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 VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) 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, the VanEck Vectors Junior Gold Miners ETF (GDXJ), 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 government's 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 two 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 four 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 five 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 SPDR Gold Trust ETF (GLD). 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 government's 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 government's 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.
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.
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