode. I got a lot of flak for that contrarian
stance.
But
sure enough since overboughtness hadn’t been worked off and greed
remained high, that corrective selloff soon reasserted itself in
late September. GDX plunged another 12.2% in a week, extending its
total selloff since early August’s peak to 15.4% in 1.6 months.
The rGDX hit a new correction low of 1.135x that day. While that
was no longer extremely overbought, it still remained far above
oversold levels.
And
that mounting gold-stock correction still looked really anemic based
on bull-to-date precedent. It is always important to compare recent
gold-stock price action with what has come before it. That context
offers a hard empirical framework from which to game this sector’s
near-term outlook. While uplegs and corrections never repeat
exactly throughout bulls, they often rhyme clocking in at similar
sizes and durations.
During this gold-stock bull’s first three corrections, GDX plunged
39.4% over 4.4 months, 31.3% over 19.1 months, and 38.8% over 0.6
months. That averages out to 36.5% over 8.0 months! Gold
stocks’ volatile reputation is well-deserved, and a big reason this
sector is so appealing to trade. This fourth correction’s 15.4%
over 1.6 months at worst is still way short of bull precedent, even
after this bull’s second-biggest upleg.
And
the rGDX reads at earlier correction bottoms show how far gold
stocks would still need to fall to hit similar deeply-oversold
levels. The major gold stocks were blasted to an average of only
0.754x their 200dma in GDX terms before new uplegs were born!
That’s a long way down from both that 1.135x seen in late September
and this correction-to-date’s nadir of 1.132x in early October.
This selloff isn’t over!
That
doesn’t mean GDX has to collapse 35%+ again before gold stocks’ next
major upleg can get underway. Each of those three prior corrections
had extenuating circumstances deepening them beyond normal levels.
They were exacerbated by gold getting crushed after Trump’s surprise
victory in 2016, cascading gold-futures selling in mid-2018, and
this year’s rare stock panic in March. Those were all exceptional
events.
But
it’s hard to imagine GDX not at least correcting 20% to 25%
to rebalance sentiment after such great euphoria in early August.
GDX peaked at $44.48 on August 5th, a 7.5-year secular high. At
worst on September 23rd, it closed at $37.63 which was down that
mild 15.4% in just 1.6 months. And this week GDX is back up to
$39.90. Gold stocks would have to fall much farther to extend this
correction to 20% to 25%.
That’s still another 10.8% to 16.4% lower from here! And
that’s just in the major gold stocks dominating GDX. The smaller
mid-tier
producers with superior fundamentals and better upside potential
during gold uplegs see gains and losses exceeding GDX’s. So for
speculators and investors looking to buy back in to gold stocks to
ride their next upleg, much-better entry opportunities are likely
still coming in the near future.
The
ultimate depth and length of this necessary and healthy gold-stock
correction is totally dependent on gold’s own. Given the
major gold stocks’ strong 2x-to-3x leverage to gold, its fortunes
offer better angles on gaming GDX correction bottomings. This next
chart applies this same Relativity analysis to gold itself, looking
at it as a multiple of its 200dma technical baseline. Gold hasn’t
revisited that key support yet either.
The
parallel gold correction forcing this gold-stock one has only
extended to 9.8% over 1.6 months at worst so far, hitting an rGold
level of 1.085x. Like gold stocks, that’s all on the light side
compared to this bull’s prior corrections. They averaged 14.3% gold
losses over 4.1 months, bottoming at 0.926x gold’s 200-day moving
average. Gold too needs to correct more before getting
oversold and eradicating greed.
The
strongest support zones for major corrections are these 200dmas.
This week gold’s is way down near $1754, another 8.8% lower from
current levels! And GDX’s is down at $34.27, another 14.1% lower
from here. That makes for considerable downside risks for
both this metal and the stocks of its miners. 200dma approaches are
almost always seen before bull-market corrections finally give up
their ghosts.
Because gold and GDX soared so fast in such massive uplegs into
early August, their 200dmas are still rapidly climbing as well.
Corrections work through both the size of their losses and the time
they take to unfold. Deeper faster corrections return prices to
their 200dmas more rapidly, compressing the pain into a shorter
timeframe finishing the necessary rebalancing work sooner. These
are more beneficial to traders.
Corrections can also stretch out into shallower high
consolidations, giving rising 200dmas more time to catch up with
relatively-high prices. These are slower to unfold, as the
rebalancing of technicals and sentiment take considerably longer to
accomplish in a grinding-sideways environment. The possibility
remains that gold and thus gold stocks simply drift horizontal long
enough to evade rolling over into deeper selloffs.
This
is the preferred outcome for longer-term investors, who don’t cash
out before corrections and don’t want the psychological angst of
watching them unfold. But one key factor is really ramping the odds
for a more-serious gold correction rather than the milder drift.
That is the fortunes of the US dollar, which gold-futures
speculators look to for trading cues. Their super-leveraged bets
wield outsized gold-price influence.
I
wrote an entire essay last week analyzing why today’s
low dollar is
risky for gold. The US dollar remains really oversold
after being heavily shorted this past summer, which was a big reason
why gold and miners’ stocks shot parabolic into early August. Thus
this world reserve currency is overdue for a mean-reversion rebound
rally to rebalance its own technicals and sentiment. That implies
considerable dollar upside from here.
As
of the middle of this week, the leading US Dollar Index benchmark
remained 4.3% under its 200dma. As major currencies usually move
with glacial slowness, a 4%ish dollar rally would wreak havoc on
gold prices that haven’t fully corrected yet. And a US-dollar
rally is increasingly likely with the improving US economic outlook
reducing Congress’s motivation to pass another massive
pandemic-stimulus-spending bill.
This
gold correction so far since early August has seen eight major down
days exceeding 1% losses. Every single one of them happened on a
USDX up day. During those gold averaged ugly 2.4% daily plunges on
mere 0.5% average USDX rallies! That’s because a stronger dollar
unleashes leveraged gold-futures selling which quickly
hammers gold lower. If 0.5% does that kind of damage, imagine what
4%+ would do!
And
if the overdue US-dollar rebound forces gold lower, rest assured the
major gold stocks of GDX will follow it down amplifying its losses
by 2x to 3x. Since neither gold nor gold stocks have come anywhere
close to revisiting their 200dmas yet which are major correction
support, odds are these selloffs haven’t run their courses. So it
remains prudent to expect more selling before these bulls’
next major uplegs start marching.
There’s another way to gauge gold stocks’ correction progress. At
worst so far gold is down about 10% compared to about 15% for GDX.
That is just 1.5x downside leverage for the major gold stocks,
really lagging their 2x to 3x precedent. These bulls’
prior-correction averages of 14.3% for gold and 36.5% for GDX work
out to 2.5x leverage right in the middle of that historic range.
That’s likely again in today’s selloff.
That
implies a 25% GDX correction even if gold doesn’t fall much farther
than 10%. And if gold retreats all the way back to its 200dma today
which would make for 15% total, that major-gold-stock correction
would exceed 37% at 2.5x! I don’t expect it to go that deep, as
gold stocks didn’t hit the extraordinarily-overbought levels
gold did in early August. But GDX falling another 10% to 15% from
here wouldn’t surprise.
Successful speculation and investment demand buying relatively low
before later selling relatively high. Waiting for those optimal buy
and sell points defined by correction bottomings and upleg toppings
sure requires lots of patience. But that’s the surest way to
multiply your wealth in the stock markets, only trading when
probabilities for success are wildly in your favor. Those
are the best times to bet big to win big!
And
right now is not one of them. Both gold stocks and gold are in
confirmed corrections after soaring in enormous uplegs. And neither
the miners nor their driving metal have yet given the important
technical green lights to confirm likely correction bottomings. So
we have to assume these corrections are ongoing until evidence to
the contrary. Thus weathering these necessary selloffs in cash
remains the best option for now.
Both
speculators and investors should embrace these inevitable
rebalancing corrections, as they yield the best mid-bull buying
opportunities within ongoing bull markets. That is when to
aggressively redeploy in gold, gold ETFs, gold-stock ETFs, and
individual gold stocks with superior fundamentals. Bulls’
inexorable upleg-correction cycles are great boons for traders,
greatly expanding their potential gains to be won!
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Corrections are the time to do your gold-stock homework, preparing
to redeploy as they pass.
The
bottom line is gold stocks are still correcting. Their necessary
selloff to work off overboughtness and rebalance sentiment after
their latest upleg peak hasn’t finished its mission. The major gold
stocks per GDX have yet to revisit oversold levels and eradicate
early August’s universal greed. And they haven’t yet fallen far
enough to leverage gold’s own correction by their normal 2x to 3x,
arguing more selling is coming.
Like
usual the depth and duration of this gold-stock correction is fully
dependent on gold’s own. And that doesn’t look over yet either
since gold remains so far above its key 200-day-moving-average
correction-bottoming support zone. Gold is at risk of serious
gold-futures selling as the oversold US dollar inevitably mean
reverts higher. That will likely really accelerate this gold-stock
correction, forcing it closer to climaxing. |