The
gold miners’ stocks are correcting. They’ve been sliding and
drifting lower on balance since their powerful recent upleg peaked a
month ago. Corrections are normal and healthy in ongoing bull
markets, rebalancing sentiment to pave the way for the next upleg.
They also offer the best buy-low opportunities seen inside secular
uptrends. Deploying capital in gold stocks after corrections
multiplies wealth-building potential.
While most people dread corrections, battle-hardened speculators and
investors embrace them. They make prices oscillate around their
bull-market uptrends, greatly expanding their overall travel. The
more price movement, the more potential upside to ride. Today’s
gold-stock bull proves this. Consider it in terms of the
most-popular gold-stock benchmark and trading vehicle, the GDX
VanEck Vectors Gold Miners ETF.
This
gold-stock bull was born in mid-January 2016, from the depths of
despair after a secular gold bear. Over the next 6.4 months, GDX
skyrocketed 151.2% higher in an epic maiden upleg! That initial
early-August-2016 peak has yet to be eclipsed, but GDX came within
1.2% as this latest upleg peaked in early-September 2019. So the
maximum potential gains by buying and holding this entire bull are
still 151.2%.
But
it has actually enjoyed 3 separate uplegs, that initial 151.2%, a
small 34.6% into early 2017, and the 76.2% one that peaked a month
ago. Add these together, and the maximum potential gains from swing
trading this bull’s uplegs and corrections are 262.0%. That’s over
1.7x better! Of course timing the exact bottoms and tops is
impossible, so let’s lop off a quarter of that potential. That
still leaves 196.5% versus 113.4%.
Speculators buying within 1/8th or so of correction bottomings and
selling within about 1/8th of upleg toppings can generate far-bigger
gains than buy-and-hold investors. That’s an achievable goal, as
there are plenty of technical and sentimental indicators revealing
when these key upleg-correction reversals are likely happening in
real-time. Gold stocks are a volatile sector, so we may as well
harness that in our favor.
This
first chart provides perspective on this gold-stock bull through the
lens of GDX. Its major upleg-and-correction swings so far are
noted. Since gold overwhelmingly drives gold miners’ profits and
thus gold-stock price action, gold-stock cycles are generally
considered in gold terms. Despite their huge uplegs and
brutal corrections, gold-stock bulls persist as long as gold’s own
do. And gold’s bull is alive and well today.
Price movements are driven by the collective trading of all market
participants. And their individual buy-and-sell decisions are
heavily influenced by how they feel, or sentiment. The
ethereal and unquantifiable greed and fear of the herd are what
define when gold-stock uplegs and corrections run out of momentum
and reverse. And there are plenty of signs when those key junctures
for multiplying wealth are probably nearing.
Since this essay is on the current gold-stock correction, I’m going
to focus on the topping side. Uplegs are ultimately constrained,
they have finite amounts of buying power available to drive them.
There are only so many speculators and investors interested in gold
stocks at any given time, and they all have limited capital. So
once their buying firepower is expended, which coincides with peak
greed, uplegs top then fail.
While the whole mission of trading is buying low then selling high,
our natural human instinct is to do the exact opposite. It’s
hard buying gold stocks low late in corrections, as everyone is
bearish on them and assumes the downside momentum will persist
indefinitely. So after an initial short-covering spike, most of
early uplegs tend to be gradual. Gold stocks have to rally
sufficiently to convince skeptical traders to return.
But
the higher gold stocks climb, the better they look and the more
excited traders get. The faster gold stocks rally, the more capital
traders deploy. The more they buy, the faster gold stocks climb.
This powerful virtuous circle directly fueled by greed often drives
prices sharply higher heading into the ends of uplegs. Eventually
everyone interesting in buying anytime soon has already bought, so
buying potential is exhausted.
The
main technical indicator warning that gold-stock uplegs are likely
peaking is how overextended GDX stretches. Measuring this
empirically requires some kind of baseline, but it can’t be static
since prevailing gold-stock price levels are always changing. My
favorite has long been the 200-day moving average. With nearly 10
months of trading days feeding into it, it only changes gradually
yet still slowly follows prices.
GDX’s 200dma is rendered in black in this chart. Note above that
both of this bull’s major uplegs saw GDX soar far above its 200dma.
Those were signs of overboughtness, that too much capital was
flooding into gold stocks too quickly to be sustainable. The faster
and more exciting gains after a long and strong upleg, the greater
the odds they will soon run out of steam. They rapidly suck in all
near-future buying potential.
Well
over a decade ago I developed a trading system based on how
stretched prices were relative to their own 200dmas, called
Relativity
Trading. It simply divides a price by its 200dma yielding a
multiple. Over time in trending bull markets these form
horizontal trading ranges, with distinctive topping and
bottoming zones. Since I started analyzing this years before GDX
was even born, I use the older HUI gold-stock index.
GDX’s latest upleg peaked at $30.95 on September 4th.
A couple days later I published an essay warning “Gold
Stocks Very Overbought” explaining why and the implications in
depth. On that peaking day, GDX had soared way up to 1.341x its
200dma. For most gold-stock bull-market uplegs, seeing index prices
stretched 30%+ above their 200dmas is a big warning sign. It means
prices have run too far too fast.
Sentiment extremes
always coincide with price extremes, since how traders feel is
totally dependent on how prices are faring. When uplegs are
topping, telltale emotions run rampant. Widespread greed mixes with
exuberance, complacency, and even euphoria. When gold-stock prices
are topping, traders as a herd are totally convinced the gold miners
are on the verge of surging much higher. It is funny to watch.
Buying low then
selling high requires being contrarian, actively fighting the crowd
to do the opposite. But being contrarian requires so much hard
training and emotional discipline that few bother painfully forging
that mindset. So most traders, and most analysts and market
commentators, just follow the momentum. They are most excited and
eager to buy when prices are high, when popular greed infects their
market outlooks.
While you can
easily figure out when prices stretch really far over their 200dmas,
sentiment isn’t directly measurable. But it can be inferred by
paying attention to your own emotions and those of other traders and
analysts. If prices have rallied long and far and you are really
excited and bullish, you are getting greedy. If you are buying gold
stocks when it feels good and validating, odds are you are buying
late and high.
When gold-stock
uplegs are topping, the widespread bullish sentiment becomes evident
in the financial media. Most of the time this small contrarian
sector is totally ignored. So when you see professionals on CNBC
and Bloomberg appear much more often waxing bullish on the gold
miners’ stocks, that’s a major warning sign. Financial television
is very useful because it reflects and reveals prevailing
sentiment!
Most gold-stock
speculators and investors also follow some commentators, as not
everyone can or wants to spend all day everyday studying the
markets. Usefulness derived from market analysis is dependent on
how a particular analyst thinks. Are they a herd-follower momentum
trader or a contrarian? You need to figure that out before you
trade on anyone’s advice. A little homework will clarify how they
tend to think.
Look at what your
commentator was predicting in real-time at known past major
gold-stock toppings and bottomings. In early August 2016 and early
September 2016 as gold-stock euphoria reigned, did they call for big
additional gains? Or did they warn of an imminent correction.
Contrarians are even rarer publicly since being in this camp draws
mockery. Traders hate hearing when their beloved uptrends are
ending!
So between how you
feel about gold stocks, how professionals interviewed in the
financial media feel, and how your favorite commentators feel, you
can get a good idea of prevailing sentiment. Chances are if you are
excited about buying gold stocks, much of the driving upleg has
already run its course. The time to buy is when it feels
miserable, after gold stocks have fallen so far that they seem
hopeless again.
As a newsletter
guy for the past couple decades now, I have an additional
sentiment-revealing conduit that is super-valuable. I’m constantly
e-mailed feedback and questions from subscribers. They grow excited
about gold stocks when uplegs are topping, and depressed when
corrections are bottoming. It is not just a collective thing, but
even individuals. Certain people have written me periodically for
years on end.
They’ve proven
great contrary indicators. Like clockwork they are very
bullish and excited when gold stocks are topping, and really bearish
and disheartened when gold stocks are bottoming. If you happen to
be fortunate enough to talk with someone regularly who also trades
this sector, you can get a similar read by asking them where they
think it is going. Unless they are hardened contrarians, do the
opposite!
When technicals
get really overbought and sentiment really greedy, it’s definitely
time to be wary. But I still generally don’t sell high. Gold
stocks are a volatile sector that can really surprise to the upside
at times. So instead of selling outright and trying to catch an
inherently-unpredictable precise top, instead I just ratchet up
my trailing-stop-loss percentages. Tighter stops lock in more
profits when prices reverse.
In early September
gold stocks were very stretched technically, with GDX far above its
200dma baseline. And everywhere you looked, traders and analysts
were wildly bullish on gold miners’ prospects. Those were all the
hallmarks of an upleg peaking before a major correction. But a
more-obscure indicator really caught my attention. It was how
speculators were collectively positioned in gold futures,
which is crucial.
I wrote a whole
essay explaining this in depth in mid-September, titled “Gold-Futures-Selling
Overhang”. Gold stocks are essentially leveraged plays on
gold, since it utterly dominates their earnings power. And the
primary short-term gold driver is how gold-futures specs are
betting. Like most gold-stock traders, they are momentum followers
and not contrarians. So they grow really bullish when gold itself
is topping.
This
exuberant sentiment manifests itself on both sides of the
gold-futures trade, longs and shorts. When these traders expect
gold to keep rallying after a strong upleg, their long upside bets
are very high. They also radically curtail their short-selling
downside bets. These guys always bet wrong when uplegs are topping,
and the extreme leverage inherent in gold-futures trading means they
can’t afford to be wrong for long.
Gold
stocks follow gold, which is mostly driven by speculators’
gold-futures trading. Thus whenever I’m assessing the likelihood of
a major gold-stock upleg topping, I carefully consider specs’
positioning. If their collective bets are normal, longs and
shorts both in the middle of their gold-bull-market ranges, then the
odds of gold and thus gold-stock corrections are much lower. But
when bets are extreme, watch out below.
This
last chart looks at speculators’ total long and short contracts held
in gold futures, which are published weekly. Long upside bets are
rendered in green, and short downside bets in red. The higher
longs, and the lower shorts, the more bullish gold-futures
speculators. And that is more bearish for gold and gold
stocks over the near term! A month ago this chart heavily
influenced my warning on gold-stock overboughtness.
In
early September as gold stocks stretched far above GDX’s 200dma and
bullishness was universal, the gold-futures specs’ total longs were
nearing an all-time record high! At the same time their shorts were
very low. On September 3rd specs’ total longs and shorts were
running 96% and 8% up into their gold-bull-market trading ranges
since mid-December 2015. These guys were effectively
all-in longs and all-out shorts!
Like
gold-stock traders, gold-futures traders’ capital is finite. They
buy aggressively in gold uplegs, which drives them higher. But
eventually they’ve deployed all the capital they are able to wield,
which leaves no more buying firepower left. At that point all
they can do is sell when the right news catalyst hits sooner or
later. That selling soon snowballs due to the crazy leverage,
unleashing gold and gold-stock corrections.
With
gold-futures speculators’ potential buying nearly tapped out in
early September, gold wasn’t likely to go much higher but had high
odds of selling off. And that would drag the gold stocks with it.
The major gold miners that dominate
GDX’s weightings
tend to amplify underlying moves in gold by 2x to 3x. So
when that inevitable gold-futures selling hit, it was going to
hammer gold stocks particularly hard like usual.
Fast-forward to today, and spec gold-futures positioning is a key
reason why gold stocks are suffering a correction now. The latest
report on speculators’ collective gold-futures bets last Tuesday
revealed their total longs and shorts are still running 97% and
5% up into their gold-bull-market trading ranges! That is close
to the most-bearish-possible for gold of 100% and 0%, guaranteeing
big gold-futures selling was coming.
And
indeed we saw a lot of it over the week since. After peaking at
$30.95 in early September yielding a 76.2% upleg gain over 11.8
months, GDX plunged 13.9% to $26.64 over the next couple
weeks. That was beyond that classic 10% correction threshold for
stock markets, although gold stocks are so volatile their definition
should be wider. Then GDX rebounded fast, surging 10.7% higher to
$29.49 on September 24th.
While early September’s sharp gold-stock selloff caught traders’
attention, that bounce rally rekindled lots of complacency.
It’s fitting that secondary gold-stock topping hit the same day
specs’ latest gold-futures positioning was so extreme. Gold fell
sharply from there, dragging the gold stocks down with it. By the
end of September, GDX had plunged another 13.7% to $26.71. Lower
highs were forming a correction downtrend.
Still, at worst GDX was only down 13.9% correction-to-date. That’s
nothing yet by gold-stock-correction standards. Today’s gold-stock
bull has seen two prior corrections, a massive 39.4% into late 2016
and an also-ugly 31.3% into late-summer 2018. Both of these were
excessive, exacerbated by market anomalies heading into their
climaxes. But their 35.4% average losses illustrate how serious
these get.
Bull-market corrections most often bounce at 200dmas, and GDX’s was
running $23.90 as of the middle of this week. That would make for a
22.8% total correction. But since GDX’s price remains well above
that 200dma, it is gradually rising. So it will be somewhat higher
by the time GDX is forced back down to it by specs’ gold-futures
selling. Another way to game the potential gold-stock downside is
to look at gold.
Gold’s parallel bull that’s driving this gold-stock one also
experienced those same two corrections so far, which ran 17.3% and
13.6%. That averages 15.5%. But again those were excessive, made
way worse by some extreme market events that aren’t going to
repeat. Gold should see a milder and more-normal bull-market
correction this time around, somewhere in the 6%-to-12% range. GDX
will amplify that by 2x to 3x.
That
implies a gold-stock correction of 12% to 36%, for a 24% midpoint.
25% is reasonable, and right in line with past-bull-market
precedent. During gold stocks’ last mighty secular bull across the
entire 2000s decade, the
average major
gold-stock correction per the HUI was 26.1%. That excludes
2008’s wildly-anomalous stock-panic selloff, but covers fully 12
other corrections. Around 25% is par for the course.
That
implies a GDX downside target around $23.21, another 15.3% lower
from this week’s levels. It is interesting that gold stocks’
weakest seasonals of the year from late September to late
October align with this as well. Last week I wrote a whole essay “Gold-Stock
Red October” explaining why this is the case. Everything is
lined up for considerable sector weakness in the coming weeks.
Traders need to be ready.
Corrections are just a sentiment thing, a rebalancing to bleed off
the excessive greed surrounding upleg toppings. The buying
opportunity after this one will be really important, as gold miners’
fundamentals are rapidly improving with higher prevailing gold
prices. In the just-finished third quarter, average gold prices
soared a stupendous 12.6% higher quarter-on-quarter! So gold
miners’ earnings must have exploded.
After every quarterly earnings season, I analyze the collective
results of the GDX gold miners. In
Q2’19, their average all-in sustaining costs ran $895 per
ounce. That yielded sector profits of $414 per ounce at Q2’s $1309
average gold price. Assuming AISCs are flat in Q3, when they are
actually likely to fall, those earnings soared to $579 at last
quarter’s $1474 average gold price. That’s up an incredible
39.8% QoQ!
So
gold miners’ upcoming releases of Q3 results between late October to
mid-November are going to look fantastic. As long as gold’s
own selloff is waning, this great fundamental news may cap the worst
of gold stocks’ correction in time terms. Gold stocks’ powerful
recent surge on gold’s
decisive
bull-market breakout caught traders’ attention, and the
bottoming of this underway correction will be the time to buy big.
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
weekly and
monthly
newsletters. We later realized big gains including
109.7%, 105.8%,
and 103.0%!
To
profitably trade gold stocks, you need to stay informed about gold’s
major drivers and their likely near-term impacts. Our newsletters
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upleg after this correction largely passes.
The
bottom line is a gold-stock correction is underway. The major gold
miners have been grinding lower and sideways for a month now, after
becoming very overbought technically. That major warning sign of
upleg toppings was accompanied by exuberant popular sentiment. On
top of that, speculators’ gold-futures positioning was and is again
excessively bullish, signaling major gold selling is inevitable
soon.
Corrections should be embraced, not dreaded. They are normal and
healthy in bull markets, existing to bleed off excessive greed and
restore sentiment balance. These selloffs offer the best
opportunities to buy relatively low within ongoing bulls. Traders
need to watch for them, prepare for them with stops, and hold off on
redeploying stopped capital until they’ve run their courses. Then
jump back in to ride the next upleg! | 
