Gold Stocks Wavering

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Instead of correcting hard to kill greed quickly, the major gold stocks have largely been drifting sideways generating apathy. This lukewarm wavering is slowly staking enthusiasm for this sector. This is evident in gold-stock capital flows and gold-stock sentiment. Back in late August and early September, bullishness for big additional gains ran rampant. Today gold stocks are shifting back towards being ignored like usual.

Trading high consolidations is very different than trading corrections. Since this sector mostly grinds horizontally, replacing selloff downside with time, existing positions don’t have to be liquidated. They can be held to ride out the consolidation, as the potential losses are way lower than in a correction. Later on after the consolidation has mostly eradicated greed, new positions can be added ahead of the next upleg.

One clue both corrections and consolidations may be ending is 200dma approaches. 200-day moving averages are the strongest support zones within ongoing bull markets. So when GDX retreats back to its 200dma, either quickly through a correction or slowly through a consolidation, odds rise that sentiment is nearing sufficient rebalancing. And so far in this corrective phase, GDX hasn’t even come close to its 200dma.

The day that last gold-stock upleg peaked in early September, GDX was running 1.341x its 200dma. At worst in late November when the major gold stocks revisited their correction lows, that metric contracted to 1.047x. But GDX still remained almost 5% above its 200dma, way too high for a convincing approach. By late December that ballooned back up to 1.151x, and was still running 1.109x in the middle of this week.

Thus while overboughtness has mitigated considerably in recent months, it never went away. Both prior gold-stock corrections saw GDX plunge way under its 200dma, to 0.767x and 0.801x respectively. While such deep correction lows probably aren’t necessary this time around, this leading gold-stock benchmark could easily fall 5% to 10% under its 200dma before greed is eradicated. So considerable risks remain.

The key to successfully trading gold stocks is their dominant primary driver, gold. Gold’s fortunes over the next few months will dictate whether the gold miners roll over into a correction or keep consolidating high to evade one. 80%+ of gold-stock price action is driven by gold, not company-specific news. If gold is rallying, the miners climb with it amplifying its gains. If gold is selling off, gold stocks leverage its losses.

The major gold miners of GDX tend to leverage material gold moves by 2x to 3x. So if gold rallies 10% from here, GDX is likely to surge 20% to 30% higher. But if gold falls 10%, this leading gold-stock ETF will likely be dragged 20% to 30% lower. The lack of a normal gold correction following gold’s own early-September upleg peak is why gold stocks haven’t corrected significantly. They simply mirrored gold’s action.

At worst in late November, gold had retreated 6.4% in 2.7 months. While not perfectly synched time-wise, GDX’s 15.4% drop at worst was 2.4x gold’s. That’s right in the middle of that normal leverage range. But gold’s parallel high consolidation that has enabled gold stocks’ has also been far milder than bull-to-date precedent. This gold bull’s prior couple corrections averaged much-larger 15.5% selloffs over 6.0 months!

So whether these wavering gold stocks correct or consolidate depends on whether gold itself corrects or consolidates. The only way this sector’s high consolidation can continue and avoid rolling over into a bigger selloff is if gold remains relatively high too. As always gold-stock speculators and investors must look to gold for what’s probable next. Again it is responsible for well over 4/5ths of gold-stock price action!

Like gold stocks, gold is driven by capital flows. When speculators and/or investors are buying, gold rallies pushing the gold stocks higher. When they sell, gold falls dragging its miners’ stocks lower. What gold speculators and investors do in coming weeks and months will determine the short-term fate of the gold stocks. Unfortunately, the recent gold buying looks precarious, as I detailed in another essay last week.

In recent weeks GDX’s highest close remained 4.7% under its last upleg peak in early September. Yet gold was breaking out to new upleg highs, fueled by shocking geopolitical events. The US government assassinated Iran’s top general with a drone strike while he was traveling in Iraq, then Iran retaliated by lobbing ballistic missiles at Iraqi bases used by the US military!  So gold blasted 2.9% higher in 3 trading days.

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