Gold Stocks Still Correcting / Commodities / Gold and Silver Stocks 2020

The gold miners’ stocksare still correcting, continuing to rebalance both technicals and sentiment.  This sector’s huge surge into early August spawnedextreme overboughtness and universal euphoria, which are gradually being bledaway.  This same necessary and healthy correctiveprocess is underway in gold itself, which overwhelmingly drives gold-stockprice levels.  This is leading to greatbuying opportunities.

Gold-stock speculatorsand investors are growing weary, wondering when miners’ next upleg will finallyget running.  Fully 2.5 months have passed since the gold stocks were rocketing higher with gold last summer,generating great excitement.  Since thenthis sector has gradually ground sideways to lower, leaving tradersincreasingly discouraged.  More are abandoninggold stocks as weeks drag on into months.

Corrections certainly aren’teasy to weather psychologically.  Theirmission is to eradicate the universal greed at preceding upleg toppings.  That means gutting traders’ enthusiasm for ahot sector that has just soared.  Losses unfoldingand deepening over time are the only way to swing the sentiment pendulum backfrom euphoria to apathy to despair.  Thatrequires the great majority of traders to be forced to capitulate.

While much progress hasbeen made in this hard process, it doesn’t look over yet.  Corrections generally don’t end until theopposite extremes that spawned them are seen. Upleg toppings’ overboughtness must yield to proportionaloversoldness, and popular greed must be displaced by fear.  Only then is this sector reset and ready tostart marching higher in its next major bull-market upleg.  That opportune time is nearing.

Gold stocks’ correctionprogress can be evaluated in this sector’s leading benchmark and tradingvehicle, the GDX VanEck Vectors Gold Miners ETF.  GDX’s recent technical action considered in theessential context of its bull-market precedent offers lots of clues about howclose this correction likely is to giving up its ghost.  This first chart looks at this secular gold-stockbull through this GDX lens, offering crucial perspective.

It includes a constructcalled the Relative GDX, or rGDX.  Thatsimply divides this gold-stock ETF’s daily closes by their 200-day movingaverage, and charts the resulting multiples over time.  These tend to form horizontal tradingranges that flag when this sector is really overbought or oversold, thetimes to sell and buy.  This is based onmy effective and very-profitable Relativity Trading system ifyou want more background.

Gold stocks’ last uplegwas massive, rocketing 134.1% higher in just 4.8 months per GDX!  Those huge gains erupted from gold stocksbeing battered to fundamentally-absurdlows during March 2020’s pandemic-lockdown-spawned stock panic.  Such a big-and-fast jump left this sectorextremely overbought and generated universal euphoria.  By early August nearly everyone expected thatsurge to persist indefinitely.

But big-and-fast gains leadingto major highs are never sustainable for long. They fuel great excitement for the rallying sector, attracting in lotsof new capital from speculators and investors chasing that upside momentum.  But since traders’ capital is finite, soon theiraggressive buying exhausts itself. As everyone interested in buying in to gold stocks anytime in the nearfuture gets fully deployed, capital inflows peter out.

GDX hit that terminalupleg-slaying phase over several weeks leading into early August, where this ETFblasted 19.8% higher.  That didn’t feel excessiveto many, but annualized to a nearly-300% pace of gains that is wildly unsustainable!  That Relative GDX multiple traded at 1.448x theday this ETF peaked, or in other words GDX was stretched nearly 45% above its 200dma.  Mighty past uplegs failednear those levels.

While this year’s blisteringpost-panic gold-stock upleg was this secular bull’s fourth, the only other big-and-fastcomparable one was its maiden upleg.  Inlargely the first half of 2016, GDX rocketed 151.2% higher in 6.4 months!  The rGDX was trading way up at 1.567x when thatpeaked, well into the historical extreme-overboughtness levels exceeding 1.50x.  Anything around there is the danger zone formajor toppings.

I warned about gold,silver, and their miners’ stocks getting very overbought inlate July.  When that starts to happenafter uplegs see big-and-fast gains to major new highs, the prudent strategy isto ratchet up the trailing-stop-loss percentages on open gold-stocktrades.  That helps traders ride uplegs’gains for as long as possible, while also locking in more of their profits whenthose uplegs inevitably roll over into corrections.

Indeed the red-hot goldstocks soon started correcting, and those tighter trailing stops realized biggains for those who wisely ran them. GDX’s initial selloff out of its lofty early-August peak was fast, asthis key ETF plummeted 12.2% in just four trading days!  That sharp plunge exceeding the 10%correction threshold confirmed one of those major selloffs was underway, a bigwarning to traders still bullish on gold stocks.

But GDX bounced sharplyout of those initial lows, and spent the next 5 weeks or so consolidatinghigh.  As usual the gold stocks were justmirroring and amplifying what was happening in gold.  The major gold stocks of GDX tend to leveragematerial gold moves by 2x to 3x. Gold-stock prices amplify gold’s price action because that metal’sfortunes overwhelmingly drive their profits. So as goes gold, so go the miners.

This sector’s highconsolidation from mid-August to mid-September really retarded this correction’scritical rebalancing work.  Over 5 weeksor so GDX rebounded 9.7% to claw back up to just 3.7% under early August’s peaklevels.  I tried to warn traders not tobe lulled into complacency, writing an essay in early September arguing gold stockswere still in correctionmode.  I got a lot of flak for that contrarianstance.

But sure enough sinceoverboughtness hadn’t been worked off and greed remained high, that correctiveselloff soon reasserted itself in late September.  GDX plunged another 12.2% in a week,extending its total selloff since early August’s peak to 15.4% in 1.6 months.  The rGDX hit a new correction low of 1.135x thatday.  While that was no longer extremelyoverbought, it still remained far above oversold levels.

And that mountinggold-stock correction still looked really anemic based on bull-to-dateprecedent.  It is always important tocompare recent gold-stock price action with what has come before it.  That context offers a hard empirical frameworkfrom which to game this sector’s near-term outlook.  While uplegs and corrections never repeat exactlythroughout bulls, they often rhyme clocking in at similar sizes and durations.

During this gold-stockbull’s first three corrections, GDX plunged 39.4% over 4.4 months, 31.3% over19.1 months, and 38.8% over 0.6 months. That averages out to 36.5% over 8.0 months!  Gold stocks’ volatile reputation is well-deserved,and a big reason this sector is so appealing to trade.  This fourth correction’s 15.4% over 1.6 monthsat worst is still way short of bull precedent, even after this bull’s second-biggestupleg.

And the rGDX reads atearlier correction bottoms show how far gold stocks would still need to fall tohit similar deeply-oversold levels.  The majorgold stocks were blasted to an average of only 0.754x their 200dma in GDX termsbefore new uplegs were born!  That’s a longway down from both that 1.135x seen in late September and this correction-to-date’snadir of 1.132x in early October.  Thisselloff isn’t over!

That doesn’t mean GDX hasto collapse 35%+ again before gold stocks’ next major upleg can get underway.  Each of those three prior corrections had extenuatingcircumstances deepening them beyond normal levels.  They were exacerbated by gold getting crushedafter Trump’s surprise victory in 2016, cascading gold-futures selling in mid-2018,and this year’s rare stock panic in March. Those were all exceptional events.

But it’s hard to imagineGDX not at least correcting 20% to 25% to rebalance sentiment after suchgreat euphoria in early August.  GDXpeaked at $44.48 on August 5th, a 7.5-year secular high.  At worst on September 23rd, it closed at $37.63which was down that mild 15.4% in just 1.6 months.  And this week GDX is back up to $39.90.  Gold stocks would have to fall much fartherto extend this correction to 20% to 25%.

That’s still another10.8% to 16.4% lower from here!  Andthat’s just in the major gold stocks dominating GDX.  The smaller mid-tier producers withsuperior fundamentals and better upside potential during gold uplegs see gainsand losses exceeding GDX’s.  So forspeculators and investors looking to buy back in to gold stocks to ride theirnext upleg, much-better entry opportunities are likely still coming in the nearfuture.

The ultimate depth andlength of this necessary and healthy gold-stock correction is totally dependent on gold’s own.  Given the majorgold stocks’ strong 2x-to-3x leverage to gold, its fortunes offer better angleson gaming GDX correction bottomings. This next chart applies this same Relativity analysis to gold itself, lookingat it as a multiple of its 200dma technical baseline.  Gold hasn’t revisited that key support yeteither.

The parallel gold correctionforcing this gold-stock one has only extended to 9.8% over 1.6 months at worst sofar, hitting an rGold level of 1.085x. Like gold stocks, that’s all on the light side compared to this bull’sprior corrections.  They averaged 14.3%gold losses over 4.1 months, bottoming at 0.926x gold’s 200-day movingaverage.  Gold too needs to correctmore before getting oversold and eradicating greed.

The strongest support zonesfor major corrections are these 200dmas. This week gold’s is way down near $1754, another 8.8% lower from currentlevels!  And GDX’s is down at $34.27,another 14.1% lower from here.  Thatmakes for considerable downside risks for both this metal and the stocksof its miners.  200dma approaches arealmost always seen before bull-market corrections finally give up their ghosts.

Because gold and GDXsoared so fast in such massive uplegs into early August, their 200dmas arestill rapidly climbing as well. Corrections work through both the size of their losses and the time theytake to unfold.  Deeper fastercorrections return prices to their 200dmas more rapidly, compressing the pain intoa shorter timeframe finishing the necessary rebalancing work sooner.  These are more beneficial to traders.

Corrections can alsostretch out into shallower high consolidations, giving rising 200dmasmore time to catch up with relatively-high prices.  These are slower to unfold, as therebalancing of technicals and sentiment take considerably longer to accomplishin a grinding-sideways environment.  The possibilityremains that gold and thus gold stocks simply drift horizontal long enough toevade rolling over into deeper selloffs.

This is the preferredoutcome for longer-term investors, who don’t cash out before corrections anddon’t want the psychological angst of watching them unfold.  But one key factor is really ramping the oddsfor a more-serious gold correction rather than the milder drift.  That is the fortunes of the US dollar,which gold-futures speculators look to for trading cues.  Their super-leveraged bets wield outsizedgold-price influence.

I wrote an entire essaylast week analyzing why today’s low dollar is risky for gold.  The US dollar remains really oversold after being heavily shorted this past summer, which was a big reason why goldand miners’ stocks shot parabolic into early August.  Thus this world reserve currency is overduefor a mean-reversion rebound rally to rebalance its own technicals andsentiment.  That implies considerabledollar upside from here.

As of the middle ofthis week, the leading US Dollar Index benchmark remained 4.3% under its 200dma.  As major currencies usually move with glacialslowness, a 4%ish dollar rally would wreak havoc on gold prices thathaven’t fully corrected yet.  And a US-dollarrally is increasingly likely with the improving US economic outlook reducing Congress’smotivation to pass another massive pandemic-stimulus-spending bill.

This gold correction sofar since early August has seen eight major down days exceeding 1% losses.  Every single one of them happened on a USDXup day.  During those gold averaged ugly2.4% daily plunges on mere 0.5% average USDX rallies!  That’s because a stronger dollar unleashes leveragedgold-futures selling which quickly hammers gold lower.  If 0.5% does that kind of damage, imagine what4%+ would do!

And if the overdue US-dollarrebound forces gold lower, rest assured the major gold stocks of GDX willfollow it down amplifying its losses by 2x to 3x.  Since neither gold nor gold stocks have comeanywhere close to revisiting their 200dmas yet which are major correctionsupport, odds are these selloffs haven’t run their courses.  So it remains prudent to expect moreselling before these bulls’ next major uplegs start marching.

There’s another way to gaugegold stocks’ correction progress.  Atworst so far gold is down about 10% compared to about 15% for GDX.  That is just 1.5x downside leverage for themajor gold stocks, really lagging their 2x to 3x precedent.  These bulls’ prior-correction averages of14.3% for gold and 36.5% for GDX work out to 2.5x leverage right in the middleof that historic range.  That’s likelyagain in today’s selloff.

That implies a 25% GDXcorrection even if gold doesn’t fall much farther than 10%.  And if gold retreats all the way back to its200dma today which would make for 15% total, that major-gold-stock correctionwould exceed 37% at 2.5x!  I don’t expectit to go that deep, as gold stocks didn’t hit the extraordinarily-overboughtlevels gold did in early August.  ButGDX falling another 10% to 15% from here wouldn’t surprise.

Successful speculationand investment demand buying relatively low before later selling relativelyhigh.  Waiting for those optimal buy andsell points defined by correction bottomings and upleg toppings sure requires lotsof patience.  But that’s the surest wayto multiply your wealth in the stock markets, only trading when probabilitiesfor success are wildly in your favor. Those are the best times to bet big to win big!

And right now is notone of them.  Both gold stocks and goldare in confirmed corrections after soaring in enormous uplegs.  And neither the miners nor their driving metalhave yet given the important technical green lights to confirm likely correctionbottomings.  So we have to assume thesecorrections are ongoing until evidence to the contrary.  Thus weathering these necessary selloffs incash remains the best option for now.

Both speculators andinvestors should embrace these inevitable rebalancing corrections, as theyyield the best mid-bull buying opportunities within ongoing bullmarkets.  That is when to aggressivelyredeploy in gold, gold ETFs, gold-stock ETFs, and individual gold stocks with superiorfundamentals.  Bulls’ inexorable upleg-correctioncycles are great boons for traders, greatly expanding their potential gains tobe won!

At Zeal we started aggressivelybuying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscription newsletters back in mid-March right after the stock-panic lows.  We layered into dozens of new positionsbefore gold stocks grew too overbought, which were stopped out later at hugerealized gains running as high as +199%!  Our subscribers multiplied their wealth withinmonths.

To profitably trade high-potentialgold stocks, you need to stay informed about what’s driving gold.  Our popular newsletters are a great way, easyto read and affordable.  They draw on my vastexperience, knowledge, wisdom, and ongoing research to explain what’s going on inthe markets, why, and how to trade them with specific stocks.  Subscribe today and take advantageof our 20%-off sale!  Correctionsare the time to do your gold-stock homework, preparing to redeploy as they pass.

The bottom line is goldstocks are still correcting.  Theirnecessary selloff to work off overboughtness and rebalance sentiment after theirlatest upleg peak hasn’t finished its mission. The major gold stocks per GDX have yet to revisit oversold levels and eradicateearly August’s universal greed.  And theyhaven’t yet fallen far enough to leverage gold’s own correction by their normal2x to 3x, arguing more selling is coming.

Like usual the depthand duration of this gold-stock correction is fully dependent on gold’s own.  And that doesn’t look over yet either sincegold remains so far above its key 200-day-moving-average correction-bottomingsupport zone.  Gold is at risk of seriousgold-futures selling as the oversold US dollar inevitably mean revertshigher.  That will likely really acceleratethis gold-stock correction, forcing it closer to climaxing.

Adam Hamilton, CPA

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