The
gold miners’ stocks continue to grind lower in their latest
correction, leaving increasingly-bearish sentiment in their wake.
Even contrarian traders have mostly abandoned this high-potential
sector. But the leading gold-stock benchmark has just converged
with two key support zones. After the last time this happened,
major gold stocks quickly rebounded over a third higher. So today
looks like a good buying opportunity.
Stock trading is simple conceptually, buy low then sell high. But
this plain mission is difficult to execute for the vast majority of
traders. They get caught up in herd sentiment, leading them
to do the opposite. Exciting popular greed as sectors top seduces
them into buying high, the exact wrong time. Then after the
subsequent sentiment-rebalancing selloffs, excessive prevailing fear
scares them into selling low for big losses.
Buying low then selling high requires overcoming our own emotions to
trade when we least want to. The worse a sector feels after
a sizable selloff, the greater the odds it is bottoming ahead of a
major rally. So the gold stocks languishing really out of favor and
mired in apathy today is a bullish omen. We’ve been buying
aggressively in recent weeks to refill our newsletter trading books,
trying to straddle this bottoming.
The
dominant GDX
gold-stock ETF remains this sector’s leading benchmark, and it
has had a tough go this month. At worst as of mid-week, it has
fallen a sizable 5.5% so far in June. That’s certainly material, so
it’s no wonder traders have really soured on gold miners. Their
latest grind lower has been fueled by gold’s own May pullback
extending to a 2.7% June-to-date loss. GDX has amplified gold’s
losses by 2.0x.
Interestingly that’s on the lower side, as the major gold miners of
this ETF tend to leverage gold moves by 2x to 3x. So the
gold stocks have actually somewhat outperformed the metal they mine
this month. June’s demoralizing slogs lower are extensions of
bigger selloffs that started in early May, which have been
exacerbated by gold’s usual summer doldrums. June is the peak month
of this seasonally-weakest spell.
One
big reason traders usually fail to overcome their own greed and fear
as we humans have a strong innate immediacy bias. Our
worldviews are tainted by heavy overweighting of whatever is
happening to us right now. You can be greatly blessed for years,
then one bigger challenge arises and it feels like your world is
crashing down around you. Traders view markets through a
what-have-you-done-for-me-lately lens.
After long decades of actively speculating and writing financial
newsletters, I’ve found the best antidote for this is simply
maintaining perspective. Instead of allowing our perceptions of
markets to overwhelmingly dwell on the present, we need to consider
ongoing price trends within broader context. A 4% GDX down day like
last Tuesday feels terrible, but when considered within the past six
months or so it isn’t a big deal.
This
basic GDX chart of the last few years or so really provides that
essential framing. Yes gold stocks are correcting, and selloffs are
painful to weather so they fuel increasingly-bearish sentiment. But
from a more balanced longer-term perspective, this battered sector
looks to be bottoming. That natural process prepares the way
for the next big surge higher. So contrarian traders should be
looking to buy, not ostriching.
Despite being increasingly abandoned since early May, the major gold
stocks dominating GDX remain in a strong uptrend. They
carved a major 2.5-year secular bottom in late September, after
being crushed to extreme stock-panic-level lows. Since then they
have powered higher in a major upleg, achieving both higher lows and
higher highs since. At best in mid-April, GDX had blasted up an
impressive 63.9% in 6.5 months!
But
major uplegs are never clean linear affairs, they choppily advance
taking two steps forward before retreating one step back. Traders’
collective greed-fear dynamic is the reason. After big surges greed
grows excessive, threatening to pull in too much near-future buying
too soon which prematurely exhausts and slays uplegs. So sharp
corrections following those big surges eradicate greed to restore
balance.
This
major upleg’s initial big surge ran from late September to late
January, where GDX racked up big 52.1% gains in just 4.0 months.
That was largely a necessary V-bounce out of last summer’s extreme
selloff. The major gold stocks’ big gains were fueled by gold’s
underlying powerful 20.2% rebound during roughly that same span. So
GDX’s upside leverage to gold ran 2.6x, right in the middle of that
2x-to-3x range.
But
gold had rallied so far so fast it was getting really overbought,
stretched way up above its baseline 200-day moving average. That
was stoking excessive greed, so odds increasingly favored a
mid-upleg selloff to rebalance sentiment. A
sharp-yet-healthy
pullback erupted in February, which quickly dragged the gold
stocks down with it. GDX amplified gold’s 7.2% pullback by 2.8x to
a 19.8% correction over 1.4 months.
This
upleg’s first big one-step-back retreat really accomplished its
mission of eradicating greed. After that selloff, gold-stock
sentiment waxed pretty bearish in late February to early March.
Traders figured this sector would keep grinding lower on balance, so
they capitulated and sold low. Yet GDX was converging with
two key support zones simultaneously, its upleg’s uptrend support
and its more-important 200dma.
200dmas are ideal technical baselines from which to measure
overboughtness and oversoldness. They gradually follow their prices
as prevailing levels change, yet they move slowly enough to distill
out all that daily volatility that so kindles traders’ greed and
fear. These key technical lines often prove strong support for
major selloffs within ongoing uplegs, heralding reversals.
Minor selloffs tend to bounce higher near 50dmas.
Trend-line support zones are important too, yet they are somewhat
subjective and often hand-drawn. But 200dmas are hard empirical
data that is universally recognized. So technically-aware
contrarian traders are more likely to resume buying with 200dma
approaches. That indeed happened in GDX a few months ago soon after
it converged with those two key support zones. Gold stocks’ upleg
resumed in a sharp surge.
Over
the next 1.2 months into mid-April, GDX blasted up another 34.4%!
The resulting higher high really solidified this upleg’s strong
uptrend. Those big gold-stock gains were fueled by a parallel 12.6%
surge in gold in a similar span. The gold stocks amplified their
underlying metal’s gains by 2.7x during that latest run higher.
Their overall entire-upleg leverage to gold clocked in at 2.5x then,
GDX’s 63.9% to gold’s 25.7%.
That
second two-steps-forward surge of fast gains drove flaring popular
greed and left both gold and GDX seriously overbought. They
were stretched way up to 1.138x and 1.295x their 200dmas
respectively! The big question then was whether these uplegs were
climaxing after exhausting their potential buying, ready to give up
their ghosts. Several factors argued they still had room to run
after more rebalancing selloffs.
First although overboughtness was serious it hadn’t yet stretched to
historical upleg-slaying levels. Over the last five years ago, the
extreme-overboughtness thresholds for gold and GDX started over
1.16x and 1.35x their 200dmas. Both remained well shy of those
warning signs in mid-April! Second gold rallied to a subsequent
higher high in early May, so its own upleg driving gold stocks’
definitely didn’t peak a month earlier.
Third up 25.7% at best in mid-April, gold was enjoying its strongest
upleg by far since the last big ones peaked in 2020. Once gold
uplegs grow to major status, they tend to take on lives of their own
as traders love chasing upside momentum. Gold’s last two similar
uplegs grew much larger to 42.7% and 40.0% gains on massive
investment buying! There hasn’t been much of that yet in today’s
upleg, giving it room to run.
And
if gold’s driving upleg didn’t terminally peak in early May up
26.3%, then the selloff since is another healthy mid-upleg
pullback. And gold’s total selloff so far as of mid-week is just
6.9%, still a pullback well shy of the 10%+ correction threshold.
That is right in line with this upleg’s previous 7.2% pullback into
late February, after which gold surged sharply to major new upleg
highs. If gold’s upleg isn’t over, neither is GDX’s.
At
worst as of mid-week, GDX’s own latest correction is running 18.5%
which is normal 2.7x downside leverage to gold. Gold’s pullback
probably wouldn’t have lasted this long if not for the
summer doldrums.
June has long proven the weakest time of the year seasonally
for gold and its miners’ stocks, devoid of any outsized recurring
demand surges. Gold’s initial $1,941 pullback low in late May held
for several weeks.
Gold
and gold stocks were both stabilizing and starting to advance again
in early June, holding their own until last Tuesday when some
crazy-improbable Fed-hawkish economic data drove a minor
breakdown to new pullback lows in the metal. That’s why these
pullbacks have re-intensified over the week or so since. But just
like in early March, GDX has again converged with both its upleg’s
uptrend support and its 200dma.
That
doesn’t guarantee gold stocks will bounce sharply from here, but it
really ups the odds they are in the process of bottoming
ahead of another big surge higher. While fear abounds after this
latest selloff, these technicals are really bullish. That’s why
we’ve been boldly buying new gold-stock trades low to refill our
newsletter trading books. Buying low requires deploying capital
when sectors don’t look or feel good.
Gold
stocks are likely to soon resume powering higher on balance growing
this upleg because gold itself does. Gold uplegs are driven by
three sequential telescoping stages of buying. This upleg’s initial
stage-one gold-futures short-covering buying is spent. But a
whopping 5/6ths or so of its much-larger stage-two gold-futures
long buying remains! Speculators have only bought longs 1/6th up
into their likely trading range.
If
you want to get up to speed, I analyzed all this in depth a couple
weeks ago in another essay on
gold bottoming
despite the hawkish Fed. I also cover the latest spec
gold-futures positioning and its near-term implications for gold in
all our subscription newsletters. These super-leveraged traders who
bully around gold prices still have huge room to buy in.
Gold’s upleg likely won’t fail before long buying exhausts itself.
And
gold’s ultimate stage-three investment buying has barely even
started. Those monster 42.7% and 40.0% gold uplegs cresting in
2020 were fueled by
enormous
identifiable investment buying. The best high-resolution daily
proxy for that is the combined holdings of the mighty world-dominant
GLD and IAU gold ETFs. Their bullion soared 30.4% or 314.2 metric
tons during the first and 35.3% or 460.5t in the second!
Surprisingly still at best in today’s strongest gold upleg since
those, GLD+IAU holdings have only climbed a tiny 4.3% or 58.2t
between mid-March to late May! So investors still have vast room to
buy and chase gold’s upside momentum. That will likely be rekindled
by Fed-dovish news, either the FOMC nearing the end of its extreme
rate-hike cycle or big downside surprises in key economic data,
sparking gold-futures buying.
The
end of the summer doldrums will play a role too, as Asian harvest
buying ramps up pushing global gold prices higher. That starts in
July then accelerates in August. During gold’s modern bull-market
years over the past couple decades or so, gold has averaged 0.2%
losses in June before excellent 1.1% and 1.8% average gains soon
follow in July and August! So gold and gold stocks are poised to
resume climbing.
Another reason gold stocks look really bullish at this
seasonal-low
buying opportunity is their upcoming Q2’23 earnings season. As
analyzed in last week’s essay, quarterly-average gold prices surged
up to a record high this quarter while many major gold miners are
forecasting lower mining costs. That should really boost their
earnings, leaving gold stocks even more undervalued relative
to prevailing gold prices.
So
with gold stocks at key support zones, today sure looks like a good
time to buy low technically. This sector is really out of favor
with fear and apathy abounding, thus bearish herd sentiment also
implies gold stocks are bottoming. Maintaining this
essential perspective for context is enabling us to aggressively add
trades in great fundamentally-superior
mid-tier and
junior gold miners at some excellent bargain prices!
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The
bottom line is gold stocks have converged with two key support
zones, really increasing the odds their latest mid-upleg pullback
has largely run its course. This healthy selloff accomplished its
mission of rebalancing sentiment, eradicating excessive greed. That
paves the way for gold-stock traders to return in force, driving
this upleg’s next big surge higher. Gold’s own imminent resuming
rallying will fuel their buying.
Gold
is exiting June’s summer-doldrums seasonal slump, with both
gold-futures speculators and investors still having huge buying
firepower left. The former will flock back as Fed hawkishness wanes
with this epic rate-hike cycle mostly behind us. The resulting big
gold gains will entice investors back to chase them. As gold’s
interrupted upleg starts powering higher again, capital will flood
into gold stocks with a vengeance. |