Gold stocks still correcting

Corrections certainly aren’t easy to weather psychologically. Their mission is to eradicate the universal greed at preceding upleg toppings. That means gutting traders’ enthusiasm for a hot sector that has just soared. Losses unfolding and deepening over time are the only way to swing the sentiment pendulum back from euphoria to apathy to despair. That requires the great majority of traders to be forced to capitulate.

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

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

It includes a construct called the Relative GDX, or rGDX. That simply divides this gold-stock ETF’s daily closes by their 200-day moving average, and charts the resulting multiples over time. These tend to form horizontal trading ranges that flag when this sector is really overbought or oversold, the times to sell and buy. This is based on my effective and very-profitable Relativity Trading system if you want more background.

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

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

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

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

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

Indeed the red-hot gold stocks soon started correcting, and those tighter trailing stops realized big gains for those who wisely ran them. GDX’s initial selloff out of its lofty early-August peak was fast, as this 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 big warning to traders still bullish on gold stocks.

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

This sector’s high consolidation from mid-August to mid-September really retarded this correction’s critical rebalancing work. Over 5 weeks or so GDX rebounded 9.7% to claw back up to just 3.7% under early August’s peak levels. I tried to warn traders not to be lulled into complacency, writing an essay in early September arguing gold stocks were still in correction mode. I got a lot of flak for that contrarian stance.

But sure enough since overboughtness hadn’t been worked off and greed remained high, that corrective selloff 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 that day. While that was no longer extremely overbought, it still remained far above oversold levels.

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

During this gold-stock bull’s first three corrections, GDX plunged 39.4% over 4.4 months, 31.3% over 19.1 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 months at worst is still way short of bull precedent, even after this bull’s second-biggest upleg.

And the rGDX reads at earlier correction bottoms show how far gold stocks would still need to fall to hit similar deeply-oversold levels. The major gold stocks were blasted to an average of only 0.754x their 200dma in GDX terms before new uplegs were born! That’s a long way down from both that 1.135x seen in late September and this correction-to-date’s nadir of 1.132x in early October. This selloff isn’t over!

That doesn’t mean GDX has to collapse 35%+ again before gold stocks’ next major upleg can get underway. Each of those three prior corrections had extenuating circumstances deepening them beyond normal levels. They were exacerbated by gold getting crushed after 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 imagine GDX not at least correcting 20% to 25% to rebalance sentiment after such great euphoria in early August. GDX peaked at $44.48 on August 5th, a 7.5-year secular high. At worst on September 23rd, it closed at $37.63 which 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 farther to extend this correction to 20% to 25%.

That’s still another 10.8% to 16.4% lower from here! And that’s just in the major gold stocks dominating GDX. The smaller mid-tier producers with superior fundamentals and better upside potential during gold uplegs see gains and losses exceeding GDX’s. So for speculators and investors looking to buy back in to gold stocks to ride their next upleg, much-better entry opportunities are likely still coming in the near future.

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

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

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

Because gold and GDX soared so fast in such massive uplegs into early August, their 200dmas are still rapidly climbing as well. Corrections work through both the size of their losses and the time they take to unfold. Deeper faster corrections return prices to their 200dmas more rapidly, compressing the pain into a shorter timeframe finishing the necessary rebalancing work sooner. These are more beneficial to traders.

Corrections can also stretch out into shallower high consolidations, giving rising 200dmas more time to catch up with relatively-high prices. These are slower to unfold, as the rebalancing of technicals and sentiment take considerably longer to accomplish in a grinding-sideways environment. The possibility remains that gold and thus gold stocks simply drift horizontal long enough to evade rolling over into deeper selloffs.

This is the preferred outcome for longer-term investors, who don’t cash out before corrections and don’t want the psychological angst of watching them unfold. But one key factor is really ramping the odds for 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 outsized gold-price influence.

I wrote an entire essay last 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 gold and miners’ stocks shot parabolic into early August. Thus this world reserve currency is overdue for a mean-reversion rebound rally to rebalance its own technicals and sentiment. That implies considerable dollar upside from here.

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

This gold correction so far since early August has seen eight major down days exceeding 1% losses. Every single one of them happened on a USDX up day. During those gold averaged ugly 2.4% daily plunges on mere 0.5% average USDX rallies! That’s because a stronger dollar unleashes leveraged gold-futures selling which quickly hammers gold lower. If 0.5% does that kind of damage, imagine what 4%+ would do!

And if the overdue US-dollar rebound forces gold lower, rest assured the major gold stocks of GDX will follow it down amplifying its losses by 2x to 3x. Since neither gold nor gold stocks have come anywhere close to revisiting their 200dmas yet which are major correction support, odds are these selloffs haven’t run their courses. So it remains prudent to expect more selling before these bulls’ next major uplegs start marching.

There’s another way to gauge gold stocks’ correction progress. At worst so far gold is down about 10% compared to about 15% for GDX. That is just 1.5x downside leverage for the major gold stocks, really lagging their 2x to 3x precedent. These bulls’ prior-correction averages of 14.3% for gold and 36.5% for GDX work out to 2.5x leverage right in the middle of that historic range. That’s likely again in today’s selloff.

That implies a 25% GDX correction even if gold doesn’t fall much farther than 10%. And if gold retreats all the way back to its 200dma today which would make for 15% total, that major-gold-stock correction would exceed 37% at 2.5x! I don’t expect it to go that deep, as gold stocks didn’t hit the extraordinarily-overbought levels gold did in early August. But GDX falling another 10% to 15% from here wouldn’t surprise.

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

And right now is not one of them. Both gold stocks and gold are in confirmed corrections after soaring in enormous uplegs. And neither the miners nor their driving metal have yet given the important technical green lights to confirm likely correction bottomings. So we have to assume these corrections are ongoing until evidence to the contrary. Thus weathering these necessary selloffs in cash remains the best option for now.

Both speculators and investors should embrace these inevitable rebalancing corrections, as they yield the best mid-bull buying opportunities within ongoing bull markets. That is when to aggressively redeploy in gold, gold ETFs, gold-stock ETFs, and individual gold stocks with superior fundamentals. Bulls’ inexorable upleg-correction cycles are great boons for traders, greatly expanding their potential gains to be won!

At Zeal we started aggressively buying 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 positions before gold stocks grew too overbought, which were stopped out later at huge realized gains running as high as +199%! Our subscribers multiplied their wealth within months.

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

The bottom line is gold stocks are still correcting. Their necessary selloff to work off overboughtness and rebalance sentiment after their latest upleg peak hasn’t finished its mission. The major gold stocks per GDX have yet to revisit oversold levels and eradicate early August’s universal greed. And they haven’t yet fallen far enough to leverage gold’s own correction by their normal 2x to 3x, arguing more selling is coming.

Like usual the depth and duration of this gold-stock correction is fully dependent on gold’s own. And that doesn’t look over yet either since gold remains so far above its key 200-day-moving-average correction-bottoming support zone. Gold is at risk of serious gold-futures selling as the oversold US dollar inevitably mean reverts higher. That will likely really accelerate this gold-stock correction, forcing it closer to climaxing.

(By Adam Hamilton)