Gold-Stock Upleg Pauses

The gold miners’ stocks have slumped in January, tilting sentiment back to bearish. This sector’s strong December upward momentum was checked by gold’s own upleg stalling out. Gold investment demand growth slowed on the blistering stock-market rally. But uplegs always flow and ebb, and this young gold-stock upleg merely paused. The gold miners’ gains will likely resume soon, rekindling bullish psychology.

Most investors and analysts track the gold-mining sector with its leading ETF, the GDX VanEck Vectors Gold Miners ETF. GDX was this sector’s pioneering ETF birthed in May 2006, creating a huge first-mover advantage that is insurmountable. This week GDX’s net assets of $9.9b were an incredible 56.7x larger than the next-biggest 1x-long major-gold-miners ETF!GDX dominates this space with little competition.

Back in early September, the gold stocks plunged to a major 2.6-year secular low per GDX. This sector suffered a brutal forced capitulation on cascading stop-loss selling, devastating sentiment. The triggering catalyst was gold getting pounded to its own major lows in mid-August on record futures short selling. At worst GDX fell to $17.57 on close, which was down an ugly 24.4% year-to-date. Most traders fled in disgust.

But major new uplegs are born in peak despair, and that was it. The gold stocks started recovering out of those fundamentally-absurd levels, gradually carving a solid upleg. By early January GDX had rallied 22.3% higher in 3.7 months, fueling more-optimistic sector sentiment. Plenty of speculators and investors including me were comparing 2019’s setup for gold stocks to the first half of 2016, a wildly-lucrative stretch.

That was just after today’s gold bull ignited, and its maiden upleg surged 29.9% higher in just 6.7 months. Such gold strength ignited a flood of capital into the gold miners, catapulting GDX an enormous 151.2% higher in essentially that same span! This year when GDX’s latest closing upleg high of $21.48 was achieved on January 3rd, traders were salivating at the prospects of another mighty H1’16-like gold-stock upleg.

But instead of powering higher, the gold stocks stalled and started drifting lower. By last Friday the 18th, GDX had slumped 5.4% over a couple of weeks or so to $20.31. That really discouraged the gold-stock traders, torpedoing the nascent bullishness driven by GDX’s powerful 10.5% December rally. I’ve been getting lots of e-mails from discouraged traders moping and often convinced this gold-stock upleg fizzled.

Sentiment has really deteriorated in recent weeks as gold-stock prices retreated. One manifestation of this resurgent bearishness is apparent in how individual gold miners’ stocks are reacting to company-specific news. Early in new quarters, many gold miners report their prior quarter’s production. And early in new years, plenty also give guidance for new full-year production. Traders are selling hard on this news.

Even though these production reports and outlooks have generally been flat to good, they are being used as excuses to sell. When traders wax bearish, all news is considered bad. So when pessimism reigns early in new quarters, it’s not unusual to see traders flee. Conversely, when gold stocks are rallying nicely early in new quarters, this news is typically bought. Gold stocks’ reaction to news is a sentiment indicator.

Interestingly selling on full-year production guidance is usually a poor decision. Gold-miner managers try to maximize their compensation which is heavily driven by their stock’s price. So they tend to lowball their production estimates early in new years, leaving room to beat them later in those years. Then when they exceed their own expectations, their stocks catch strong bids into year-ends maximizing their personal earnings.

Plenty of traders have written me worrying that January 2019 is nothing like January 2016, arguing that a major new gold-stock upleg isn’t underway. They are dead wrong, everyone forgets the gold stocks also fell in much of that pivotal month. In the first couple weeks of January 2016, GDX actually dropped 9.1% despite a parallel 2.5% gold surge! Then like now, emotional gold-stock traders were irrationally scared.

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