Gold stocks room to run

The resulting bigger gains accelerate the buying, ultimately driving sentiment through greed into euphoria. But that frenzied gain chasing soon burns itself out, enticing in too much near-future buying too soon. In the process it forces gold stocks nearly vertical, leaving them extremely overbought. Then mature uplegs top, as traders interested in participating are effectively all-in. Corrections ensue, resetting this key cycle.

These bull-market waves of uplegs and corrections are very lucrative to trade, giving speculators and investors multiple relatively-low entry points and relatively-high exit points. Actively buying low then later selling high through a secular bull greatly increases potential gains. That’s certainly evident in our current gold-stock bull, as seen through the lens of the leading GDX VanEck Vectors Gold Miners ETF benchmark.

Born back in mid-January 2016, this bull has seen four complete upleg-correction cycles so far. This current young upleg today is this bull’s fifth. At best as of its peak-to-date in early August 2020, GDX had powered 256.7% higher over 4.5 years. While those are great bull gains, they were handily bested by this bull’s total individual uplegs. In GDX terms they weighed in at +151.2%, +34.6%, +76.7%, and +134.1%.

That adds up to 396.6% potential gains from trading uplegs and corrections, 1.54x better than buying and holding! And if this in-progress young fifth upleg’s small gains so far are included, those numbers grow to 425.0% and 1.66x. While these maximums are theoretical since it is impossible to buy and sell exactly at bottoms and tops, whatever percentage of entire uplegs actually captured still trounces buying and holding.

The hard work of buying low and selling high to ride bull-market upleg-correction cycles comes in timing trades. That requires lots of experience, expertise, and a resolute contrarian bent. Gold stocks must be bought when the vast majority of traders are scared because they just suffered major corrections. And they have to be sold when most traders are euphoric since they recently soared after powering higher for months.

Gold-stock sentiment today remains far from exuberance. Most analysts and traders are apathetic at best, with bearishness creeping back in the longer this sector consolidates sideways. This lack of widespread greed is a bullish sign, indicating this upleg still has a long ways to run before it matures. If you want to remember what herd euphoria looks like, read commentary published in early August as GDX peaked.

Back then it was a frenzied gold-stocks-to-the-moon mentality, which is typical when uplegs go terminal. Today this small contrarian sector is off the radars of most traders, they simply don’t care. They won’t until this young gold-stock upleg rallies long enough and high enough to command more attention. GDX has only climbed 28.4% at best so far over 2.5 months, which is still small compared to bull-market precedent.

Those previous four uplegs of this bull averaged stunning 99.2% GDX gains over 7.6 months! This big-and-fast upside is why traders put up with this volatile sector. And in the secular gold-stock bull before that, the old HUI gold-stock index predating GDX enjoyed literally a dozen uplegs averaging 87.5% gains each over 7.8 months! The gold-stocks have a multi-decade history of quick near-doublings multiplying wealth.

Circling back to our current fledgling upleg still mired in indifference, it looks as young technically as it does sentimentally. In order to actively trade upleg-correction cycles by buying low then selling high, “low” and “high” have to be defined in real-time. That’s no mean feat, as it requires fighting the herd to do the opposite of popular consensus. Almost two decades ago I developed a trading tool to aid this battle.

It is called Relatively Trading, empirically defining when prices are relatively low or relatively high within longer-term secular trends. That “relative” qualifier is essential, as prices gradually climb on balance in ongoing bull markets. So what is low or high for GDX today is very different from those levels a couple years ago. Some baseline is needed to measure from, but it can’t be static since price levels slowly rise.

After years of testing various measurement baselines followed by more years of actually trading on them, the 200-day moving average won out as an ideal one. The average closing price of the last 200 trading days moves at a tortoise-like pace, it is immune from the often-large day-to-day volatility common in gold stocks. Yet 200dmas still gradually climb to reflect higher prevailing price levels through ongoing bulls.

All relativity trading does is recast GDX closing prices as multiples of their 200dma, so the math is very simple. The Relative GDX or rGDX indicator is just GDX’s daily close divided by its 200dma. In the middle of this week, those ran $38.00 and $36.70 respectively. That yields a relative multiple of 1.035x, GDX is trading 3.5% above its 200-day moving average. The magic comes in charting these over time.

A Relativity chart effectively flattens 200dmas to horizontal at 1.00x, and prices meander around that key baseline in perfectly-comparable percentage terms regardless of prevailing price levels. rGDX multiples tend to form horizontal trading ranges through secular bulls. Corrections bottom when GDX sinks low relative to its 200dma, and uplegs top when it soars comparatively high. The latter isn’t happening yet.

This Relative GDX chart superimposes the actual ETF along with its 50dma and 200dma over that rGDX multiple. I define Relativity trading ranges over the last five calendar years, during which the rGDX’s ran between 0.80x and 1.50x. Corrections bottom at extremely-oversold conditions near the former, while uplegs top at extremely-overbought levels around the latter. Today’s upleg is nowhere near overbought yet!

At this young upleg’s last interim gold-stock high in mid-May, GDX had only climbed to 1.074x its 200dma despite a sharp surge breaking out above it. Those rGDX levels have largely held since, with this gold-stock ETF grinding sideways to lower. The rGDX edged up to 1.075x in early June, but hasn’t made any meaningful progress for several weeks now. Overboughtness has yet to flare in this entire gold-stock upleg!

That means it isn’t mature yet, having lots of room to run much higher before giving up its ghost. When today’s upleg was born in early March, fear and despair were rampant as GDX was hammered down to just 0.825x its 200dma. That was an extremely-oversold rGDX read, perfect conditions to birth a new bull upleg. Such super-low gold-stock prices relative to their benchmark’s 200dma heralded a major bottom.

While the exact timing and level is never knowable in real-time, we attempted to straddle that bottoming by aggressively adding great fundamentally-superior gold-stock trades in our newsletters. I wrote an essay in mid-February explaining why gold stocks retesting lows was a great time to buy in low. Then in early April after earnings season, another essay showed that bottoming had happened so a new upleg was underway.

We’ve kept full trading books in our monthly and weekly since, which had stock unrealized gains running as high as +78.0% this week! This Relativity Trading system absolutely works, flagging when bull uplegs are topping and subsequent corrections are bottoming. The rGDX reveals when sector overboughtness or oversoldness stretches to such extremes that a major imminent short-term trend reversal is highly likely.

Most of this baby gold-stock upleg’s gains so far are just a mean-reversion bounce out of early March’s extremely-oversold lows. While GDX did surge to break out above its 200dma into mid-May, it never got anywhere near upleg-slaying levels of overboughtness. That 1.074x rGDX read was really low compared to bull precedent. GDX’s previous upleg crested way up at 1.448x its 200dma, far higher than recent levels.

That was a monster mean-reversion one exploding higher out of March 2020’s stock panic spawned by governments’ COVID-19 lockdowns. That wildly-unprecedented anomaly truncated the upleg before that prematurely, but it still peaked at a 1.153x rGDX. Those sector uplegs clocked in at massive +134.1% and +76.7% GDX gains respectively, which again highlight how small our current upleg is at just +28.4% at best.

And this bull’s maiden upleg in the first half of 2016 was even bigger, ballooning to an enormous +151.2% over 6.4 months! That was another mean-reversion one out of extremely-oversold conditions, born at an rGDX of just 0.781x. That wasn’t much lower than early March 2021’s 0.825x. That initial upleg of this bull topped at an extreme 1.567x rGDX, after soaring to a radically-overbought 1.646x leading into that crest.

Gold-stock uplegs need to mature before they roll over into corrections, and that is evident through both excessive popular greed and GDX soaring nearly vertically to extremely-overbought levels. Neither has been seen yet in this current young upleg. Thus it likely still has a long ways to run higher yet. And if it gets anywhere near this GDX-bull-market average of 99.2% gains, the lion’s share of the upside lies ahead.

That doesn’t necessarily mean recent weeks’ high consolidation deteriorating into a pullback is over. We are in the summer doldrums in early June, the weakest time of the year seasonally for precious metals. GDX could easily retreat back to its 200dma, which was running at $36.70 mid-week. Individual bull uplegs flow and ebb, taking two steps forward before sliding one step back. That helps keep sentiment balanced.

In addition to this upleg not yet spawning significant greed and remaining far from overbought, a major buy signal is just triggering. I discussed it last week in an essay on the mounting gold-stock gains. It is called a golden cross, which triggers when GDX’s 50dma climbs back above its 200dma after a major correction. The last time this powerful technical buy signal triggered was earlier in GDX’s last upleg.

That was again that +134.1%-over-4.8-months post-panic monster, which ran until euphoria waxed extreme catapulting this dominant gold-stock ETF way up to 1.448x its 200dma. Nothing remotely close has yet happened during this current upleg, buttressing the case it still has much room to run. Not even these summer doldrums are likely to hold back gold and gold stocks for long, as evident in recent summers’ action.

Last summer between the end of May to early August, GDX soared 28.9%. And a year earlier between the end of May to early September 2019, GDX rocketed up 43.4%! So gold stocks have attracted much capital in recent summers on gold powering higher, contrary to normal weak seasonals. Gold’s fortunes are always the dominant driver of gold stocks’ near-term price action, and gold’s setup today is very bullish.

Speculators still have lots of room to buy gold futures before they exhaust their capital firepower. And investors are increasingly returning to gold after fleeing during and after its recent extended correction. I analyze the latest data on both these critical gold-driving fronts in all our newsletters, and digging in here is beyond the scope of this essay. But gold’s young upleg remains highly likely to keep rallying on balance.

Gold demand is naturally growing as inflation soars, fueled by the Fed’s colossal money printing since March 2020’s stock panic. This central bank has already nearly doubled its balance sheet in that short span, nearly-doubling the US-dollar supply! Vastly more dollars flooding the system are bidding up the prices on everything, including gold. Its own supply only grows on the order of 1% a year through mining.

As gold’s own bull marches higher on strong fundamentals, the major gold stocks of GDX will amplify its gains by 2x to 3x like usual. They are already earning money hand over fist with these high prevailing gold prices, as was evident in their great Q1’21 results. So the gold miners’ fundamentals also support much-higher stock prices. All the stars are aligned for this young gold-stock upleg to grow much larger!

If you aren’t fully deployed yet, that buy-relatively-low window hasn’t yet closed. The gold stocks aren’t as cheap as they were straddling early March’s correction bottoming, but their prices will soar much higher as this upleg matures in coming months. Our newsletter trading books are currently fully of excellent fundamentally-superior gold stocks, which should see ultimate upleg gains well outpacing GDX’s upside.

The bottom line is this young gold-stock upleg still has much room to run. At best so far it is still small by sector standards, at just over a quarter of this bull’s near-doubling upleg average. Sentiment remains apathetic if not bearish, as gold stocks haven’t yet surged high enough to stoke significant bullishness. And GDX is still far from overbought relative to its baseline 200-day moving average compared to bull precedent.

Thus this gold-stock upleg remains young, with the lion’s share of its gains still yet to come. This sector will follow gold higher, amplifying its gains because of the miners’ inherent profits leverage to gold. The yellow metal itself is also in a young upleg powering higher on extreme monetary inflation. The more the resulting surging price levels become apparent to traders, the more they will pile into gold and its miners’ stocks.

(By Adam Hamilton)