Gold Stocks Room To Run

The gold miners’ stocks have been drifting sideways to lower in recent weeks, fueling bearish sentiment. With their short-term upside momentum stalled, the great majority of analysts and traders seem worried about a deepening selloff. But this young gold-stock upleg is very much alive and well, with lots of room to run yet. Bull-market uplegs naturally flow and ebb, and today’s has been nowhere close to overbought yet.

Bull uplegs have a normal life cycle, which can be tracked with sentiment and technicals. They are born in deep despair, after major corrections bottom in deeply oversold conditions. Those reveal likely selling exhaustion, paving the way for new buying. That pushes gold stocks higher, gradually shifting sentiment back towards bullish. The longer and higher an upleg rallies, the more it attracts mounting capital inflows.

The resulting bigger gains accelerate the buying, ultimately driving sentiment through greed into euphoria. But that frenzied gain chasing soon burns itself out, enticing in too much near-future buying too soon. In the process it forces gold stocks nearly vertical, leaving them extremely overbought. Then mature uplegs top, as traders interested in participating are effectively all-in. Corrections ensue, resetting this key cycle.

These bull-market waves of uplegs and corrections are very lucrative to trade, giving speculators and investors multiple relatively low entry points and relatively high exit points. Actively buying low then later selling high through a secular bull greatly increases potential gains. That’s certainly evident in our current gold-stock bull, as seen through the lens of the leading GDX VanEck Vectors Gold Miners ETF benchmark.

Born back in mid-January 2016, this bull has seen four complete upleg-correction cycles so far. This current young upleg today is this bull’s fifth. At best as of its peak-to-date in early August 2020, GDX had powered 256.7% higher over 4.5 years. While those are great bull gains, they were handily bested by this bull’s total individual uplegs. In GDX terms they weighed in at +151.2%, +34.6%, +76.7%, and +134.1%.

That adds up to 396.6% potential gains from trading uplegs and corrections, 1.54x better than buying and holding! And if this in-progress young fifth upleg’s small gains so far are included, those numbers grow to 425.0% and 1.66x. While these maximums are theoretical since it is impossible to buy and sell exactly at bottoms and tops, whatever percentage of entire uplegs actually captured still trounces buying and holding.

The hard work of buying low and selling high to ride bull-market upleg-correction cycles comes in timing trades. That requires lots of experience, expertise, and a resolute contrarian bent. Gold stocks must be bought when the vast majority of traders are scared because they just suffered major corrections. And they have to be sold when most traders are euphoric since they recently soared after powering higher for months.

Gold-stock sentiment today remains far from exuberance. Most analysts and traders are apathetic at best, with bearishness creeping back in the longer this sector consolidates sideways. This lack of widespread greed is a bullish sign, indicating this upleg still has a long ways to run before it matures. If you want to remember what herd euphoria looks like, read commentary published in early August as GDX peaked.

Back then it was a frenzied gold-stocks-to-the-moon mentality, which is typical when uplegs go terminal. Today this small contrarian sector is off the radars of most traders, they simply don’t care. They won’t until this young gold-stock upleg rallies long enough and high enough to command more attention. GDX has only climbed 28.4% at best so far over 2.5 months, which is still small compared to bull-market precedent.

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