Gold Stocks Retest Lows

The gold miners’ stocks have had a tough week, sinking to marginal new correction lows. So far this is a technical retest, driven by a parallel one in gold. While uncommon and unpredictable, these retests are very challenging psychologically. The resulting drawdowns in gold-stock positions shake out the weak hands, spawning widespread capitulation. But holding on through retests rather than selling low is prudent.

Trading stocks is hard, which is why the majority of people who try it end up losing money. The mission is simple, buy low then sell high. But actually executing on that is difficult, as it requires constantly battling your own emotions. It’s hard to buy low because that’s only possible when prices have already fallen and nearly everyone else is scared and bearish. Correction-low retests create this psychological landscape.

Selling high isn’t much easier, as that requires exiting profitable trades after big runs higher. Those are the times when nearly everyone else is excited and greedy, extrapolating continuing gains indefinitely. To be successful, traders have to both buy and sell when they least want to and when popular consensus argues those are bad decisions. It takes strong discipline and mental toughness to fight your heart and the herd.

I’m blessed to live in beautiful Colorado and love the rugged mountains here. My family does plenty of hiking, camping, and skiing to enjoy the high country. My kids have learned countless lessons up there about the paramount importance of perseverance through hard conditions. The best example is hiking Colorado’s fourteeners, mountains with summits over 14,000 feet. I’ve done dozens, and they are all hard.

You have to get to the trailheads hours before first light because these trails are often 7-to-15-mile round trips! You have to haul lots of gear, including sufficient water, food, and winter clothes. Temperatures at summits can be 50 degrees colder than their bases. Once you get above the tree line around 11,500 feet, winds are often stiff and insufficient oxygen makes exertion hard. Hiking fourteeners is utterly exhausting.

But man, the peak views and feelings of accomplishment for overcoming challenges is unparalleled! You never forget those hard days. My daughter hiked her first fourteener at 6 years old, 7 miles all on her own feet. Whenever my kids face challenges in life, I always remind them of fourteeners. Perseverance is the key, always trudging forward no matter how hard it is. You can always take one more step, then another.

A couple of Sundays ago I went skiing with a friend. The forecast was 60mph sustained winds with 90mph gusts, all above 10,800 feet! Although we dressed in arctic gear, we weren’t sure how long we could last in such extremes at elevation. It proved a hard day, but incredible as I saw sights I’ve never seen in decades of mountain experience. Big evergreen trees were waving like grass, whipped by fierce snow whirlwinds!

Trading stocks reminds me of being in the mountains. Both are challenging and fulfilling, but provide little comfort. Like hiking a fourteener, once you commit to a trade you are in for the full ride. The only thing capitulating early at the first signs of hardship guarantees is failure and losses. Few things test the mettle of traders like correction-low retests, revealing who is mentally-tough enough to weather inevitable drawdowns.

The leading and dominant gold-stock benchmark and trading vehicle is the GDX VanEck Vectors Gold Miners ETF. In the middle of this week, as this sector retested its latest correction low, GDX commanded fully 64% of all the capital deployed in all the US-traded gold-stock ETFs!As this GDX chart shows, the gold stocks have been grinding lower on balance for six weeks now. That has devastated psychology.

(Click on image to enlarge)

The gold stocks skyrocketed out of last March’s COVID-19-lockdown-fueled stock panic, with GDX utterly soaring 134.1% higher in just 4.8 months! Naturally, such a big-and-fast upleg left this sector extremely overbought, necessitating a healthy correction to rebalance sentiment and technicals. And that is exactly what happened over the next 3.6 months when GDX lost 24.9% falling back under its 200-day moving average.

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