Gold-Stock Correction Matures

The gold miners’ stocks have suffered a correction since early August, gutting traders’ enthusiasm for this contrarian sector. This necessary and healthy selloff is maturing, after largely accomplishing its essential mission of rebalancing sentiment and technicals. The universal greed and extreme overboughtness plaguing gold stocks as their last upleg peaked has been reversed, paving the way for their next bull upleg.

Since corrections are challenging to weather psychologically, most traders hate them. But they are an integral part of secular bulls, which are ultimately an alternating series of uplegs followed by corrections. By preventing sentiment and technicals from terminally overheating, these corrections greatly extend bull markets’ longevity. Without rebalancing selloffs, bulls would rocket parabolic soon exhausting potential buying.

The overpowering greed fueled by extreme gains rapidly seduces in all traders interested in a sector. So they rush to buy expending their capital firepower, pulling forward much future demand which slays bulls. Corrections prevent those premature failures, bleeding off excess greed before it spirals out of control. More importantly for traders, these periodic selloffs really multiply the potential gains available in bull markets.

Successful trading demands buying low then later selling high. Correction bottomings are the best times to buy relatively-low within ongoing bulls, aggressively deploying capital. The subsequent upleg toppings are the best times to sell relatively-high, locking in big gains. Actively riding these upleg-correction cycles is way more profitable than buying and holding for an entire bull. Corrections bring great opportunities!

So traders should embrace them rather than fretting about them. Today’s maturing gold-stock correction is sure evident in this sector’s leading benchmarks, led by the popular GDX VanEck Vectors Gold Miners ETF. GDX commands the lion’s share of capital deployed in major gold miners’ stocks via exchange-traded funds. The wild ride its share price has been on this year reflects big sector uplegs and corrections.

Context and perspective are essential for understanding and trading markets, so this chart shows GDX’s price action over gold stocks’ entire secular bull market. Overall between mid-January 2016 to early-August 2020, the major gold stocks soared 256.7% higher during this 4.5-year span. That leveraged gold’s own parallel bull run by 2.9x, on the high side of major gold stocks’ normal range running from 2x to 3x.

But actively trading this bull’s uplegs and corrections was far more lucrative. The gains won in GDX’s four individual uplegs added up to 396.6%. Those were further amplified by the increased buying power from holding cash through corrections. Traders selling relatively-high at upleg toppings were able to buy more shares of the same fundamentally-superior gold miners at correction bottomings, accelerating their overall gains.

(Click on image to enlarge)

This year’s roller-coaster gold-stock price action started with mid-March’s brutal stock panic, driven by governments imposing widespread economic lockdowns to slow the spread of COVID-19. The major gold stocks literally crashed on that, with GDX plummeting 24.5% in a two-trading-day capitulation climax, as soaring US-dollar safe-haven demand hammered gold. That left the major gold stocks radically oversold!

After GDX cratered 38.8% in just 0.6 months, a major new bull upleg was overdue. So only two trading days after that stock panic’s nadir, we started aggressively buying and recommending great gold and silver miners in our subscription newsletters. As April dawned I wrote an essay explaining the huge opportunities, “All this argues that a major new gold-stock upleg is getting underway, portending big gains coming!”

Indeed the gold stocks kept rocketing higher, ultimately catapulting GDX up 134.1% in just 4.8 months by early August! Interestingly that wasn’t even exceptional by this bull’s standards. Its first upleg back in the first half of 2016 saw even-bigger 151.2% GDX gains. But gold stocks had run so far so fast by this past summer that they were extremely overbought. That danger was readily evident in GDX’s technicals back then.

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