Gold Stocks Wavering / Commodities / Gold and Silver Stocks 2020

The gold miners’ stocksare wavering, frustrating traders.  Forthe better part of a half-year, this sector has neither broken out nor brokendown.  Instead it has mostly groundsideways since the last upleg’s peak. Gold stocks being mired in a consolidation so long, even arelatively-high one, is steadily eroding bullish sentiment.  That ups the odds it will roll over into acorrection, especially considering gold’s situation.

Last summer the goldstocks were rocking, with the leading GDX VanEck Vectors Gold Miners ETF justsoaring.  Following gold’s decisive bull-market breakout to its first new highs in several years in late June, GDX blasted 29.0% higherover the next 2.5 months!  That generatedgreat bullishness, capping a larger 76.2% upleg over 11.8 months.  The major gold stocks dominating GDX were becomingbelles of the ball.

That fast run left themsuper-overbought, so a correction was highly probable to rebalance sentiment inthis hot sector.  And that indeed lookedto be getting underway, with GDX retreating 15.4% over the next 1.3 months intomid-October.  The gold stocks mostly bumpedalong those correction lows for another 1.3 months into late November.  Then GDX rallied a bit, but kept grindingsideways on balance for most of December.

But on Christmas Eve’sthrowaway half-day trading session, gold surged in a surprising rally managingto break out above its own downtrend resistance.  GDX surged 6.2% in just 4 trading days, rekindlinghopes the gold stocks were off to the races again.  But despite gold’s sharp geopolitical rally thismonth, the gold stocks haven’t been able to break out to new highs.  This week GDX fell back to pre-Christmas-Evelevels.

Thus for 4.4 months now,the major gold stocks have effectively drifted. They failed to roll over into a real correction, then failed to break outto new highs even while gold was.  Thislackluster action reminds me of Jesus Christ admonishing a church in Asia Minoras described in Revelation.  He warnedthe church in Laodicea, “I know your deeds, that you are neither cold nor hot.  I wish you were either one or the other!”

“So, because you arelukewarm - neither hot nor cold - I am about to spit you out of my mouth.”  That sounds like gold stocks in recentmonths.  If they were cold aftercorrecting, they’d be great buys.  Ifthey were hot after breaking out to new highs, momentum fueled by resurgentbullish sentiment could push them higher. But instead they’ve been lukewarm, the most unappealing temperature for food,drink, or trading.

There’s no doubt theywere hot in early September as this sector’s last upleg peaked.  GDX stretched more than 34% above itsbaseline 200-day moving average, revealing extreme overboughtness.  That was the most overextended gold stockshad been since late August 2016.  Andthat sure didn’t end well, with GDX soon plummeting 39.4% in 4.4 months in abrutal severe correction!  Those existfor a reason.

After major uplegs,popular sentiment grows too bullish. That entices in all speculators and investors who are interested inbuying in the near term.  Once they are effectivelyall-in, the capital inflows necessary to force gold stocks higher dry up.  All traders can do is sell, and that soonstarts to snowball.  The ultimate purposeof corrections is to rebalance sentiment, eradicating greed and rekindlingfear through big selloffs.

Those are themost-efficient and fastest way to bleed off upleg-killing levels of greed.  But there’s another way that is muchslower.  Instead of selling off sharply ignitingfear, gold stocks can grind sideways after uplegs in high consolidations.  That increasingly leads to apathy, whichgradually drowns out greed after uplegs peak. The critical question for traders now is whether gold stocks arecorrecting or consolidating.

The trading strategiesfor each possibility are very different. Corrections exhibit severe downside in this volatile sector.  So traders need to sell positions or at leastratchet up trailing stop losses to protect their gains.  Cash is king in corrections, since it preservescapital while gold stocks sell off enabling traders to buy back in at much-lowerprices increasing their position sizes. Gold-stock losses in corrections can get huge.

As this chart of recentyears’ GDX action shows, this gold-stock bull’s prior two corrections averagedugly 35.4% losses over 11.8 months!  So traderssure don’t want to own gold stocks during a correction.  GDX is rendered in blue here, with this gold-stockbull’s major uplegs and corrections noted. GDX’s 15.4% loss at worst over 1.3 months since the last upleg peaked iscertainly not a correction-grade selloff in this sector.

Instead of correctinghard to kill greed quickly, the major gold stocks have largely been driftingsideways generating apathy.  Thislukewarm wavering is slowly staking enthusiasm for this sector.  This is evident in gold-stock capital flowsand gold-stock sentiment.  Back in lateAugust and early September, bullishness for big additional gains ranrampant.  Today gold stocks are shiftingback towards being ignored like usual.

Trading highconsolidations is very different than trading corrections.  Since this sector mostly grinds horizontally,replacing selloff downside with time, existing positions don’t have to be liquidated.  They can be held to ride out the consolidation,as the potential losses are way lower than in a correction.  Later on after the consolidation has mostlyeradicated greed, new positions can be added ahead of the next upleg.

One clue both correctionsand consolidations may be ending is 200dma approaches.  200-day moving averages are the strongest supportzones within ongoing bull markets.  So whenGDX retreats back to its 200dma, either quickly through a correction or slowlythrough a consolidation, odds rise that sentiment is nearing sufficient rebalancing.  And so far in this corrective phase, GDX hasn’teven come close to its 200dma.

The day that lastgold-stock upleg peaked in early September, GDX was running 1.341x its200dma.  At worst in late November whenthe major gold stocks revisited their correction lows, that metric contractedto 1.047x.  But GDX still remained almost5% above its 200dma, way too high for a convincing approach.  By late December that ballooned back up to1.151x, and was still running 1.109x in the middle of this week.

Thus whileoverboughtness has mitigated considerably in recent months, it never went away.  Both prior gold-stock corrections saw GDXplunge way under its 200dma, to 0.767x and 0.801x respectively.  While such deep correction lows probably aren’tnecessary this time around, this leading gold-stock benchmark could easily fall5% to 10% under its 200dma before greed is eradicated.  So considerable risks remain.

The key to successfullytrading gold stocks is their dominant primary driver, gold.  Gold’s fortunes over the next few months willdictate whether the gold miners roll over into a correction or keepconsolidating high to evade one.  80%+ ofgold-stock price action is driven by gold, not company-specific news.  If gold is rallying, the miners climb with itamplifying its gains.  If gold is sellingoff, gold stocks leverage its losses.

The major gold minersof GDX tend to leverage material gold moves by 2x to 3x.  So if gold rallies 10% from here, GDX islikely to surge 20% to 30% higher.  Butif gold falls 10%, this leading gold-stock ETF will likely be dragged 20% to30% lower.  The lack of a normal goldcorrection following gold’s own early-September upleg peak is why gold stockshaven’t corrected significantly.  They simplymirrored gold’s action.

At worst in lateNovember, gold had retreated 6.4% in 2.7 months.  While not perfectly synched time-wise, GDX’s15.4% drop at worst was 2.4x gold’s. That’s right in the middle of that normal leverage range.  But gold’s parallel high consolidation thathas enabled gold stocks’ has also been far milder than bull-to-dateprecedent.  This gold bull’s prior couplecorrections averaged much-larger 15.5% selloffs over 6.0 months!

So whether thesewavering gold stocks correct or consolidate depends on whether gold itselfcorrects or consolidates.  The only waythis sector’s high consolidation can continue and avoid rolling over into a biggerselloff is if gold remains relatively high too. As always gold-stock speculators and investors must look to gold forwhat’s probable next.  Again it isresponsible for well over 4/5ths of gold-stock price action!

Like gold stocks, goldis driven by capital flows.  When speculatorsand/or investors are buying, gold rallies pushing the gold stocks higher.  When they sell, gold falls dragging itsminers’ stocks lower.  What goldspeculators and investors do in coming weeks and months will determine theshort-term fate of the gold stocks.  Unfortunatelythe recent gold buying looksprecarious, as I detailed in another essay last week.

In recent weeks GDX’shighest close remained 4.7% under its last upleg peak in early September.  Yet gold was breaking out to new upleghighs, fueled by shocking geopolitical events.  The US government assassinated Iran’s topgeneral with a drone strike while he was traveling in Iraq, then Iran retaliatedby lobbing ballistic missiles at Iraqi bases used by the US military!  So gold blasted 2.9% higher in 3 trading days.

Those fear-driven gainscatapulted gold to $1572 on close, 1.2% above early September’s upleg peak of$1554.  Gold-stock traders wereapparently skeptical gold’s gains would hold, as GDX certainly didn’t amplifythem like normal.  As I warned in earlyJanuary, gold stocks’ surge since Christmas Eve looked like a head-fake rally.  Those gains didn’t look sustainable becauseof the situation gold itself was facing.

Gold speculators’likely buying was effectively exhausted, while gold investors weren’tbuying.  Gold can’t enjoy uplegs withoutmaterial capital inflows from either or both of these key constituencies.  Speculators mostly game gold through goldfutures, which allow extreme leverage exceeding 30x!  Their positioning is reported weekly, and formstrading ranges when considered across gold’s current 4.1-year-old secularbull.

The latest specgold-futures data before this essay was published was current to last TuesdayJanuary 7th, the very day gold peaked on US-Iran-conflict fears.  Total spec longs, upside bets on gold, hit an all-time-record high of 444.0k contracts!  That implies spec gold-futures long buying istapped out, since both gold-futures traders and the capital they command isfinite.  They are effectively all-ingold, fully deployed.

Meanwhile their totalshorts, downside bets on gold, remained really low at 88.0k contracts.  That was just 6.5% up into their tradingrange during this gold bull.  In those gold-bull-to-datetrading-range terms, they had room to buy and cover just 11.8k contracts.  But they had room to sell short a massive 168.7k!  The spec gold-futures shorts were neartheir effective floor, so traders likely weren’t able to buy materiallymore.

The most-bullish-possiblenear-term setup for gold is specs being 0% long and 100% short in gold-bull-trading-rangeterms.  If positioning looked like that,the gold stocks would be poised for a major new upleg running from here.  But this latest data revealed specs wereactually 100% long and 7% short, which is still close to the most-bearish-possible for gold of 100% and 0%!  Speculators can’tbuy much more from here.

Even worse, they are goingto soon have to sell a big fraction of their excessively-bullish bets to normalizetheir positions.  Gold-futures contractshave expiration dates.  So theseall-time-record-high longs have to be sold sooner or later, which will pushgold lower.  And that could be much lower. Including both their longs and shorts,specs now have room to buy 11.8k contracts but room to sell 36.0x more wayup at 426.1k!

So the gold stocks aren’tonly not going to get help from more gold-futures buying, big gold-futuresselling could slam them lower amplifying gold’s losses by 2x to 3x.  That means the only hope for gold stocks tocontinue consolidating high rather than rolling over into a correction is goldinvestment buying.  Although global gold investmentdemand is only reported quarterly, there’s a great daily proxy of investmentcapital flows.

That is the holdings ofthe leading and dominant gold exchange-traded fund, the GLD SPDR GoldShares.  GLD acts as a conduit for thevast pools of American stock-market capital to slosh into and out of gold.  If you need to get up to speed on thecritical importance of GLD capital flows evident in its holdings or that specgold-futures trading, lastweek’s essay covered both in more depth. Gold stocks are this essay’s focus.

These lukewarm waveringgold stocks can only keep consolidating high if gold itself does.  And with the gold-futures traders’ buyingeffectively exhausted, gold stocks’ only near-term hope is big gold investmentbuying.  This chart of GLD’s dailygold-bullion holdings superimposed over gold unfortunately proves this isn’thappening.  Investors were barely buyinggold in recent weeks, and that has rolled over into selling.

Gold investment capitalflows tend to lag gold somewhat, as investors are slower to respond to gold priceswings than speculators.  GLD’s holdingspeaked at 924.9 metric tons of gold held in trust for shareholders in late Septembera few weeks after gold’s last upleg originally crested.  Then investors’ enthusiasm for gold fadedwith its price, so GLD’s holdings fell 4.8% or 44.3t into mid-December as GLDshares were sold.

While gold’s downtrend-breakoutrally happened on Christmas Eve, it was testing other key resistance the daybefore.  So Friday December 20th wasreally gold’s last normal correction day. Over the next couple of weeks, gold would surge 6.4% higher first onthat breakout and later on the US-Iran conflict flaring.  But American stock investors weren’t doingmuch buying, as GLD’s holdings only grew by 1.2% or 10.3t in that span.

There was littleinvestment buying fueling gold’s recent spike to a new 6.8-year secularhigh.  The lion’s share of the goldbuying driving those fast gains came from speculators buying gold futures.  In roughly that same span, specs added 43.7kgold-futures longs.  That’s theequivalent of 135.8t of gold buying, or 13.2x more than GLD’s holdingsbuild!  Gold’s breakout can’t continuewithout big investment-capital inflows.

But much more ominously,over this past week that modest differential-GLD-share buying has turned intosizable investment selling.  Once gold’ssharp geopolitically-fueled gains proved unsustainable, investors quickly resumedexiting.  In just 3 trading days endinglast Friday, GLD’s holdings plunged 2.4% or 21.7t!  That more than wiped out recent weeks’entire build, dragging GLD’s holdings to a fresh correction low.

It’s certainlyunderstandable investors aren’t enamored with gold.  After spending just two trading days at newupleg highs early last week, that breakout fizzled out.  And gold investment demand usually provesweak anyway when stock markets are near record highs spinning off great euphoria.  That’s certainly the case today, thanks tothe Fed’s extreme easing via ongoing QE4 money printing monetizing US Treasury bills.

The gold investment capitalflows per their leading daily proxy argue that gold’s breakout spike was just atemporary anomaly with no foundation. If this gold investment selling persists on balance, it is going to pushgold lower.  That could unleash the vastpent-up selling from speculators’ record gold-futures-selling overhang.  Being effectively all-in, the gold-futuresspecs really couldn’t buy more even if they wanted to.

The continuing viabilityof gold stocks’ high consolidation in recent months is totally dependent ongold’s fortunes.  Gold needs ongoingcapital inflows to stay high or rally higher. The gold-futures specs can’t buy, and the gold investors aren’tbuying.  If the investors’ recent sellingpushes gold low enough to start unleashing that massive gold-futures selling,gold will roll over into a correction dragging gold stocks with it.

These lukewarm waveringgold stocks have only consolidated high because gold has.  They will definitely get dragged into a realcorrection if gold breaks down.  And that’svery probable given speculators’ current gold-futures positioning and investors’ongoing gold selling.  If gold falls 10%from here, which is mild by bull-to-date standards, the major gold stocks asrepresented by GDX are likely to amplify that to 20% to 30%.

That’s a lot of asymmetricdownside risk compared to very-limited short-term upside at best!  So it remains prudent to be wary here,these relatively-high gold-stock levels likely aren’t sustainable.  The fortunes of this sector overwhelminglydepend on gold’s own.  And bothgold-futures speculators and gold investors seem far more likely to sell thanmaterially buy in the near future.  That’scertainly bearish for gold stocks.

To multiply your capitalin the markets, you have to trade like a contrarian.  That means buying low when few others are willing,so you can later sell high when few others can.  In the first half of 2019 well before goldstocks soared higher, we recommended buying many fundamentally-superior gold andsilver miners in our popular weekly and monthly newsletters.  We later realized big gains including 109.7%, 105.8%, and 103.0%!

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Thebottom line is gold stocks have been wavering in a high consolidation onlybecause gold has mostly done the same.  Thegold miners can’t break out to the upside without sustained higher gold prices.  But that’s really unlikely given speculators’record excessively-bullish bets and investors continuing to sell on balancedespite gold’s recent geopolitical spike. That investment selling will likely trigger big gold-futures selling.

That wouldforce the gold stocks to roll over into a real correction, breaking down to thedownside.  That’s normal after majoruplegs in this gold bull, rebalancing sentiment way more quickly than driftingsideways can.  Gold-stock traders mustremain wary until speculators’ extreme gold-futures positioning finally getsnormalized through big selling.  That willusher in the buy-low opportunities before gold’s next major upleg.

Adam Hamilton, CPA

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