The gold miners’
stocks have blasted higher in this young new year, far outpacing the
broader markets. But surprisingly gold stocks’ trading volume has
diverged from their powerful rally. Volume has actually been waning
on balance since gold stocks’ newest upleg was born in
mid-December. While volume is a complex nuanced indicator, this
bullishly suggests that major gold-stock buying hasn’t even started
yet.
Naturally price
action is the most-important technical indicator, exposing
underlying supply-and-demand trends for anything. The shares of
precious-metals miners and explorers have surged this year because
investor demand exceeds supply. The capital flowing into
this beaten-down sector is overwhelming the numbers of shares
sellers are willing to part with, bidding up stock prices and
driving their sharp rally.
But the strength
of rallies isn’t fully apparent through their price moves alone.
Trading volume, how many shares change hands daily, is a critical
secondary indicator. The strongest rallies advance on big
high-volume buying, showing growing investor interest and
broadening capital inflows. The more volume that drives any rally,
the greater its momentum, staying power, and ultimate gains. Volume
reflects vigor.
One of the many
problems plaguing today’s radically-overvalued Fed-levitated stock
markets is the low-volume buying driving recent years’ gains. Low
volume reveals low conviction, traders begrudgingly buying shares in
moderation since they doubt a rally’s durability. Low-volume
rallies are often more the result of a lack of sellers than
any meaningful buying. That’s what’s happening in gold stocks so
far in 2017.
This is readily
apparent in the leading gold-stock trading vehicle, the GDX VanEck
Vectors Gold Miners ETF. In this increasingly ETF-dominated
stock-trading world, GDX commands an insurmountable lead over its
competitors. This week, GDX’s net assets of $11.9b were a
staggering 63x larger than those of the second-largest normal
1x-long major-gold-miners ETF! GDX is truly this category’s only
ETF that matters.
GDX pioneered
gold-stock ETFs when it was launched way back in May 2006, giving it
a big first-mover advantage. This ETF’s slowly-growing popularity
leading to total ascendency has made it one of the most-important
gold-stock
benchmarks, rivaling the traditional HUI NYSE Arca Gold BUGS
Index. Since GDX holds a voluminous 51 component gold stocks, this
flagship ETF well represents its underlying sector.
The simplest way
to measure GDX trading volume is the raw number of shares changing
hands each day. Such traditional price-and-volume charts are
ubiquitous on the Web. But they suffer a crippling limitation when
considering spans of time beyond the very-recent short term. As
share prices naturally shift over time, trading volume isn’t
equivalent or meaningfully comparable at different prevailing
share prices.
At GDX’s all-time
high near $67 in September 2011, 1000 shares were worth $67k. Not a
lot of traders wield that kind of firepower for single trades. But
at GDX’s all-time low just over $12 in January 2016, the same
1000-share block was only worth $12k. In terms of the capital flows
that ultimately drive stock prices, high-share-price volume is more
important and significant than the same low-share-price volume.
This problem is
easily overcome by looking at capital volume instead of raw
volume. Capital volume is a simple construct that multiplies shares
traded each day by that day’s share price. That renders volume in
equivalent, comparable terms even across long spans of time. The
amount of dollars traded in GDX or any stock is far more important
than the number of shares. Capital volume offers a purer read on
trends.
These charts look
at GDX capital volume. For share price, I averaged each day’s
intraday high and low instead of going with the closing price.
That’s slightly more accurate in a sector as highly volatile as the
gold stocks. Since capital volume itself varies wildly from day to
day, it is best smoothed for analysis. So GDX capital volume’s
21-day moving average, one month, is superimposed in yellow over the
red raw data.
![](http://www.24hgold.com/24hpmdata/articles/img/Adam Hamilton-Gold-Stock Volume Divergence-2017-02-17-001.gif)
Gold stocks’
strong new upleg
since mid-December has proven quite powerful. GDX is up 34.6% at
best in just 1.8 months, trouncing the rest of the sectors in these
Trumphoria-riddled stock markets. But the trading volume behind
this recent rally has proven quite weak by this past year’s
standards. I’ve been watching this mounting volume divergence with
increasing interest in recent weeks, trying to understand it.
Early last year
the gold stocks started powering higher in a mighty new bull
market. In just 6.4 months, GDX skyrocketed from its
fundamentally-absurd all-time low at the depths of despair to a
magnificent wealth-multiplying gain of 151.2%! After such a
dazzling run gold stocks were
overbought and
ready to correct last summer. That was exacerbated by extreme
market distortions following Trump’s surprise win.
But throughout the
great majority of gold stocks’ roller-coaster ride last year, GDX’s
capital volume was meandering in a well-defined horizontal trading
range. When this volatile data is smoothed by that one-month moving
average, this ran between $1.5b and $2.2b. That was the total value
of GDX shares that were changing hands each day. GDX’s capital
volume exited last year near this range’s lower support line.
Year-to-date GDX
has blasted 19.2% higher, an impressive gain. Yet capital volume
has continued to wane dramatically, a major divergence. This
Wednesday, the data cutoff for this essay, GDX’s capital volume was
just $0.7b. That was the lowest since that shortened Black Friday
trading day back in late November. Excluding that single half-day,
GDX’s capital volume has slumped to its lowest levels since late
March.
This is part of a
longer downtrend that started back in late September, reflecting
slumping participation in the gold-stock sector. Just a couple
weeks ago, GDX capital volume’s 21dma slid under its $1.5b lower
support. It is now running just $1.3b, the worst levels seen in
an entire year. That’s almost been cut in half from the peak
near $2.6b in 21dma terms. Low volume betrays the lack of
enthusiasm for gold stocks.
This could be very
bearish, a serious problem for gold stocks. If speculators and
investors have lost all interest in gold stocks, it’s going to be
all but impossible for their young new upleg to persist. Big
capital inflows are usually necessary to drive big stock
rallies. Back in February and March last year when this new
gold-stock bull was getting underway, capital volume was rocketing
higher as traders flocked to this sector.
It stayed high as
GDX continued powering to new highs last spring and summer,
generally remaining elevated until gold stocks suffered
a mass stopping
in early October. As gold slipped below key support at $1300,
gold-futures stop-loss orders triggered leading to cascading
selling. That quickly spilled into the gold stocks, hammering GDX
9.9% lower and driving its highest capital-volume day ever witnessed
at $5.6b!
That brutal
mass stopping was exceedingly damaging to gold-stock
psychology. The gold stocks had already suffered a major correction
off their summer peak, and had ground higher on balance for over a
month by early October. That led traders including me to believe
their necessary and healthy correction was over. So when they
plunged from already-low levels to deeper depths, the sentiment
impact was devastating.
That’s when
gold-stock capital volume reversed and started to wane. Many
investors and speculators that had enthusiastically chased the
gold-stock momentum last summer were very disheartened. By
mid-October nearly half of the entire gold-stock bull of early 2016
had already been reversed! Such extreme volatility is difficult to
weather even for hardened contrarians, let alone mainstream traders
not used to it.
GDX capital volume
continued to decline as the increasingly-bearish sentiment was
exacerbated by two more mass stoppings last quarter. One
came in the days after Trump’s win when gold was dumped in the face
of the emerging Trumphoria stock-market rally. That was followed by
another in mid-December when gold fell after the Fed’s
more-hawkish-than-expected rate-hike forecast for 2017. GDX was
crushed.
This leading
gold-stock ETF had plunged 39.4% in just 4.4 months, erasing
nearly 2/3rds of all the gold stocks’ bull-market gains in the
first half of 2016! That naturally spawned extreme bearishness,
motivating many investors and speculators to flee this wild sector.
You can’t blame them, as most people simply don’t understand that
high volatility is the cost this sector inflicts for enjoying gold
stocks’ epic gains.
Unsurprisingly
capital volume generally reflects popular sentiment in this
sector. When traders start to get excited about a gold-stock rally
powering even higher, they rush to buy shares to ride the expected
gains. Rising capital volume reveals growing greed. But when gold
stocks sell off on balance for some time, traders mentally
extrapolate that weakness continuing indefinitely.
So they pull their capital out of this sector.
There is a key
exception to this volume-sentiment correlation though. While it’s
certainly true for volume generally, major down days with
steep gold-stock selloffs spawn the greatest capital-volume spikes
ever seen. Not only do big drops trigger much automatic stop-loss
selling that ramps volume while amplifying downside, fear is a
potent motivator. Traders rush for the exits when gold stocks
plunge, driving huge volume.
But such
fear-driven volume spikes are fleeting, immediately evaporating as
the heavy selling quickly passes. So they usually don’t skew
capital-volume trends very much. The moving averages soon smooth
them away, distilling down the core volume trend. And in gold
stocks as represented by GDX, it remains very weak. A similar
situation exists in the broader stock markets today, and that is
undoubtedly very bearish.
One of the damning
arguments against the staying power of the
Fed-conjured
stock-market levitation in recent years is the waning volume. While
the major stock indexes are driven to new highs periodically, it is
nearly always on weak and declining volume. Low-volume rallies
near major highs are suspect, since they reflect low conviction
and buying exhaustion. Major bull markets die in topping low-volume
complacency.
But remember
volume is a complex nuanced indicator. The implications of
capital-volume trends are very different depending on where they
arise within greater cycles. The markets perpetually meander
in great bull-and-bear cycles, oscillating like giant sine waves.
And the same weak volume that is bearish late in a mature bull is
actually bullish early in a young bull! Interpreting volume trends
requires broader context.
This next chart
zooms out for a much-larger perspective on this GDX capital-volume
data. Despite their powerful bull run early last year, gold-stock
price levels remain very low in historical context. Gold and
its miners’ stocks were hammered between 2013 and 2015 as the stock
markets levitated on the Fed’s extreme open-ended third
quantitative-easing campaign. Gold stocks are low and unloved, not
high and euphoric.
![](http://www.24hgold.com/24hpmdata/articles/img/Adam Hamilton-Gold-Stock Volume Divergence-2017-02-17-002.gif)
Even as GDX
climbed to all-time highs by late 2011, gold stocks’ capital volume
remained very low by recent standards. It actually started rising
in mid-2013 despite the brutal gold-stock bear, but slumped again in
early 2015. Despite relatively-low GDX share prices in historical
context early last year, capital volume exploded to record highs.
Traders enthusiastically flocked back to gold stocks as they
rocketed higher.
The growing
popularity of exchange-traded funds certainly contributed to last
year’s massive rise in GDX capital-volume levels as well. During
the last gold-stock bull, ETFs were relatively new and not as
universally accepted. Many investors preferred owning individual
gold stocks instead of GDX. But now even hedge funds are heavy ETF
buyers, betting on entire sectors instead of ferreting out
individual winners.
But the critical
point today is that gold-stock prices and thus GDX remain very low
relative to precedent. Gold stocks aren’t late in an enormous
multi-year secular bull market like general stocks. At best they
are just 13 months into a young new bull. Gold stocks’ last secular
bull ran from November 2000 to September 2011, a 10.8-year span
where that flagship HUI gold-stock index skyrocketed 1664% higher!
And since gold
stocks are far closer to bear-market lows than bull-market highs,
sentiment in this sector remains heavily bearish. Investors
and speculators alike naturally remain highly skeptical of the
beaten-down gold stocks, as GDX plummeted 81.3% over 4.4 years
ending in January 2016. Gold stocks’ low capital volume today
reflects that lingering super-bearish sentiment, which is typical
after long and deep bears.
That’s a sharp
contrast to the situation in the general stock markets, where the
leading S&P 500 broad-market stock index has blasted an astounding
247.2% higher over almost 8.0 years! That is one of the biggest and
longest stock bulls ever witnessed, leaving stocks
radically
overvalued and complacency off the charts. Waning capital
volume late in a long-in-the-tooth bull is very bearish, warning of
buying exhaustion.
But waning capital
volume early in a young bull after a brutal bear is an entirely
different story. Instead of suggesting an old rally has run out of
sustaining capital inflows since everyone has already bought, it
indicates the opposite. Waning capital volume early in a new upleg
within a young bull shows investors and speculators haven’t even
started buying yet. They remain too skeptical, mired in all the
residual bearishness.
This is
super-bullish for gold stocks today, implying the serious real
buying is still yet to come. It hasn’t been material new
buying that has catapulted this sector much higher since
mid-December, but a lack of selling. After suffering an extreme
three mass stoppings in the fourth quarter alone, all the traders
susceptible to being scared into selling low are already out.
Selling exhaustion was hit after the Fed in December.
But sooner or
later these strong recent gold-stock gains are going to catch the
attention of the sidelined investors and speculators. They love
winners, and will start moving capital back into this sector to ride
the upside momentum. Their capital inflows will snowball like they
did in early 2016, as buying begets buying. That’s when this
new gold-stock upleg will really start in earnest, all we’ve seen so
far is the pre-game show.
The most-likely
catalyst to reignite major gold-stock buying is these silly
Trumphoria-fueled general stock markets rolling over. They are
wildly overdue for a major selloff, and that will rekindle big
investment demand for gold for prudent portfolio diversification.
Gold tends to move counter to stock markets, so this anti-stock
trade grows popular when stock markets weaken. Gold stocks
naturally follow
gold higher.
The stunning
Trumphoria stock-market rally since the election has distracted
traders from gold. Gold is usually forgotten when stock markets
apparently do nothing but rally. Investors feel no need to
diversify their risky stock-dominated portfolios. So the gold and
gold-stock buyers of recent months are likely just the hardcore
contrarians. Vastly more buying will erupt when these crazy stock
markets inevitably slide.
Interestingly
after shunning
gold since the election as stock markets surged on mere hope,
big investors have just started to aggressively buy gold again.
Just this month, the dominant GLD gold ETF started to see major
capital inflows that can only be hedge funds! They see the writing
on the wall, the extreme dangers inherent in these euphoric stock
markets and the serious upside potential for gold as they roll over.
While speculators
and investors alike can certainly play gold stocks’ big coming gains
with the major ETFs like GDX, the best gains by far will be won in
individual gold stocks with superior fundamentals. Their upside
will trounce the ETFs’, which are burdened by over-diversification
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The bottom line is
gold stocks’ capital volume has diverged from their new upleg in
recent months. This reflects waning interest in this sector, the
product of much residual bearishness following last quarter’s
miserable mass stoppings. The rally since mid-December was driven
more by a lack of sellers than new buyers. But this is actually
quite bullish, as it implies this upleg’s big gold-stock buying is
still yet to come.
These
Trumphoria-fueled stock markets have been a huge distraction,
lulling traders into extreme levels of complacency. That’s allowed
gold stocks’ young new upleg to fly under their radars. But once
these stock markets roll over and gold starts surging again,
gold-stock demand is going to just explode. And that’s when
gold-stock capital volume will soar, reversing the divergence and
really amplifying gold stocks’ gains. |