Gold Stocks Still Stalled

The gold miners’ stocks are still stalled, mostly grinding sideways despite higher prevailing gold prices. This lack of progress is really frustrating traders, slowly shifting herd psychology towards apathy. That’s the mission of high consolidations, gradually rebalancing sentiment by bleeding off greed. This healthy process has already come a long way but still needs to fully play out before gold stocks’ next upleg can run.

The GDX VanEck Vectors Gold Miners ETF remains this sector’s most popular benchmark. Launched way back in May 2006, its first-mover advantage has grown into an insurmountable lead over its peers. Its $12.7b in net assets this week are running 38.2x larger than its next-biggest 1x-long major-gold-miners-ETF competitor! GDX’s lackluster price action in this past half-year or so has disheartened traders.

Last summer the gold stocks blasted higher with gold after its first bull-market breakout in several years. The gold stocks caught a bid before that landmark event, starting to rally at the end of May as gold surged on US-tariff fears. By early September GDX had soared 49.0% higher in just 3.2 months! Over 2/3rds of those big gains came after gold’s bull-market breakout. GDX crested with gold on September 4th at $30.95.

But it hasn’t come close to regaining those levels since, confounding gold-stock traders. That’s despite gold continuing to climb to major new secular highs of its own in early and late January. Both were fueled by geopolitics, first a flaring US-Iran conflict and later China’s scary coronavirus outbreak. But the major gold stocks failed to follow the metal higher which dominates their profits. That disconnect is really unusual.

In early January when gold surged to a new 6.8-year secular high of $1572 after the US assassinated Iran’s top general, GDX only hit $29.50. While gold was 1.2% above its original early-September peak of $1554, GDX stayed 4.7% lower than its own. Then in late January as gold rallied to another 6.8-year best of $1586, GDX merely hit $28.99. That was 6.3% lower than September 4th, despite gold being 2.1% higher!

Normally the major gold stocks amplify gold’s material advances by 2x to 3x. So GDX should’ve been 4% to 6% higher than its last upleg’s high-water mark rather than 6% lower. Because mining gold adds much more risk on top of the metal’s price swings, the major gold stocks have to leverage gold’s upside to be worth owning. They’ve certainly failed at that critical mission over the past 5+ months, decoupling from gold.

So why have gold stocks stalled out, ignoring major gold highs? And when will their normal relationship to gold resume? This GDX gold-stock-bull chart since 2016 helps illuminate what’s going on. The broader context is essential for gaming the markets. The major gold stocks are consolidating high because they needed to either do that or correct after last summer’s upleg. That was essential to rebalance sentiment.

(Click on image to enlarge)

Again GDX rocketed 49.0% higher in just 3.2 months last summer, a powerful surge over such a short span of time. That left this sector seriously overbought. Two days after GDX peaked, I warned about that in an essay “Gold Stocks Very Overbought”. GDX had stretched a massive 34.1% above its key 200-day moving average! That dangerous overboughtness then is evident in the gap between the blue and black lines.

Fighting the universal popular greed then, I concluded “ stocks are very overbought. The powerful counter-seasonal rally in recent months catapulted gold-stock benchmarks far beyond their 200-day moving averages. Such stretched technicals coupled with very-bullish popular sentiment are a warning this recent upleg is maturing. It is likely to roll over into a healthy correction soon to restore balance...”

Indeed that’s exactly what happened, with GDX falling 15.4% over the next 1.3 months. By mid-October, it was back down to $26.19. That was fairly small by gold-stock-correction standards, as this bull’s prior two averaged ugly 35.4% losses over 11.8 months per GDX! The major gold stocks’ latest correction still needed to deepen considerably, at least dragging GDX back down to its 200dma. That never happened.

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