The
gold miners’ stocks just rolled over into a correction, raising
concerns about the staying power of their massive post-panic upleg.
These higher prevailing gold prices have driven very-strong
fundamentals at the gold miners. But they are entering the
seasonally-weak summer doldrums. And current sentiment and
technicals play major roles in governing when uplegs remain healthy
or ready to give up their ghosts.
The
GDX VanEck Vectors Gold Miners ETF remains the leading and dominant
benchmark for this small contrarian sector. Its $14.3b in net
assets this week were a colossal 33.2x bigger than those of
its next-largest 1x-long major-gold-miners-ETF competitor! GDX’s
only real rival is its little-brother
GDXJ mid-tier
gold-miners ETF, which is only about one-third of GDX’s size.
The GDX gold stocks have sure had a wild ride.
Normally the major gold miners of GDX leverage material gold moves
by 2x to 3x. Gold stocks’ excess gains during gold uplegs
are necessary to compensate traders for miners’ big additional risks
on top of gold-price fluctuations. These include operational risks
at individual mines, geopolitical risks in countries hosting gold
mines, financial risks from hedging and currency fluctuations, along
with many other risks.
GDX
started 2020 with a modest 6.0% rally into late February. That was
really weak compared to gold though, which overwhelmingly drives
gold miners’ earnings and thus ultimately stock prices. The yellow
metal surged 9.3% by that point, gold-stock leverage to gold ran a
miserable 0.6x. Traders are better off owning the metal itself
rather than its miners when they are really underperforming. Gold
stocks were unloved.
The
subsequent stock panic into mid-March spawned by governments’
draconian COVID-19 economic lockdowns crushed gold stocks. In less
than several weeks, GDX plummeted 38.8%. The last couple days of
that brutal capitulation selloff were technically a full-on crash,
with GDX cratering 24.5% in just 2 trading days! Gold stocks’
leverage to gold over that ugly several weeks skyrocketed to a
super-high 4.7x.
By
mid-March heading into the stock panic’s nadir, the gold stocks were
radically oversold and absurdly undervalued fundamentally. So they
were overdue for a massive mean reversion higher. We had
been all-out of gold stocks
leading into that
panic, actually actively shorting them. But we started
redeploying aggressively within a couple trading days after that
extreme anomalous panic bottoming at fire-sale prices.
The
major gold stocks dominating GDX indeed soared out of those deep
panic lows. Over the next 2.2 months into mid-May, GDX skyrocketed
a breathtaking 95.8% higher! This gold-stock-technicals chart shows
how incredibly volatile this leading gold-stock benchmark has been.
After essentially doubling in just a couple months, can the gold
stocks have any gas left in the tank? That’s the critical question
now.
 
There’s no doubt gold stocks’ post-panic upleg has been huge and
violent. And normally such a wildly-outsized move would leave this
sector at upleg-slaying levels of overboughtness. But interestingly
that hasn’t happened. This gold-stock upleg ignited at such an
excessively-subterranean base that most of it was simply mean
reverting back out of the stock-panic plummeting! Those origins
are key to GDX’s outlook.
That
epic 95.8% soaring consisted of $18.21 of GDX rallying from
mid-March to mid-May. But leading into that stock panic, GDX had
plummeted $12.05 in just several weeks since late February. So
fully 2/3rds of this massive upleg popping off the charts was
merely a mean reversion regaining lost ground! From February 24th’s
$31.05 interim high to May 19th’s latest $37.21 peak, GDX only
climbed 19.8%.
The
major gold stocks’ net gains cross-panic were just 19.8% over 2.8
months, which sounds a heck of a lot more reasonable than 95.8%
gains in 2.2 months. Like all stock panics, this latest one proved
an extreme anomaly leaving incredibly-unsustainable super-low
prices. So the gains out of stock panics are some of the biggest
witnessed in all of history. The gold stocks were due to mean
revert higher violently!
GDX’s leverage to gold’s advance during that 19.8% high-to-high
rallying span was 3.8x, which is on the hot side. But stepping back
a little to gain the longer-term perspective so crucial to making
wise trading decisions, the major gold stocks still weren’t going
great guns year-to-date. GDX had surged 27.1% YTD by its recent
mid-May peak, but that only amplified gold’s parallel 15.1% YTD
rally by a rather-weak 1.8x.
Once
you realize that 2/3rds of this lightspeed-fast doubling was just a
mean reversion out of stock-panic extremes, and gold stocks aren’t
soaring from a broader perspective, this latest upleg looks much
less mature. And even at 95.8%, it remains on the small side for a
post-stock-panic one. After the last stock panic in October 2008,
GDX skyrocketed 172.1% higher over the next 7.2 months! Post-panic
uplegs are epic.
But
over the last couple weeks into the middle of this one, GDX did fall
11.8% crossing what would be considered 10%+ correction territory in
general stock markets. But those conventional metrics don’t apply
well to gold stocks, which are vastly more volatile. And GDX’s
recent selling has been way outsized compared to gold’s, running big
4.3x downside leverage. That has spawned major concerns among
traders.
But
neither sentiment or technicals were sending the kinds of signals
that usually accompany uplegs giving up their ghosts. The former is
more ethereal and harder to measure, but I have a rather unique view
into it. For over a couple decades now, I’ve been blessed to watch
the markets all day every day as a financial-newsletter guy.
I’ve intensely-studied and actively-traded gold stocks throughout
that entire span.
Our
subscribers across all 50 US states and dozens of foreign countries
give me lots of feedback. They e-mail when they are excited or
scared. The kinds of questions and their tones are very distinctive
at both major gold-stock toppings and bottomings. At the former,
enthusiasm runs high and traders are salivating at what and when to
buy. They are convinced a major gold-stock move is only starting
and are rushing in.
In
mid-May as GDX surged to a new 7.1-year secular high, I didn’t see
the greedy e-mail flow typical at major gold-stock toppings. I
suspect the reason why is the gold stocks hadn’t surged higher long
enough yet to generate serious excitement. GDX first challenged $34
in this post-panic upleg in late April. While it forayed above
there briefly in early May, by mid-May GDX was right back down near
that same $34 level.
So
the major gold stocks had largely been consolidating high for
several weeks, bleeding off enthusiasm for this sector. To
suck in upleg-exhausting kinds of capital, the gold stocks have to
surge for several weeks plus. That potentially started in mid-May,
when GDX blasted 9.2% higher to $37.21 in only 4 trading days. But
that sharp rally quickly fizzled, and GDX rolled over into its
recent greed-burning selloff.
My
e-mail flow, which is usually an excellent read of prevailing
gold-stock sentiment at major toppings and bottomings, looked
nothing like past upleg-slaying times. Interest was growing, but it
was still tentative devoid of unbridled enthusiasm. Gold stocks
weren’t overbought enough to reflect that. While sentiment is
ethereal, overboughtness can be directly measured. GDX
didn’t get anywhere near upleg-killing extremes.
One
simple and effective way to measure overboughtness is to look at
GDX’s closes as multiples of its trailing 200-day moving average.
200dmas are excellent baselines from which to gauge how fast sectors
are climbing or falling. They aren’t static which would soon leave
them outdated, but gradually evolve slowly following
prevailing price levels. The farther above its 200dma GDX
stretches, the more overbought it is.
Dividing GDX’s daily close by its daily 200dma yields the Relative
GDX, or rGDX. This multiple effectively flattens out 200dmas to
zero, rendering distances between prices and 200dmas in
constant-percentage terms which are perfectly-comparable over time.
In trending markets, this relative multiple conveniently forms
horizontal trading ranges. The rGDX both reveals and quantifies
critical gold-stock overboughtness.
This
chart superimposes GDX and its technicals over the rGDX. I define
relative trading ranges based on the last 5 calendar years of data,
which leave the current rGDX one running from 0.85x to 1.50x. Gold
stocks are extremely oversold when GDX sinks under 0.85x its 200dma,
the best times to aggressively buy them. They are extremely
overbought when GDX surges over 1.50x its 200dma, truly
upleg-slaying levels.
When
GDX hit that latest interim high of $37.21 in mid-May, this leading
gold-stock ETF had stretched to just 1.311x its 200dma. That was
certainly very overbought, but not extremely so. And since then
during the correction of the last couple weeks, the rGDX has rapidly
collapsed back down to 1.145x. This isn’t the kind of behavior that
typically accompanies major upleg toppings. It is much more
mid-upleg-like.
The
last time traders got euphoric about gold stocks was when this
bull’s mighty maiden upleg was peaking into the summer of 2016. GDX
skyrocketed 151.2% higher over 6.4 months in that massive run, and
none of that was a mean reversion out of panic lows. Leading into
that topping, GDX soared so far so fast on extreme greed that the
rGDX blasted to a nosebleed 1.615x and 1.646x! Now that’s
overbought.
The
day that colossal upleg finally gave up its ghost, the rGDX was
still way up at 1.567x. Historically in both GDX and the earlier
HUI index gold-stock benchmark, stretching more than 50% above
200dmas was the danger zone for major uplegs topping and rolling
over into severe selloffs. So as that metric nears, it is prudent
to ratchet up trailing-stop-loss percentages to lock in more of the
big gold-stock gains accrued.
After that extreme overboughtness in summer 2016, GDX plummeted
39.4% over the next 4.4 months. Contrast that euphoric upleg
topping and aftermath to the next time gold stocks started returning
to favor last summer. Heading into early-September 2019, the rGDX
surged as high as 1.341x. Again that is very overbought, but not
extremely so. That overboughtness level exceeded the 1.311x we just
saw in mid-May.
While gold stocks indeed sold off to bleed off excess greed, that
proved relatively mild. GDX merely slid 15.4% over the next 1.3
months, which proved more of a mid-upleg pullback by gold-stock
standards. Then that same gold-stock upleg resumed before peaking
in late February. While that only happened at a really-low 1.153x
rGDX, the gold stocks were getting sucked into an ultra-rare and
crazy-violent stock panic.
GDX’s 11.8% selloff over the last couple weeks is similar in
magnitude and technical profile to that seen last autumn. Back then
the major gold stocks hadn’t soared to upleg-slaying levels of
overboughtness, so that upleg wasn’t finished despite needing a
healthy breather. Today’s setup is very similar, and remains very
different to what was witnessed back in the summer of 2016. This
gold-stock upleg still looks healthy.
Odds
are it has considerably higher to climb yet before it surges fast
enough to drive excessively-bullish sentiment, which sucks in and
exhausts all near-term buying firepower. That’s what kills uplegs!
They can keep powering higher on balance even in
the summer
doldrums if they aren’t mature yet. Yes this is the weakest
time of the year seasonally for gold and its miners’ stocks. But
seasonals are a secondary driver.
Gold
stocks have no problem rallying in June, July, and August if major
capital inflows are driving gold itself higher. Last summer was a
great case in point. GDX rocketed 38.3% higher during that
market-summer span in 2019 on a 16.7% gold surge! Gold’s strength
in turn was driven by major investment buying as evident in
its leading GLD SPDR Gold Shares gold ETF. Its gold-bullion
holdings soared 18.2%!
Think of weak seasonals like headwinds, they are only
relevant if the motors are off on gold’s primary drivers. When
capital inflows are strong, they easily overcome the resistance from
weak seasonals. And leading into this summer of 2020, gold
investment demand
has proven incredibly strong. GLD’s holdings soared 9.3% in
April, another 6.3% in May, and are already up still-another 0.9% in
June’s first few days!
While a big topic that needs another essay soon to analyze, American
stock investors are piling into gold for obvious reasons. Despite
the Fed-goosed stock-market levitation, the US economy is really
hurting thanks to governments’ draconian COVID-19 lockdowns.
Tens of millions of Americans are out of work which will really
hurt consumer demand and thus corporate profits. That portends
sharply-lower stock markets.
And
the panicking Fed has pulled out all the stops to disconnect the
stock markets from their underlying economy. Between mid-March to
late May, the Fed’s balance sheet has skyrocketed a dumbfounding
64.6% or $2,785.4b in just 11 weeks! This record
near-hyperinflation guarantees price inflation with that vast
deluge of newly-conjured dollars competing for shrinking pools of
goods and services to spend it on.
Serious inflation fueled by extreme central-bank money printing, and
more likely stagflation since the US economy is rapidly
shrinking due to governments’ unconstitutional lockdowns, is
powerfully bullish for gold. Gold remains exceptionally compelling
for portfolio diversification this summer given the colossal
stock-market downside risks and mounting inflation. If gold
investment demand continues, gold will rally.
And
if gold keeps grinding higher on balance this summer, the major gold
stocks of GDX will follow it up and amplify its gains.
Another near-term bullish factor for gold is the price-dominating
gold-futures speculators haven’t been buying much throughout this
post-stock-panic upleg. Their positioning is far from all-in, they
have big room to buy catapulting gold even higher. It’s a great
setup for gold and its miners’ stocks!
The
major gold miners’ fundamentals are outstanding too. As I discussed
in a comprehensive essay on the
GDX gold miners’
Q1’20 results a few weeks ago, their earnings are soaring thanks
to these higher prevailing gold prices. That is despite COVID-19
shutdowns around the world that are being wound down for the gold
miners. Gold-stock fundamentals are incredibly strong, the
best they’ve been in many years!
Considering all this, this post-panic mean-reversion gold-stock
upleg continues to look healthy. Leading into this current
salubrious correction, sentiment wasn’t greedy enough nor technicals
overbought enough to warn of upleg-slaying potential. Everything on
those fronts looks much more mid-upleg-like than seen in late uplegs
going terminal. That gives gold stocks a long runway to keep
amplifying gold’s gains on balance.
Far
from being threats, mid-upleg selloffs are great gifts to traders.
They offer the best mid-upleg entry opportunities to add new
gold-stock trades at relatively-low prices! So if your gold-stock
allocations aren’t yet sufficiently large, mid-upleg selloffs are
when to buy more. While gold-stock gains are already huge since the
stock-panic lows, they will grow much bigger still as this
gold-stock upleg keeps powering higher.
At
Zeal we started aggressively buying and recommending
fundamentally-superior gold and silver miners in our
weekly and
monthly
subscription newsletters back in mid-March right after the
stock-panic lows. We’ve been layering into new positions ever
since, with unrealized gains already growing huge. Today our
trading books are full of these fundamentally-thriving gold and
silver miners that aren’t done running yet.
To
profitably trade high-potential gold stocks, you need to stay
informed about the broader market cycles that drive gold. Our
newsletters are a great way, easy to read and affordable. 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! Seize this
gold-stock weakness to mirror our many winning trades before this
powerful upleg resumes.
The
bottom line is this post-stock-panic gold-stock upleg continues to
look healthy. While the major gold stocks effectively doubled in a
couple months, fully 2/3rds of that was merely a mean reversion out
of the extreme stock-panic lows. Gold stocks haven’t rallied
excessively from a cross-panic perspective, and haven’t yet seen
anything resembling upleg-slaying levels of greedy sentiment and
overbought technicals.
Like
usual this gold-stock upleg will follow gold, which continues to see
exceptionally-strong investment demand into this summer. Prudent
investors fear the Fed’s mind-boggling inflation, and worry the
stock-market levitation it has fueled will roll over hard to reflect
an uglier pandemic economic reality. As long as investment capital
is migrating into gold to prudently diversify portfolios, gold
stocks will leverage its gains. | 
