Gold-Stock Upleg Immature

By Adam Hamilton

With gold stocks’ powerful upleg gathering steam, more traders are piling in to chase this sector’s big gains.  Plenty of fundamentally-superior mid-tier and junior gold miners have already enjoyed doublings in recent months.  As mounting capital inflows accelerate gold stocks’ surge, smart contrarians who bought in early are wondering how much longer this upleg can run.  Interestingly it still looks immature on multiple fronts.

Gold stocks have blasted higher in quite a rally over this past half-year or so.  The GDX VanEck Gold Miners ETF, this sector’s leading benchmark, has soared 59.6% higher over 6.5 months as of mid-week!  And that remains dominated by major gold miners, which aren’t as responsive to gold as smaller ones due their hefty market-capitalization and huge-production inertias.  Still GDX usually amplifies gold by 2x to 3x.

Since late September, the yellow metal fueling gold miners’ earnings has surged 24.5% higher in its own strong upleg.  So far GDX’s parallel upleg has leveraged gold’s by 2.4x, right in the middle of its normal range.  Gold stocks’ outperformance tends to grow as uplegs mature, stoking more greed and attracting in more traders.  The longer and higher prices run, the more enthusiasm generated for chasing those gains.

But the mid-tiers and juniors are faring way better, leaving our newsletter trading books brimming with big gains.  One fast-growing junior gold miner we added back in early November when this sector languished deeply out of favor has already skyrocketed 124% as of mid-week!  Those fat unrealized gains are joined by plenty of other trades up in the 80%-to-90% range.  The getting has certainly been good in gold stocks.

Obviously the ideal time to pile into the smaller miners was back last autumn when on one else wanted anything to do with them.  I pounded the table back then on buying these screaming bargains, writing a bunch of essays.  They included calling out late September’s false gold-stock panic one trading day before GDX decisively bottomed, and explaining why the Fed’s dollar/gold shock was ending back in early November.

To ride the great majority of massive uplegs, you have to be contrarian.  You have to always stay abreast of sectors that interest you, especially after major selloffs when they are despised!  That’s why I’ve always been a fan of financial newsletters, subscribing to great ones for decades and launching my own.  In just an hour reading an issue, you glean ongoing priceless wisdom forged from long decades of trading experience.

But since traders can’t time travel back six months to buy gold stocks crazy-low, the crucial question now is how much longer and higher can this gold-stock upleg run?  Can traders late to the game still buy in?  Should contrarians like our newsletter subscribers with massive unrealized gains be looking to sell?  No one can know in real-time when uplegs will die, but precedent and probabilities argue this one isn’t over yet.

The greatest threat faced by gold-stock uplegs is excessive overboughtness.  The longer and higher this high-flying sector runs, the more popular greed is generated.  Big and fast gains increasingly attract in larger numbers of traders, who pour in accelerating the upside.  But their frenzied buying is finite, and eventually exhausts itself.  When all the potential near-term buyers are already in, gold-stock uplegs peak.

Unfortunately ethereal herd sentiment is impossible to measure, it can only be inferred.  But price action drives psychology, leaving that closely linked to technicals.  Yet even using those to judge overboughtness is mostly subjective.  So to help optimize our newsletter gold-stock trading, a couple decades ago now I developed a more-empirical approach I call Relativity Trading.  It looks at prices relative to a key baseline.

This week GDX is trading around $35, and a year ago this week it was faring better near $41.  Are these prices particularly low or high, respectively implying more rallying left or an imminent major selloff?  One way to quantify that is looking at them relative to their trailing 200-day moving averages.  Those slowly track broader gold-stock trends reflecting evolving price levels, while distilling out this sector’s intense volatility.

While studying ways to quantify overboughtness and oversoldness long ago, I found that prices divided by their 200dmas yielded multiples that often formed horizontal trading ranges.  The GDX variant is called the Relative GDX or rGDX.  Over the past five calendar years, this rGDX multiple has usually meandered between 0.80x to 1.35x.  In other words, GDX has mostly traded between 80% to 135% of its 200dma.

This chart superimposes the actual GDX and its key technicals over that rGDX construct during the last couple years or so.  The Relative GDX effectively squashes GDX’s 200dma to flat at 1.00x, and then gold-stock prices meander around that.  The best times to aggressively buy are when the rGDX is near the lower support of that trading range.  That of course was back around late September to early November.

The bargains in gold stocks back then were extraordinary, so I wrote my heart out in these web essays and our newsletters to help traders understand why.  GDX bottomed at a fundamentally-absurd $21.87 on September 26th.  Those were literally stock-panic gold-stock levels, not witnessed since the dark heart of March 2020’s brutal pandemic-lockdown stock panic!  During that GDX only closed lower on four trading days.

Last autumn’s day the left-for-dead gold stocks bottomed, the rGDX was ridiculously low too at just 0.703x.  That oversoldness was some of the most extreme ever witnessed in gold-stock history!  During that same latest stock panic, the rGDX had bottomed at a very similar 0.694x.  After that GDX had screamed higher in a mighty 134.1% mean-reversion-overshoot upleg in just 4.8 months!  Talk about a buying opportunity.

Then I tried to help traders understand how explosive gold-stock upside looked, but most had abandoned this sector.  Not paying attention, they had no chance of buying in super-low.  Ostriching and disengaging from markets is a losing strategy.  Traders need to always stay informed to buy low and sell high, and reading great newsletters is an easy low-cost way.  I study markets all day everyday so you don’t have to!

The gold stocks blasted higher into early February, with GDX soaring 52.1% in 4.0 months.  But then gold suffered a sharp selloff, mostly sparked by a record-seasonal-adjustment-driven upside surprise in monthly US jobs.  That goosed the US dollar, motivating gold-futures speculators to sell aggressively.  The rGDX had only stretched to 1.155x before that, and then soon collapsed back down to 0.966x in early March.

The crux of Relativity trading is the farther under its 200dma a price goes, the better the odds for seeing big subsequent gains.  That week GDX’s correction bottomed, I wrote an essay analyzing the latest Q4’22 fundamental results from this ETF’s 25 largest component stocks.  I concluded then with “That makes these recent out-of-favor lows great buying opportunities, as this excessively-bearish sentiment won’t last.”

Indeed since then GDX has already rebounded an impressive 30.8% higher, carving major new upleg highs.  Again its total gains extended to 59.6% over 6.5 months as of mid-week.  That blistering surge has absolutely left gold stocks far more overbought, with that rGDX multiple hitting 1.262x mid-week.  That’s certainly on the high side, way above month-earlier sub-200dma levels.  So traders are wise to be wary here.

As a hardened contrarian speculator, I wouldn’t be comfortable buying now.  That’s an easy decision with our newsletter trading books already full of massive-and-growing unrealized gains.  But legions of upside-momentum-chasing traders will increasingly pile into gold stocks, accelerating their upside as herd greed mounts.  Luckily for them, while gold stocks are overbought they haven’t yet challenged upleg-slaying levels.

To define Relativity trading ranges, I study the last five calendar years of data.  Major gold-stock uplegs in that span generally weren’t in imminent danger of giving up their ghosts before the rGDX exceeded 1.35x.  And that was actually on the low side compared to preceding ranges, which stretched up to 1.50x for dangerous sector overboughtness!  So merely near 1.26x, this gold-stock upleg still looks relatively immature.

That doesn’t mean it can’t fail tomorrow, the markets are a probabilities game.  Even when the odds are way in our favor, low-probability events are always possible.  My family went to Las Vegas for the kids’ spring break in March, and I got to watch part of a poker tournament at the Wynn.  While better hands usually won tables, it was interesting to see them occasionally trumped by and lose to lower-probability hands.

Still a major gold-stock upleg isn’t yet in danger of failing from extreme overboughtness at just 1.26x its 200dma.  And another factor is actually skewing today’s rGDX higher than it normally would be at this stage in an upleg.  Gold stocks’ 200dma has been trending lower over the last couple years, which were a high consolidation.  GDX had skyrocketed in back-to-back 77% and 134% uplegs in 2020 leading into that.

These Relativity trading ranges work best in trending markets, and 200dmas are normally rising when big gold-stock uplegs are underway.  But GDX’s 200dma has only just started to mean revert higher since late March.  So that key baseline is lagging well behind where it would typically be with a big gold-stock upleg underway.  That makes today’s rGDX reading artificially high until that 200dma starts catching up!

When that last mighty 134% GDX upleg crested in early August 2020, this ETF’s 200dma was rising fast yet the rGDX still stretched way up near 1.45x before that upleg stalled out!  So while 1.26x may be too high to comfortably buy in for prudent contrarians, it is well shy of sector precedent for upleg-slaying overboughtness levels.  While GDX has already powered up 60%, its gains could still easily double from here.

Like all gold-stock uplegs, this one’s ultimate fortunes depend on how gold fares in coming weeks and months.  Gold’s powerful driving upleg rocketed back in March on massive leveraged gold-futures buying by speculators.  Their capital firepower for buying and selling is limited, so their overall positioning in gold futures tends to also run in defined ranges.  I analyze where that is in all our weekly and monthly newsletters.

Major gold uplegs are fueled by three sequential stages of buying, stage-one gold-futures short covering, stage-two gold-futures long buying, then vastly-larger stage-three investment buying.  While digging into gold futures again is outside the scope of this essay, all that still looks quite bullish for gold.  Per the latest weekly Commitments of Traders futures reports, that initial likely stage-one short covering has been exhausted.

But the larger stage-two long buying is still likely less than half-finished!  And that ought to drive gold high enough for long enough to increasingly entice investors to return with their enormous pools of capital.  They love chasing upside momentum, which their capital inflows accelerate into virtuous circles to fuel the biggest gold and gold-stock uplegs.  Today’s really have potential to grow into those given this backdrop.

As long as gold’s own underlying upleg continues powering higher on balance, so will the gold stocks’ upleg.  Gold stocks are ultimately leveraged plays on the metal they mine, since their profits multiply material gold price moves.  In last week’s essay on gold stocks soaring again, I analyzed more of this gold buying and factors likely to grow it in coming months.  Gold stocks shouldn’t top before gold itself does.

Finally April and May are the strongest time of the year seasonally for gold stocks.  Their seasonal spring rally well underway sees their best gold outperformance during the entire year.  On average during all 19 of gold’s modern bull-market years since 2001, the major gold stocks averaged hefty 12.1% seasonal gains between mid-March to late May.  That amplified gold’s parallel spring seasonal rally by a big 3.4x!

Strong seasonals act like tailwinds blowing gold stocks even higher when uplegs are already underway for more-important technical, sentimental, and fundamental reasons.  That increases the odds that GDX should have another six weeks or so of rallying ahead.  Gold stocks’ big gains should grow considerably in that timeframe.  But eventually GDX will get extremely overbought so this upleg will roll over into a correction.

That’s when the next big buying opportunity back down near the major gold miners’ collective 200dma is likely coming.  If you are understandably wary of buying in relatively high today after these big gold-stock gains, I’d wait until after the next correction to deploy capital.  But if you are comfortable chasing upside momentum, this gold-stock upleg still looks to have plenty left in its tank.  Buying or not is matter of risk tolerance.

Either way, successfully trading gold stocks to multiply your wealth demands staying abreast of this sector all the time.  That’s where great newsletters shine.  I eat, breathe, and sleep the markets, furthering my decades of knowledge through ongoing study.  You can enjoy all the fruits of that for only about $12 an issue and under an hour of your precious time.  They distill down everything necessary to game coming trends.

The bottom line is this current gold-stock upleg still looks immature.  While the last optimal buy-super-low opportunities have long passed, the major gold stocks haven’t yet challenged upleg-slaying levels of overboughtness.  That implies herd greed hasn’t climaxed yet, leaving lots of traders and capital left to chase and accelerate this sector’s mounting upside.  This upleg’s gains still have potential to double from here.

Gold’s own driving upleg fueling this big gold-stock surge looks far from spent.  Speculators’ gold-futures positioning continues to look bullish, and investors have barely even started buying gold yet.  All that is on top of gold miners’ strong-spring-rally season only about half over.  So there’s no reason today’s gold-stock upleg shouldn’t grow considerably larger before giving up its ghost.  Watching those gains mount is awesome.

Adam Hamilton, CPA