Gold Stocks Upleg Accelerates / Commodities / Gold and Silver Stocks 2021

This young gold-stockupleg is accelerating, with fast-rising prices enticing in more capital.  This sector has surged sharply to multiplemajor upside breakouts in recent weeks, which is starting to turn skeptics intobelievers.  Despite their strong upside momentumbeing chased, gold-stock prices remain far from overbought levels warning ofimpending selloffs.  This mounting uplegstill has great room to power way higher.

Gold miners’ earningsare highly leveraged to prevailing gold prices, which drive this sector’s uplegand correction cycles.  In early March asthe last extended gold-stock correction was bottoming, I wrote an essay on gold’s momentum selloff.  It concluded with “the gold-futures sellingthat ignited all this is finite, and is likely nearing exhaustion.  After that, gold should rally hard.”  We were positioned for a new upleg.

At that major bottoming,the trading books in our newsletters were full of fundamentally-superior goldminers’ stocks.  We added and recommendedthem leading into that at low prices, when they were deeply out offavor.  A few weeks later, I wroteanother essay analyzing the latestquarterly results from the mid-tier gold miners.  They are in the sweet spot for stock-priceappreciation potential when gold powers higher.

Still out of favor,they had just reported one of their best quarters ever.  Their production growth was way better thantheir larger peers’.  And thanks to the still-highprevailing gold prices despite its last correction lingering, these elite goldminers reported record revenues, earnings, operating cash flows, and cash treasuries!  Their fundamentals are outstandingly-bullish yettheir stock prices continued to mostly languish.

But the gold stocks werestealthily climbing on balance, as evident in their leading benchmark the GDXVanEck Vectors Gold Miners ETF.  A coupleweeks later in still-another essay, I explained why another gold-stock upleg was underway.  GDX had poked its headabove its correction-downtrend resistance and its 50-day moving average.  And its technical performance since bottoming looked very young-upleg-like.

My young-upleg thesis advancedin early April was met with a lot of skepticism and even hostility.  From the feedback I got, it seemed like most traderswere convinced the gold stocks still needed to drop much lower before a newupleg could get underway.  Sentimentstaying bearish is typical after any bottoming, as traders extrapolate recentconditions out into the indefinite future. Their festering doubt was a bullish sign.

And that contrariannew-upleg-growing analysis has since been vindicated in spades.  In the past couple weeks, GDX has blastedsharply higher cementing its strong uptrend.  Naturally this accelerating gold-stock uplegis working wonders for sector psychology, attracting traders back to thisbattered sector to chase those mounting gains. That has shifted the tenor of what I’m hearing from speculators andinvestors.

A couple weeks ago, thatwas mostly “Adam you are wrong, the gold-stock correction is very much aliveand well and will pummel this sector much lower.”  Few were bullish like they should’ve beenwhen gold-stock prices were considerably lower. Now I’m largely getting “Did I miss this gold-stock move, is a sellofflooming?”  After such big-and-fast gains,traders fear this sector will soon roll over again into another selloff.

This latest GDX chart showsthe recent blistering gold-stock surge, which decisively broke out above both thisleading sector benchmark’s correction-downtrend resistance and 50dma.  But despite rallying sharply, the goldstocks remain relatively-low.  Whilethey may be short-term overbought, they have a long ways to run until they getoverheated enough to threaten this upleg. It still looks young technically, a bullish omen.

Bull markets powerhigher in a series of alternating uplegs followed by corrections.  While the latter sure aren’t fun for tradersnot prepared for them, they are very important for bulls’ longevity.  They are utterly essential for rebalancingsentiment, eradicating the excessive popular greed that flares late inmajor bull uplegs.  That ensures the bulldoesn’t burn out prematurely, sucking in too much future buying too soon.

By early March, GDX hadcorrected 30.5% in 6.8 months.  That wasnecessary after this dominant gold-stock ETF had skyrocketed 134.1% higher in just4.8 months out of last March’s stock panic! Such big-and-fast gains fueled extreme greed, which had to be bled awaybefore this bull market could continue higher again.  That upleg also left gold stocks extremelyoverbought, justifying a bigger and longer correction.

Its downtrend is readilyapparent in this chart.  Despite normalsharp countertrend rallies periodically, gold-stock prices generally kept grindinglower on balance.  It looked like gold’sown driving correction had matured in late November, green-lighting a new upleg for gold stocks.  And indeed GDX surged up15.2% in 1.3 months straddling December. But unfortunately that young upleg was soon prematurely slain.

Gold was hammered by heavy momentum selling inboth gold futures and gold-ETF shares.  Thatfed on itself in a vicious circle, with lower gold prices sparking more sellingleading to still-lower gold prices.  The goldstocks and thus GDX had no choice but to be dragged lower with gold.  That left this sector super-cheap relative toprevailing gold prices, with gold-minervaluations really low.  They were trulyscreaming buys.

Technically acorrection is a series of lower highs and lower lows.  But those downtrends are punctuated by sharpcountertrend rallies, which trick traders into staying deployed throughout thoseselloffs.  These intra-correction surges areshort-lived though, tending to last for a few weeks at most before theyroll over into new lower lows.  A goodexample of these deceptive surges happened leading into early November.

In just seven tradingdays, GDX rocketed 13.4% higher and broke out above its downtrend resistance.  But that false breakout quickly failed,sending this ETF plunging back down 19.3% over the subsequent couple weeks orso to a deep new correction low.  If thislatest gold-stock rally since early March looked more like that, much shorterand sharper, caution would be warranted. But instead it is more upleg-like.

As of the middle ofthis week, GDX had powered 19.2% higher over 1.7 months or seven weeks!  This kind of move off a major low is too bigand too long to be a countertrend rally within a correction.  It looks like the real deal technically, amounting young upleg carving a beautiful series of higher lows and higherhighs.  This ETF’s major decisive breakoutsabove both its correction resistance and 50dma cement that.

Gold-stock prices’upside momentum is accelerating, which is normal as herd psychology shifts.  Back surrounding early March’s bottoming whengold stocks were much cheaper, the momentum traders didn’t believe a new uplegwas increasingly probable.  But GDX’shard bounce since then has shattered their doubts, so they are rushing to redeployand chase these big gains.  This crucial uplegdynamic is self-feeding.

The more gold stocks climbon balance, the more traders want to buy them. The more capital they deploy in this sector, the higher gold stocksrally.  That builds bullish sectorsentiment, attracting still more traders to perpetuate this virtuous circle.  Despite their sharp surge in recent weeks,gold stocks are scaling the proverbial wall of worry.  Hence all the concern out there that gold stocksare overbought and need to sell off.

That may be true overthe short-term, as bull-market uplegs naturally flow and ebb.  They take two steps forward in surges, beforeretreating one step in healthy pullbacks. These alternating swings within uplegs also keep sentiment balanced, extendingtheir lifespans.  But there is no reasonto worry that this entire young upleg is ready to fail and give up its ghost.  It remains too small, too short, and far fromoverbought enough.

This secular gold-stockbull born back in January 2016 has already seen four previous uplegs.  In GDX terms, they averaged massive 99.2%gains over 7.6 months each! Doublings are par for the course in this volatile high-potential sector,which is why contrarians put up with the serious corrections between these mightyuplegs.  Climbing merely 19.2% so farover just 1.7 months, this upleg is nowhere near mature.

The fact traders areeven worried about that proves this upleg remains young!  Late in major gold-stock uplegs, herdsentiment is convinced gold stocks will rocket to the moon.  Greed grows so extreme after typical hugeupleg gains no one but the most-hardened contrarians even think major selloffs arepossible let alone likely.  So rejoice whenyou read bearish gold-stock commentary, as that doesn’t exist near toppings!

Another major reasonthis young gold-stock upleg is far from ending is GDX actually remainssomewhat oversold even after recent weeks’ sharp surge!  There’s a great indicator that quantifiesoverboughtness and oversoldness, or how fast and far prices have moved.  It looks at GDX as a multiple of its underlying200-day moving average.  This is based onmy Relativity Trading system,which has proven super-profitable.

Dividing GDX’s closingprice by its 200dma every day and charting these results over time reveals whenthis sector gets overbought or oversold. I call this multiple the Relative GDX, or rGDX for short.  Within ongoing secular bulls, it tends to formhorizontal trading ranges.  Aftermajor uplegs, gold-stock prices tend to peak near certain rGDX levels.  And after major corrections, they tend tobottom around other ones.

This rGDX chart effectivelynormalizes gold-stock price action over the last couple years or so, rendering itin perfectly-comparable percentage terms off GDX’s baseline 200dma.  The black 200dma is flattened to 1.00x, andGDX prices are expressed in percentages relative to it in the red line.  An rGDX read of 1.10x for instance shows GDXis 10% above its 200dma, while 0.90x indicates this ETF is trading 10% underit.

Relativity tradingranges are based off the last five calendar years of data, and GDX’s from 2016to 2020 encompassing this bull ran from 0.80x on the low side to 1.50x on thehigh side.  Nearing and crossing thatlower rGDX support zone, gold stocks are extremely oversold.  After GDX has plunged far enough and fastenough to near 80% of its 200dma, odds are a major correction has run itscourse and is bottoming.

In early March when GDX’srecent extended correction ended, the rGDX closed at just 0.825x.  While the actual bottoming day and level wasn’tknowable in real-time, such extremely-low rGDX reads greatly upped the oddsthat selloff was climaxing.  That’s onereason I was pounding the table on buying dirt-cheap gold stocks then, when fewothers were bullish.  We filled our newsletterswith great gold-stock trades.

Conversely major-gold-stock-uplegtoppings during this bull have happened at extremely-high rGDX reads up near1.50x.  GDX skyrocketed 151.2% higherin this gold-stock bull’s maiden upleg into mid-2016.  That failed at extreme-overbought levels withthe rGDX running way up at 1.567x.  Andwhen GDX shot 134.1% higher into last August, that latest gold-stock upleg diedas the rGDX soared back up to 1.448x.

So upleg-slaying levelsof overboughtness aren’t baked in until GDX soars high enough fast enough tocatapult it about 50% above its 200-day moving average.  Today we aren’t even close!  As of this leading sector ETF’s $36.83mid-week close, the highest GDX had been relative to its 200dma was only0.988x.  Anything under 1.00x technicallyremains oversold within this indicator’s longer-term upleg-correctioncontext.

With GDX still underits 200dma, there is virtually no risk this young gold-stock upleg will soon fail.  Heck, that prematurely-killed earlier uplegstraddling December drove the rGDX to 1.055x. With GDX’s 200dma now running at $37.28, to stretch way up to a risky extremely-overbought1.50x rGDX read would require GDX to soar to $55.92!  That would extend its total upleg since earlyMarch to 81.0%, closer to precedent.

Since greedy euphoricupleg toppings can propel gold-stock prices higher than most expect, I don’tsell outright in them.  Instead I ratchetup the trailing-stop-loss percentages on our open trades as gold stocks getmore overbought.  That way we can ridethe uplegs as long as possible, maximizing our big gains from buying low aroundcorrection bottomings.  And the selldecisions are mechanical, eliminating emotions.

With gold stocks so darnedvolatile, we start with very-loose 25% trailing stops when adding new trades.  After major corrections mature and GDX getsextremely oversold, gold stocks are very unlikely to keep plunging.  So those loose stops are like catastropheinsurance.  But as uplegs mature, I startraising those trailing stops to 20%, 15%, 10%, and sometimes a tight 5%.  That whole process is governed by the rGDX.

A neutral GDX trades atits 200dma, while an extremely-overbought one stretches 50% above it.  So once the rGDX trades about 2/3rds up into that overbought area, I start preparing for a topping.  I round that up to a 1.35x rGDX read.  When gold stocks surge fast enough and highenough to push GDX 35% over its 200dma, it’s time to start getting wary and graduallytightening stops.  Today that works outto a $50.33 GDX.

That is still another36.7% higher from this week’s prices, way up there from here!  It is pointless to worry about upleg-slayinglevels of overboughtness until this GDX sector benchmark at least hits that 1.35xpoint.  And these GDX targets are conservative,since its 200-day moving average climbs paralleling maturing gold-stockuplegs.  1.35x and 1.50x whatever GDX’s200dma is a few months from now will be higher.

So despite thisaccelerating gold-stock upleg generating increasing interest, this move isnowhere near overbought in broader cycles terms.  While gold stocks may pull back modestly fora few days after such a sharp surge, that is normal intra-upleg behavior.  Uplegs gradually meander higher in uptrends,carving series of higher lows and higher highs. This one has a long ways to march yet before overboughtness nears.

Thus I reiterate what Iwrote a couple weeks ago arguing that another gold-stock upleg wasunderway when GDX was 5.7% lower.  Ifyou are not sufficiently deployed in fundamentally-superior gold stocks to ridethis sector’s next major upleg, the window to buy in relatively-low isincreasingly closing.  The biggest gains arewon by those brave enough to buy in the earliest, before gold stocks getpopular and greed flares.

While it wasn’t easy psychologically,we gradually filled up the trading books in our newsletters into and after GDX’sMarch 1st correction bottoming.  Now ourweekly and monthly respectively have twenty and ten open gold-stock and silver-stocktrades.  These hand-picked fundamentally-superiorcompanies offering excellent production-growth prospects still have great upsidepotential, but they are rallying fast.

At Zeal we walk the contrarianwalk, buying low when few others are willing before later selling high when fewothers can.  We overcome popular greedand fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental,and fundamental research.  That’s why all1178 stock trades recommended in our newsletters since 2001 averaged hefty +24.0%annualized realized gains!

To multiply your wealthtrading high-potential gold stocks, you need to stay informed about what’sgoing on in this sector.  Stayingsubscribed to our popular and affordable weekly and monthly newsletters is agreat way.  They draw on my vast experience,knowledge, wisdom, and ongoing research to explain what’s going on in themarkets, why, and how to trade them with specific stocks.  Subscribetoday while this gold-stock upleg remains young!  Our newly-reformatted newsletters have expandedindividual-stock analysis.

The bottom line is thisyoung gold-stock upleg is accelerating. Speculators and investors are increasingly realizing that this sector’spowerful surge since early March is the real deal.  So they are rushing to chase this momentum byredeploying in gold stocks.  The more theybuy, the faster the miners rally attracting in even more capital inflows.  Yet in typical young-upleg fashion, bearish psychologylingers in a wall of worry.

Traders fear goldstocks have surged too far too fast, growing too overbought.  While that may prove true in the very short-term,from a broader upleg-correction-cycle context this sector remains slightlyoversold.  The gold stocks have to blastfar higher and multiply their gains before they get anywhere near upleg-slayinglevels of overboughtness.  So there’snothing to fear technically here, pullbacks should be bought.

Adam Hamilton, CPA

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