Gold Green-Lights Miners

The mission of corrections is to rebalance sentiment, to eradicate widespread greed by stoking popular fear to smother it. A few days of selling isn’t enough to break traders’ wills to force them to capitulate. It takes sustained, sizable downtrends to shift prevailing psychology from bullish back to bearish. Since corrections usually take their sweet time to accomplish this, they trap traders lulling them into complacency.

After gold’s initial plunge in this bull’s fourth correction, it generally ground sideways consolidating high until mid-September. With this metal meandering around $1948 which is still very high, the great majority of traders and analysts assumed its correction was over. I wrote some contrarian essays arguing the opposite, that much more selling was still coming since gold remained so overbought. Traders scoffed at that.

But sure enough gold suffered another sharp plunge in late September, blasting it 4.7% lower in just three trading days to $1859. That finally established gold’s correction downtrend, another major lower low to accompany the lower highs. That big leg lower naturally rekindled correction fears, but traders have short memories. So once gold started grinding sideways on balance again into late October, they fell back asleep.

Gold retested its correction low late that month, which held. Then gold started surging into the elections, on pollsters’ universal blue-wave-sweep predictions implying another huge pandemic-stimulus-spending bill. Then when Democrats didn’t win the Senate and saw their House lead seriously dwindle, gold blasted higher again on hopes that would force the Fed to step in with more quantitative-easing money printing.

The day that fanciful rationalization took root a couple days after the voting, gold surged 2.5% to $1949. That looked like a breakout above both the upper resistance of gold’s correction downtrend and its 50-day moving average!That proved the hardest day psychologically of this entire selloff, as a technical case could be made that it had ended. But gold had yet to revisit oversold conditions, so I suggested staying wary.

In financial markets, absolute price levels usually don’t matter very much. The important thing is how fast they got to wherever they are. If they recently moved too far too fast, they are likely going to soon mean revert to reverse some of those excessive moves. When gold hit $1859 in late September and $1869 in late October, that rGold indicator was running 1.085x and 1.060x. Gold never got close to falling under its 200dma.

These 200-day moving averages are the strongest support zones in ongoing bull markets, the bottoming levels for major corrections. When all three of this secular gold bull’s previous corrections bottomed, they were all under gold’s 200dma. The rGold reads at those best buying opportunities of this bull came when gold was pummeled way down to 0.885x, 0.908x, and 0.984x its 200dma. 1.060x remained way too high.

Indeed gold’s breakout surge on Fed-QE hopes soon collapsed, with this metal plummeting 4.4% back to $1866 in a single trading day shortly after that election spike! It had proven to be false, another sharp headfake rally which aren’t uncommon during corrections. Gold’s necessary corrective work to rebalance sentiment and technicals hadn’t been finished yet. But once again many traders refused to believe that.

Gold started grinding sideways again, averaging $1875 for the next two weeks into mid-November. But with this bull’s fourth correction still small compared to bull precedent, and gold having yet to even revisit its 200dma support, I continued to fear the selling wasn’t over. We still hadn’t added any long gold-stock trades in our newsletters since early July before gold shot parabolic, as gold corrections pummel gold stocks.

The necessary and healthy gold-selling resumed at the end of November during Thanksgiving week. That Monday and Tuesday gold plunged 1.9% and 1.5%, finally retreating all the way back to $1808 and challenging its 200dma. That selling pressure continued cascading on Black Friday when gold plunged another 1.1% to $1787. That finally dragged it back under that key support zone for the first time in this correction!

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