Gold Stocks Still Stalled

Adam Hamilton     February 14, 2020     2758 Words


The gold minersí stocks are still stalled, mostly grinding sideways despite higher prevailing gold prices.  This lack of progress is really frustrating traders, slowly shifting herd psychology towards apathy.  Thatís the mission of high consolidations, gradually rebalancing sentiment by bleeding off greed.  This healthy process has already come a long way, but still needs to fully play out before gold stocksí next upleg can run.


The GDX VanEck Vectors Gold Miners ETF remains this sectorís most-popular benchmark.  Launched way back in May 2006, its first-mover advantage has grown into an insurmountable lead over its peers.  Its $12.7b in net assets this week are running 38.2x larger than its next-biggest 1x-long major-gold-miners-ETF competitor!  GDXís lackluster price action in this past half-year or so has disheartened traders.


Last summer the gold stocks blasted higher with gold after its first bull-market breakout in several years.  The gold stocks caught a bid before that landmark event, starting to rally at the end of May as gold surged on US-tariff fears.  By early September GDX had soared 49.0% higher in just 3.2 months!  Over 2/3rds of those big gains came after goldís bull-market breakout.  GDX crested with gold on September 4th at $30.95.


But it hasnít come close to regaining those levels since, confounding gold-stock traders.  Thatís despite gold continuing to climb to major new secular highs of its own in early and late January.  Both were fueled by geopolitics, first a flaring US-Iran conflict and later Chinaís scary coronavirus outbreak.  But the major gold stocks failed to follow the metal higher which dominates their profits.  That disconnect is really unusual.


In early January when gold surged to a new 6.8-year secular high of $1572 after the US assassinated Iranís top general, GDX only hit $29.50.  While gold was 1.2% above its original early-September peak of $1554, GDX stayed 4.7% lower than its own.  Then in late January as gold rallied to another 6.8-year best of $1586, GDX merely hit $28.99.  That was 6.3% lower than September 4th, despite gold being 2.1% higher!


Normally the major gold stocks amplify goldís material advances by 2x to 3x.  So GDX shouldíve been 4% to 6% higher than its last uplegís high-water mark rather than 6% lower.  Because mining gold adds much more risk on top of the metalís price swings, the major gold stocks have to leverage goldís upside to be worth owning.  Theyíve certainly failed at that critical mission over the past 5+ months, decoupling from gold.


So why have gold stocks stalled out, ignoring major gold highs?  And when will their normal relationship to gold resume?  This GDX gold-stock-bull chart since 2016 helps illuminate whatís going on.  Broader context is essential for gaming the markets.  The major gold stocks are consolidating high because they needed to either do that or correct after last summerís upleg.  That was essential to rebalance sentiment.



Again GDX rocketed 49.0% higher in just 3.2 months last summer, a powerful surge over such a short span of time.  That left this sector seriously overbought.  Two days after GDX peaked, I warned about that in an essay ďGold Stocks Very OverboughtĒ.  GDX had stretched a massive 34.1% above its key 200-day moving average!  That dangerous overboughtness then is evident in the gap between the blue and black lines.


Fighting the universal popular greed then, I concluded ď stocks are very overbought.  The powerful counter-seasonal rally in recent months catapulted gold-stock benchmarks far beyond their 200-day moving averages.  Such stretched technicals coupled with very-bullish popular sentiment are a warning this recent upleg is maturing.  It is likely to roll over into a healthy correction soon to restore balance...Ē


Indeed thatís exactly what happened, with GDX falling 15.4% over the next 1.3 months.  By mid-October it was back down to $26.19.  That was fairly small by gold-stock-correction standards, as this bullís prior two averaged ugly 35.4% losses over 11.8 months per GDX!  The major gold stocksí latest correction still needed to deepen considerably, at least dragging GDX back down to its 200dma.  That never happened.


At that initial correction low, GDX remained 8.2% above that key technical baseline.  That wasnít enough of a selloff to rebalance sentiment, to largely eradicate the excessive greed seen at the preceding uplegís topping.  So that young correction prematurely truncating left much residual greed, which quickly emboldened traders.  Them cutting short that necessary and healthy gold-stock selloff was pretty surprising.


GDX retested that modest low two more times in early November and late November, and it held solid.  That happened to be at an interesting level technically.  Note above this gold-stock correction bounced at the upper resistance line of the last uplegís uptrend.  Technically-oriented gold-stock traders were buying, hoping that existing resistance would morph into support.  That kept GDX above that uplegís trend channel.


The gold stocks mostly ground sideways in Q4, with GDX meandering between about $26 to $28.  That upped the odds this sector was rebalancing sentiment a different way.  Greed can be eradicated by both losses and time.  The faster something corrects, the quicker greed is destroyed making room for fear.  But when prices instead drift sideways on balance, greed slowly turns to apathy as traders grow frustrated.


All major uplegs are followed by either corrections or high consolidations.  The formerís big losses make that necessary rebalancing work happen much faster.  The latterís lack of upside progress makes this process much slower and more discouraging.  As a speculator I far prefer corrections, as they usher in the next buy-low opportunities way sooner.  But consolidations are easier psychologically for investors not trading.


The major gold stocks continued to threaten to resume correcting until Christmas Eve.  GDX surged 3.2% higher in that low-volume holiday-shortened session after gold broke out above its own minor correctionís downtrend.  That grew into a larger 6.2% GDX rally over 4 trading days into year-end, making for normal 3.1x upside leverage to goldís 2.0% gains.  But the gold stocks couldnít follow gold to new upleg highs.


That has certainly proven vexing for gold-stock traders given the news.  When the US killed that Iranian general, and Iran retaliated by lobbing ballistic missiles at Iraqi airbases used by the US military, there were lots of fears that World War 3 was brewing!  Thatís the kind of thing that should make gold and its minersí stocks soar parabolic.  Yet GDX only hit $29.50, which was again 4.7% under its early-September peak.


Then a few weeks later Chinaís coronavirus outbreak was threatening becoming the first global pandemic in a century!  That virulent and dangerous virus, which is increasingly looking bio-engineered, defied Beijingís draconian efforts to stop its spread.  The news out of China is grim and terrifying, perfect to fuel a huge gold-stock surge.  Yet this sector per GDX only hit $28.99, again 6.3% under its latest uplegís crest.


In light of these troubling geopolitical backdrops, and the resulting major new 6.8-year secular gold highs, the gold stocks have been performing poorly.  As a result, GDX has carved lower highs over the past 5.3 months.  That new declining upper-resistance line is converging with the last uplegís resistance line that has turned into support.  So the major gold stocks are compressing into a tightening symmetrical triangle.


That means gold stocksí correction-defying high consolidation is running out of technical room to merely keep drifting sideways.  Sometime in the next month or two, GDX either has to stage an upside breakout above its declining resistance or fail to the downside below its rising support.  The former could keep this high consolidation alive, while the latter would likely push GDX lower to resume its long-stalled correction.


Interestingly that correction possibility isnít as menacing as it was back in early September.  Again just over 5 months ago, GDX was stretched a massive 34.1% over its 200dma.  Greed was excessive, with gold-stock traders and analysts convinced this sector would keep blasting higher.  Thankfully the high consolidation since then eradicated the majority of that greed, less enthusiasm remains for this adrift sector.


And this week GDX slumped back down to just 5.7% above its 200dma.  Those were the major gold stocksí least-overbought levels since late Novemberís correction-low retest, which saw a +4.7% GDX read.  Thus there is much less corrective work remaining to be done compared to what the gold stocks faced in early September.  The high consolidation since attenuated the worst of the downside risks facing GDX.


But how the gold stocks fare over the next month or two really depends on gold like usual.  These major gold miners are effectively just leveraged plays on gold, which overwhelmingly drives their earnings and thus ultimately stock prices.  If gold rallies from here, GDXís breakout will likely be to the upside.  If gold drifts, so will GDX.  And if gold resumes selling off in its own truncated correction, GDX will follow it lower.


Like the major gold stocks, goldís rallies relative to the scary geopolitical news so far this year have been anemic.  Again in late January gold was merely 2.1% higher than its last uplegís original peak back in early September.  Its total gains were less than $33 in 4.9 months.  Thatís pathetic given the US-Iran military attacks and pestilence ravaging China.  These shocks shouldíve blasted gold hundreds of dollars higher!


Yet gold has only mustered a lethargic reaction at best.  It isnít attracting the kinds of capital inflows that it ought to be given the ominous news flow.  And thatís almost certainly why gold stocks failed to amplify its gains.  Seasoned gold-stock traders closely watch gold, and theyíre well aware goldís upside has proven weak relative to this situation.  So theyíve prudently held off on buying gold stocks until this oddness passes.


The two primary drivers of goldís own price action are speculatorsí gold-futures trading and investment buying.  Iíve written much about both in recent months.  Specs have mostly been all-in gold futures since early September, their capital firepower for buying more largely exhausted.  And investors havenít been interested in gold with the stock markets levitating to endless new all-time highs on central-bank money printing.


As I discussed in mid-January, the recent gold buying is precarious.  Speculatorsí hyper-leveraged bets in gold futures can be considered in gold-bull-trading-range terms.  The most-bullish-possible positioning for gold is them having 0% longs and 100% shorts relative to their own gold-bull ranges, meaning they have vast room to buy more gold futures to add to their longs and cover existing shorts.  That is super-bullish for GDX.


The most-bearish-possible near-term setup for gold and its minersí stocks is specs having 100% longs and 0% shorts.  That means they have bought pretty much all the gold futures they are likely able to, and leaves vast room to sell both existing longs and add new shorts.  In early September total spec longs and shorts hit 96% and 8%, which was really bearish for gold and gold stocks.  That threatened major corrections.


I also wrote about this menacing gold-futures-selling overhang in mid-September.  Some progress was made in normalizing specsí excessively-bullish bets, with their positioning starting to mean revert hitting 77% longs and 8% shorts in mid-October.  But that necessary and healthy rebalancing was cut short in late December, as it was speculators aggressively buying gold futures that fueled goldís downtrend breakout.


By year-end, total spec longs and shorts were right at that most-bearish-possible read of 100% longs and 0% shorts!  Thatís the reason gold didnít soar on the US-Iran conflict and Chinaís coronavirus outbreak.  The gold-futures specs who dominate goldís short-term price action were already fully-deployed, with little spare buying capacity.  That situation persisted into late January, when specs had 97% longs and 0% shorts.


With these influential traders still having little room to buy but vast room to sell by their own gold-bull-to-date standards, thereís much-higher odds of gold selling off again than rallying materially.  And as goes gold, so go the major gold stocks.  GDX will amplify any significant gold moves lower on specs unwinding their excessively-bullish gold-futures bets.  That would almost certainly force this ETF to fresh correction lows.


Compounding goldís problems, gold investment demand has been weak too.  Despite this yearís stunning gold-bullish developments, identifiable gold investment demand has barely budged.  Its best daily proxy is found in the bullion holdings of the worldís leading GLD SPDR Gold Shares gold ETF.  As of this week they still remain slightly below goldís last-upleg-peak levels from late September.  Investors arenít buying!


The biggest reason is likely the extreme euphoria spewing off these record-high stock markets.  Thanks to the Fedís extreme QE4 Treasury monetizations, the US stock markets have rocketed higher since that campaign began in mid-October.  These fast gains have fueled epic complacency, investors donít have a care in the world.  Popular expectations that stocks will keep rallying indefinitely greatly retard gold demand.


Gold is the ultimate portfolio diversifier, the go-to asset to mitigate losses during major stock selloffs.  So it is largely forgotten when stock markets are surging.  Gold investment demand is unlikely to resume in size again until these lofty euphoric US stock markets suffer a correction-grade 10%+ selloff.  And if investors arenít buying gold and gold-futures speculators canít, then thereís no way it can stage an upside breakout.


On top of this bearish gold seasonals are coming into play again too.  After goldís strongest seasonal rally of the year from late October to late February, this metal tends to suffer a seasonal slump into mid-March.  That headwind will likely exacerbate any gold-futures selling.  Normally that pre-spring-rally slump comes after the Chinese Lunar New Year celebrations, which see major consumer gold buying for holiday gifts.


But this year Chinaís entire week-long Lunar New Year holiday was cancelled with that novel coronavirus out of control!  The Chinese people largely couldnít travel to see family and friends, couldnít gather together in public to celebrate, and that probably heavily impaired normal LNY gold demand.  Thus the post-LNY gold slump could come earlier than usual this year.  That would drag the gold stocks lower in sympathy.


Given all this, it still looks prudent to remain cautious on gold stocks here.  Their high consolidation since early September hasnít yet finished their necessary corrective work.  And their dominant primary driver gold faces massive mean-reversion selling in gold futures while investors are distracted by these euphoric record-high stock markets.  Couple that with weak seasonals, and gold is more likely to retreat than rally.


So gold-stock traders ought to remain patient here.  If gold falls 10% from its late-January peak, the major gold stocks could drop 20% to 30% given their usual 2x to 3x leverage.  But even if they only retreat 15%, that will still yield way-superior entry points to redeploy capital for this sectorís next major upleg.  It should be well worth the wait.  This gold bullís prior three GDX uplegs averaged mighty 87.3% gains over just 6.7 months!


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 high-potential gold stocks, you need to stay informed about whatís driving broader gold cycles.  Our newsletters are a great way, easy to read and affordable.  They draw on my vast experience, knowledge, wisdom, and ongoing research to explain whatís going on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantage of our 20%-off sale!  Get onboard now so you can mirror our coming trades for goldís next upleg after this corrective phase largely passes.


The bottom line is gold stocks remain stalled, making no progress on balance over the past half-year or so.  Despite higher gold prices fueled by geopolitical fears, the major gold stocks are carving lower highs.  Gold-stock traders are worried about goldís anemic gains given the news, so they are wary of deploying big capital into the miners.  That caution is wise given goldís situation, with selling much more likely than buying.


The gold-futures speculators who overwhelmingly drive goldís price action remain tapped out, their capital firepower for buying exhausted.  The Fedís extreme stock-market levitation has sapped investorsí interest in gold, while the Chinese havenít been able to do their normal Lunar New Year buying.  All that leaves gold and thus its minersí stocks continuing to face risks for sizable selling.  Wait until that runs its course to buy.


Adam Hamilton, CPA     February 14, 2020     Subscribe