Gold Miners Too Bullish?

One hundred percent of gold miner stocks are exhibiting bullish chart patterns, according to StockCharts.com

It’s hard to find 100% consensus on any issue, much less investments. Yet, here it is: 100% of gold miner stocks are exhibiting bullish chart patterns. according to StockCharts.com, an investor-friendly website that seeks to educate the hoi polloi in all things technical.

You’d think that this would be cause for gold bugs to celebrate, right? Not really. You see, whenever gold miners’ bullish percentage reaches extremes, it’s more likely a sign of an impending reversal than a continuing trend. That’s, at least, what history reveals.

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The last time the Gold Miners Bullish Percent Index hit 100% was four years ago. That condition lasted about week before the miners went on a four-month slide. By November 2016, only 7% of the stocks still looked bullish. Over that time, the VanEck Vectors Gold Miners ETF (NYSE Arca: GDX), a cap-weighted index tracker composed of more than 50 precious metals producers, lost 29% of its market value. Spot gold, meanwhile, slipped 11%.

Gold miners afford investors exposure to both gold’s price and to the equity market. Not equal exposure, mind you. When gold miners lost ground in the second half of 2016, the equity market represented by the SPDR S&P 500 Trust (NYSE Arca: SPYactually rose 5%. Over the long run, though, gold miners typically exhibit a positive albeit weak correlation to the broader swath of stocks. In the past five years, GDX sported a 0.08 coefficient to SPY. A sister fund, the VanEck Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) chalked up a 0.15 correlation, while gold bullion posted a -0.01 stat.

Five -Year ETF Performance

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Miners’ current bullishness is a likely set-up for a pullback. Will it be on the scale of the 2016 sell-off? That’s hard to say at this point. Once the market heels over—if it heels over—we’ll be in a better position to sight a probable objective. Suffice it to say that the prospect of weakening presents a buying opportunity for those investors who didn’t step aboard the FOMO (fear of missing out) train earlier. That is, if those investors still have confidence in the gold market. After all, miners, proxied by the GDX fund, correlate at 0.63 to bullion currently. As a portfolio diversifier, GDX lags a bit behind gold itself but still has offered fair compensation for its volatility.

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