With
demand soaring for high-potential trades, newer speculators and
investors shouldn’t overlook the gold miners’ stocks. For decades
contrarians have used this volatile sector’s big swings to multiply
their capital. Gold-stock uplegs yield massive gains, which are
realized near toppings to weather subsequent corrections in cash.
Timing entries and exits to ride the lion’s share of these major
moves is fairly simple.
The
gold miners’ stocks are ultimately leveraged plays on gold.
Their earnings
really amplify changing prevailing gold levels, so their stock
prices follow. And gold’s fortunes are also silver’s
dominant primary
driver, which in turn drives silver miners’ profits and stock
prices. So “gold stocks” is a generic term that really means
precious-metals-mining stocks. Gold, silver, and their miners’
stocks tend to move in lockstep.
Fueled by secular gold bulls, gold stocks enjoy long-and-strong bull
markets. Per the leading gold-stock benchmark which is the GDX
VanEck Vectors Gold Miners ETF, this current specimen has run 256.7%
higher at best over 4.5 years as of early August. That is still
tiny by this sector’s wild standards, with the previous gold-stock
bull soaring 1,664.4% higher over 10.8 years by September 2011 per
the older HUI index!
Born
in May 2006, GDX wasn’t around long enough to encompass that mighty
earlier bull. That epic run included a
dozen major uplegs
and corrections, with the former averaging huge 87.5%
absolute gains over 7.8 months! The latter rebalancing selloffs
averaged 30.0% losses over 3.1 months. Riding uplegs and sitting
out corrections generated enormous realized gains for contrarian
traders gaming these big swings.
This
young current gold-stock bull isn’t much different, seeing
four uplegs and
corrections so far. Through that GDX lens, they averaged huge
99.2% absolute gains over 7.6 months! The price of those were
subsequent corrections averaging 33.6% losses over 6.9 months.
Actively trading these big swings in this bull is far more
lucrative than buying and holding. Again at best today’s bull is up
256.7% in GDX terms.
Yet
its individual uplegs added up to much-larger 396.6% gains. There’s
far-greater wealth-multiplying potential in riding uplegs and
sitting out corrections than staying deployed. Since exact
bottomings and toppings are impossible to know in real-time, the
goal with timing gold-stock trades is to catch the middle 2/3rds
or so of those big swings. Do that successfully for a few bull
cycles, and your capital will just soar.
For
decades now I’ve published weekly and monthly newsletters striving
for this very goal. GDX’s last upleg was extreme, born out of March
2020’s COVID-19-lockdown-spawned stock panic. Over the next 4.8
months, GDX rocketed 134.1% higher. We realized 17 and 9 gold-stock
and silver-stock trades in our newsletters during that span,
averaging +81.3% and +83.6% absolute gains! This sector multiplies
wealth.
Over
the decades I’ve executed thousands of gold-stock trades, gradually
developing and honing a gold-stock trading system that has proven
very successful in real-time. And it is fairly simple, easy to
apply even for traders not deeply immersed in this high-potential
sector. To ride gold-stock uplegs and cash out before the
subsequent corrections, the mission is to buy in relatively-low
then later sell out relatively-high.
Defining “relatively-low” and “relatively-high” in real-time can be
done subjectively. Major gold-stock uplegs tend to run for around 8
months or so on average. So simply looking at a 6-month GDX
chart to see if that leading gold-stock benchmark is low or high
within that timeframe is a solid eyeballed estimate. If GDX is near
the bottom of its 6-month range, that is likely a good time to
deploy capital in gold stocks.
But
if GDX is near the top of that short-term chart, it is probably
prudent to abstain from adding more positions then. This contrarian
approach runs counter to traders’ natural instincts. We
humans love to pile on and chase momentum, which means buying high.
And we get scared when prices fall, leading to selling low. Buying
high when gold stocks are exciting then selling low after they’ve
fallen leads to big losses.
Buying in relatively-low can only happen following
correction-grade gold-stock selloffs leaving this sector deeply
out of favor and riddled with bearishness. If you are eagerly
anticipating buying gold stocks, you are probably doing it at the
wrong time! Buying in after major selloffs feels miserable, there’s
a pit in your stomach fighting the herd. General consensus after
corrections is gold stocks will keep spiraling even lower.
As a
long-time gold-stock speculator, I prefer hard empirical data
on whether this sector happens to be relatively-low or
relatively-high at any given time. So well over a decade ago, I
developed a system that I called
Relativity
Trading. It uses a simple construct to reveal not only when
prices are relatively-low or relatively-high, but the actual degree
of oversoldness or overboughtness to compare with sector precedent.
In
order to define relatively-low or relatively-high, some baseline
from which to measure is necessary. It can’t be static, as
prevailing price levels are changing all the time. In January 2016
when this gold-stock bull was born, GDX averaged $13.68. But last
month this dominant gold-stock ETF’s average was much higher at
$35.94. What is low and what is high gradually changes as
bull markets march higher and mature.
After making endless spreadsheets and back-testing data, the best
dynamic benchmark I found to gauge current price levels proved to be
their 200-day moving averages. Widely used by technical
traders, the 200dmas followed prices slowly enough to prove a great
baseline. Yet these 200dmas are still dynamic, gradually adjusting
to reflect new prevailing price levels. 200dmas have another
fantastic attribute as well.
During secular bull markets, prices’ 200dmas tend to closely
parallel their primary uptrend. So looking at GDX’s 200dma on a
6- or 12-month chart reveals where that bull is likely heading.
Technically-oriented traders closely watch prices relative to their
200dmas as well, making many trading decisions based on that
relationship. That further increases the utility of 200dmas as
baselines from which to measure prices.
While current GDX levels can be eyeballed relative to this ETF’s
200dma, that’s still subjective. And it can be visually-distorting
when comparing higher or lower prevailing price levels. So
Relativity Trading quantifies and renders that price-200dma
relationship in perfectly-comparable percentage terms.
Simply dividing a closing price by its 200dma shows its Relativity
multiple, the Relative GDX which I shorten to rGDX.
In
the middle of this week, GDX closed at $35.28 while its 200dma was
running $37.52. Divide these, and it yields an rGDX of 0.94x. In
other words, GDX was trading at 94% of its 200dma. When these
multiples are charted over time, they often reveal horizontal
trading ranges. These in turn show when gold stocks as a sector
have proven relatively-low and relatively-high in the past, greatly
aiding trade timing.
This
gold-stock Relativity chart renders GDX’s closes in blue, and their
trailing 200-day moving average in black. Dividing these yields the
rGDX multiple, which is shown in red. This effectively flattens
GDX’s 200dma to horizontal at 1.00x, then renders this ETF’s
distance from that baseline in percentage terms that are constant
and comparable regardless of prevailing gold-stock prices. This is
a powerful trading tool!
This
chart encompasses the past couple years or so, showing more detail
for gold stocks’ recent price action per GDX. But I use the past
five calendar years to define Relativity trading ranges. For the
rGDX, that is currently running between 0.80x on the low side to
1.50x on the high side. Gold-stock price levels generally oscillate
between 80% to 150% of GDX’s 200dma. This knowledge really
helps trade timing.
The
closer the rGDX is to 0.80x, the relatively-lower the gold-stock
prices and thus the better the buy-low opportunities. This week the
rGDX again was running 0.94x, after slumping as low as 0.903x back
in late January. That means now is a
high-probability-for-success time to deploy capital in the
out-of-favor gold stocks, buying in relatively-low! They recently
suffered a 24.9% correction per GDX, and are bottoming.
But
of course no one but hardened contrarians want to buy gold stocks
today, as they are limping along near lows and feel really
bearish. But weak technicals and damaged sentiment are
necessary to buy in relatively-low. Successfully multiplying your
capital demands buying low before later selling high, which in turn
requires fighting the herd. Buy when everyone else is selling, then
later sell when everyone else is buying!
Even
over the past couple years, the greatest gold-stock gains came after
GDX had fallen back under its 200dma. That includes during the
summer of 2019 and after March 2020’s extreme stock panic. The
general rule is the farther GDX is hammered under its 200dma, the
greater gold stocks’ potential gains in their next bull-market
upleg. The gold stocks are very oversold now, nearing
extremely oversold in rGDX terms.
Almost regardless of which gold stocks you trade, if you deploy
capital in them when the rGDX is low you will likely see big gains
during the next 6-to-12 months. This is easy for anyone to do
regardless of gold-stock-trading experience. Pull up a 6-month GDX
chart on StockCharts.com, see whether this leading sector benchmark
is relatively-low or -high, and use the numbers on that chart to
calculate the rGDX level.
All
our newsletters also include the latest rGDX read, as well as this
key indicator’s 6-month trading range. I show our current trading
bias on gold stocks based on this, either long, short, or neutral.
I also recommend gradually deploying new gold-stock trades
over time on a low rGDX read, which increases the odds of straddling
the actual correction bottoming. A new campaign can be added over a
couple months.
While everything is fairly simple at this point to buy in
relatively-low, I add a major layer of complexity which helps
amplify our subsequent upleg gains. I do deep fundamental
research on many dozens of gold miners and silver miners,
analyzing their
operating and financial results each quarter and comparing them
to their peers. The goal is to uncover the fundamentally-superior
gold stocks, this sector’s better miners.
They
have the best upside potential in gold-stock bull uplegs, usually
well outperforming fundamentally-inferior miners. And strong
fundamentals also limit downside during inevitable sector
pullbacks. Better-quality gold stocks traded in fundamental terms
lowers risks while increasing returns. I recommend my current
fundamental favorites as trades in our newsletters, explaining why
these stocks have made the cut.
Unfortunately this stock-picking knowledge only comes from hard-won
experience, from long decades of wading through thousands of
quarterly reports and actively trading gold stocks. The resulting
expertise on individual gold stocks is vast, impossible to
impart quickly like technical trade timing. But you can still
“apprentice” in this by subscribing to our newsletters for years,
gradually growing your stock-picking acumen.
The
odds are high of seeing big gold-stock gains accrue when you buy in
relatively-low in rGDX terms and deploy your capital in
fundamentally-superior gold stocks. That’s the whole game really,
as selling after subsequent gold-stock uplegs mature is best done
mechanically. That removes all the emotion from selling
decisions, nullifying the inevitable greed that arises after big
gains. This too is simple to execute.
When
adding new gold-stock trades, trailing-stop-loss sell orders should
be applied right after the entries. These limit orders instruct
your stock broker to close out your positions once pre-defined
conditions are met. Since gold stocks are so darned volatile, I’ve
long run very-loose 25% trailing stops when buying in
relatively-low. The odds of such big selloffs are fairly modest
after gold stocks have already corrected hard.
Trailing stops automatically rise with stock prices during a trade,
locking in unrealized gains. If you buy a gold stock relatively-low
that rallies 75% in an upleg, and then falls 25% to trigger its
trailing stop, you will realize about 50% gains on the overall
trade. Worst case is generally a 25% loss, although those are rare
since gold stocks usually rally after being relatively-low in rGDX
terms. That in turn drags up stop-loss levels.
But
as gold-stock uplegs mature, the risks of major selloffs mount.
Gold-stock prices get relatively-high, as evidenced in the rGDX
moving towards the upper end of its trading range. By that time we
usually have big unrealized gains in gold stocks, which are
important to protect. So I ratchet up the trailing-stop-loss
percentages themselves as gold-stock uplegs mature. That locks in
more of our gains when selloffs hit.
Although started at that very-loose 25% during correction
bottomings, once subsequent uplegs grow too overbought I tighten our
stops. That 25% is first raised to 20%, then later 15%, 10%, and
sometimes even 5%. The speed at which those stops are ratcheted
tighter depends on how fast gold stocks are surging late in uplegs
and how overbought they are getting in rGDX terms. This guarantees
more realized gains.
Using trailing stops not only removes dangerous greed from selling
decisions, but it lets traders remain deployed in gold stocks as
long as possible. Along with buying low and selling high,
another core axiom of trading is cut losses fast but let your
winners run. Trailing stop losses do both. They let the markets
realize gains or losses on trades, eliminating subjective sell
decisions while maximizing realized gains.
So
timing gold-stock trades is fairly simple. Only deploy capital
relatively-low, after the rGDX indicator gets oversold revealing a
maturing sector correction. Run loose trailing stops just in case.
Then as the subsequent gold-stock upleg matures, as seen in the rGDX
getting more overbought, start ratcheting up those trailing stops to
realize more of your gains. Then keep your capital in cash while
gold stocks correct.
That
skipping-correction discipline further amplifies overall gold-stock
gains. Again the average GDX correction during today’s bull market
has been 33.6%, call it a third. Holding cash through that selloff
cuts out these serious losses, preserving capital. Then when the
subsequent bottoming arrives, that cash has more buying power
to redeploy in about a third more gold stocks! This really speeds
up multiplying capital.
The
final key to gold-stock trade timing is carefully watching gold,
this sector’s dominant primary driver. Applying this same
Relativity Trading methodology to gold reveals when it is
relatively-low or relatively-high compared to its own baseline
200-day moving average. Since gold-stock uplegs mirror and amplify
gold’s own, gold stocks are more likely to surge after low rGold
reads and more likely to sell off after high ones.
In
addition to tracking rGold, rSilver, and the rGDX, our newsletters
are always analyzing what is driving gold’s price action on a
day-by-day basis and where this metal is likely heading next.
Gold-stock uplegs depend on gold’s own, since gold-mining earnings
leverage prevailing gold prices. Another key factor in achieving
the best long-term success trading gold stocks is staying engaged.
Checking out is the worst mistake.
I
see this constantly in the newsletter business. People are really
excited about gold stocks after prices have surged in a major
upleg. They are eager to buy in relatively-high to attempt to chase
that upside momentum. That’s exactly the wrong time to deploy
capital! Then after gold stocks correct, they wallow in popular
fear and get discouraged. So they check out mentally, not renewing
subscriptions to stay informed.
They
stop watching gold stocks during correction bottomings, the
very times to buy back in relatively-low before the next uplegs!
Multiplying wealth trading stocks demands buying relatively-low
then later selling relatively-high. But that’s only possible if you
stay engaged 100% of the time, always watching this sector whether
it feels fun and bullish or depressing and bearish. Long-term
success demands always staying abreast.
With
the rGDX remaining low after this leading gold-stock benchmark’s
24.9% correction that started to bottom in late November, this is
the time to buy back in! So ever since we’ve been aggressively
layering into fundamentally-superior gold stocks and silver stocks.
The current count is up to 17 and 8 new trades in our weekly and
monthly newsletters. There’s still time to mirror these
high-potential trades at low entry prices.
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’s why all 1178 stock trades recommended in our
newsletters since 2001 averaged hefty +24.0% annualized realized
gains!
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 and take advantage of our 20%-off sale! Early in a
young gold-stock upleg is a great time to get deployed.
The
bottom line is timing gold-stock trades to ride sector uplegs then
sit out subsequent corrections is fairly simple. Watching where
this sector’s leading GDX benchmark is trading compared to its
200-day moving average reveals when gold stocks can be bought
relatively-low then sold relatively-high. Actually executing on
that requires being contrarian, fighting the herd to do the opposite
of popular consensus.
New
gold-stock trades added after corrections should be protected with
loose trailing stop losses. These can be ratcheted tighter to
protect more gains as subsequent gold-stock uplegs mature.
Fundamentally-superior gold stocks yield better trading results,
with lower risks for losses and bigger gains as this sector powers
higher. And gold-stock traders have to watch gold, as its fortunes
drive gold miners’ earnings and stocks. |