Gold Green-Lights Miners

On the following Monday wrapping up November, gold slumped another 0.6% to $1775. That extended its total selloff to 13.9% over 3.8 months and pushed rGold down to 0.989x. Technically that was enough to imply this gold bull’s fourth major correction had finally reached maturity. Gold’s selloff had fallen deep enough and lasted long enough to eradicate the extreme greed and overboughtness of the early-August peak.

That total selloff was right in line with precedent set by this bull’s first three corrections. They averaged 14.3% losses over 4.1 months, just slightly worse than the latest 13.9% over 3.8 months. And that earlier average was skewed lower than it should’ve been, as two of those previous corrections were seriously exacerbated by anomalous and unrepeatable circumstances. Mid-March’s extreme stock panic was one of them.

Another greatly intensified this bull’s first correction towards the end of 2016. Gold was bludgeoned with merciless selling after Trump’s surprise election win unleashed a euphoric deluge into stock markets on hopes for big tax cuts soon. Without that, gold would’ve bottomed higher after a shallower selloff. So the case can be made that gold’s latest correction actually proved a bit larger than any typical one would have.

If gold’s correction is indeed over, then this secular bull’s next upleg has already begun marching higher. Again major correction bottomings are the best times to redeploy in fundamentally-superior gold stocks. The major gold miners of the leading GDX VanEck Vectors Gold Miners ETF tend to have stock prices amplify gold’s moves by 2x to 3x. And the better mid-tier gold stocks even outpace those gains during uplegs.

This secular gold bull’s four uplegs averaged strong 33.3% gains. If its fifth one merely conforms to that precedent, the major gold stocks should rocket between 67% to 100% higher during it! The prospects of doubling our capital in less than a year are super-alluring. When gold resumes marching higher on balance, massive gold-stock gains accrue. So this sector should be aggressively bought early in gold uplegs.

But don’t forget that important caveat that major bottomings are impossible to guarantee in real-time. The probabilities certainly argue that gold’s correction has matured, carving such excellent buyable lows. But bottomings don’t always take the form of sharp V-bounces. Sometimes gold prices can grind along near lows for a spell before the next upleg starts gathering momentum. Gold could even sink back to fresh lows.

Several major risk factors remain which could unleash more gold selling. The primary one is a rally in the really-low US Dollar Index, which would motivate leveraged gold-futures speculators to sell en masse. That would likely snowball given their current positioning which remains heavily long gold. Another big risk is ongoing differential selling pressure in the shares of the leading and dominant gold ETFs, GLD, and IAU.

But even if gold soon revisits its $1775 correction low from late November, or plumbs new depths and extends this total selloff, odds are the lion’s share of the selling is behind us. With gold’s latest correction mature, the gold-stock redeployment for gold’s next upleg can commence anyway. New trades are gradually layered in over time, minimizing overall portfolio risk while attempting to straddle the ultimate bottom.

This last chart shows gold stocks’ performance through the GDX lens during gold’s secular bull. They have corrected with gold in recent months, and have also been dragged back down under GDX’s own 200dma. So like gold, sentiment, and technicals in the miners’ stocks have also been rebalanced in this vital selloff. That paves the way for gold stocks to surge higher amplifying the gains in gold’s next upleg.

The latest gold-stock upleg paralleling gold’s rocketed 134.1% higher in 4.8 months into early August in GDX terms! And that wasn’t even the biggest of this bull, with its initial one hitting +151.2% in roughly the first half of 2016. When gold powers higher on balance, gold-stock prices soar due to the miners’ big profits leverage to gold. GDX just corrected with gold like usual, falling 24.9% in 3.6 months into late November.

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