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Adam Hamilton

Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Are Gold Stocks Overbought?


The gold miners’ stocks have grown very overbought after soaring dramatically higher in recent months. Blasting really far really fast has left this sector really stretched technically and sentimentally. Excessive gains and greed always soon lead to major corrective selloffs, which are necessary to restore balance. All bull markets, even the most powerful, flow and ebb. Big uplegs are inevitably followed by corrections.

With gold and gold stocks plunging hard Thursday morning, the timing of this research thread is certainly lucky. My weekly-web-essay workflow is well-defined, this happens to be the 877th I’ve written. I have to decide on each week’s topic by early Wednesdays, to do the research and build necessary spreadsheets and charts that day. Then I write and proof these essays Thursdays, so they can be published early Fridays.

Even before this latest bout of selling erupted, the serious downside risks facing overbought gold stocks were readily apparent. According to virtually every technical indicator out there, this sector was looking ever-more extreme in recent weeks. The longer and farther gold stocks surged, the greater the odds for a selloff.

Before the selling hit I wrote, “Gold is overextended, due for a healthy bull-market correction over the near-term. Its technicals are way too overbought, and its sentiment way too greedy. Too many buyers have flooded in too quickly, exhausting gold’s near-term upside potential. My best guess is a 6%-to-12% gold selloff, which the major gold stocks will leverage like usual by 2x to 3x.” That works out to 12% to 36%!

Stock prices can’t soar higher without material interruptions indefinitely. Even strong uplegs eventually burn themselves out, attracting in all interested buyers over the near-term. They rush to buy to ride the upside momentum, basking in the warm greed. But once their capital firepower is exhausted, price gains stall and peak. That leaves nothing but sellers, and their resulting downside momentum feeds on itself.

The massive gains gold miners’ stocks enjoyed in recent months have truly been extraordinary, stoking widespread greed. This first chart is a seasonal one, rendering this sector’s price action in like indexed terms during every summer in modern bull-market years. Normally gold and gold stocks face seasonal drifts to slumps in market summers, the dreaded summer doldrums. This summer’s monster rally defied that.

Traders use two major benchmarks to measure gold-stock prices, the popular GDX VanEck Vectors Gold Miners ETF and the venerable HUI NYSE Arca Gold BUGS Index. Both of these track the major gold miners’ stocks. While GDX has gradually usurped the HUI in prominence, it remains too young for long-term studies. GDX was born in May 2006, roughly halfway through the last secular gold and gold-stock bull.

So the HUI has to be used to distill all gold-stock summer action from 2001 to 2012 and 2016 to 2019, the modern gold-bull-market years excluding intervening bear years. Every summer is individually indexed to its final May close, which is set at 100. Then its June, July, and August price action is recast from that common baseline. All these individual-summer indexes averaged together show the summer-doldrums drift.

(Click to enlarge)

The center-mass trend of this spilled-spaghetti chart is a sideways grind, within 10% either direction of the final May close. This summer’s breakout gold-stock rally is rendered in dark blue, and it proved an utter monster. By the end of August, the HUI had skyrocketed 45.3% higher during the three calendar months of the market summer! The seasonal average in modern gold-bull-market years before 2019 was a 3.2% gain. Related: Climbing U.S. Dollar Weighs On Global Markets

The gold miners just soared to their best summer performance in recent decades! The only comparable year was 2016, making its example important for gaming today’s overboughtness. The gold stocks spent the last few months racing higher neck-and-neck with the summer of 2016, trading the lead back and forth multiple times. It wasn’t until the last couple weeks that 2019 injected the nitrous and screamed past.

By the end of July 2016, the HUI had soared 36.3% summer-to-date compared to 2019’s considerably-smaller 26.9% gains in that same span. But by the end of August 2016, those had collapsed back down to +10.1% over that entire summer. This summer’s strong finish after a powerful multi-month rally is truly in a league of its own. Only 2003 rivaled it with 36.9% summer gains, but those started well later mid-summer.

Overboughtness is a relative thing, it can’t be defined absolutely since prevailing price levels gradually change over time. But the biggest summer gold-stock rally in modern history certainly raises concerns of running too far too fast. Gold stocks soaring by about half in several months is a huge move even by their wild standards! This mighty gold-stock surge looks even more extreme considered in longer-term context.

This next chart encompasses the current gold-stock bull since early 2016, which was driven by gold’s own parallel secular bull. Professional institutional investors have often gamed this bull with that leading and dominant GDX ETF, so it is used here rather than the older HUI. While the gold miners’ stocks achieved much technically this summer, there’s no doubt they soared to super-overextended levels which is ominous.

(Click to enlarge)

As of this Wednesday’s close, the data cutoff for this essay, GDX had powered up 76.2% in 11.8 months. Interestingly that’s right in line with the last secular gold-stock bull’s average upleg gain. From November 2000 to September 2011, the HUI skyrocketed 1664.4% higher over 10.8 years! Those gains accrued in 12 separate uplegs. Excluding an anomalous post-stock-panic-recovery one, they averaged 80.7% gains.

It’s hard to believe now, but back in early May GDX languished at $20.17 and you could hardly give away gold stocks! Traders didn’t want anything to do with them when they were universally despised and easy to buy incredibly low. I was pounding the table on buying the dirt-cheap gold stocks last spring, when this sector still had massive near-term upside potential. Near-record gold-futures shorting portended a major upleg.

Near the end of April in an essay on gold futures, I explained why. “Speculators’ big bearish shift in gold-futures positioning will have to be normalized, resulting in big buying that will push gold higher. That upside momentum could really grow... The biggest gains as gold mean reverts back higher will come in the stocks of its miners. They’ve proven resilient as gold swooned, and are poised to surge again.”

The out-of-favor gold stocks ground along near demoralizing lows for most of May, giving traders plenty of opportunities to buy relatively low before they ran again. We took advantage of that then to aggressively load up on fundamentally-superior gold miners and silver miners in our subscription newsletters. Trump of all things proved the catalyst to awaken gold and thus its miners’ stocks. That happened at the end of May.

Gold and gold stocks started surging after Trump threatened Mexico with tariffs, in an attempt to force it to stem the flood of illegal immigration into the US. Tying trade tariffs to other issues stunned traders, which unleashed safe-haven buying in gold. That helped the gold stocks rally strongly though much of June, with bullish momentum. But they really didn’t start soaring until late that month on a momentous gold milestone.

While gold technically remained in a bull market, it hadn’t made a new bull-market high since right after this bull’s maiden upleg way back in early July 2016. After 2.9 years with zero new highs, traders had long since lost interest in this sector. But in late June after the Fed shifted its future-rate-hike outlook from hiking to cutting, gold finally staged a decisive bull-market breakout. That changed everything psychologically.

The best gold levels seen in 5.8 years lit a fire under gold stocks, which kept rallying sharply in July when they are usually forgotten. They were getting overbought by mid-July, so momentum flagged heading into month-end. They were starting to roll over into what would’ve likely been a pullback until Trump surprised again, hiking tariffs on China as August dawned. That ignited gold stocks’ latest surge earlier last month.

That too soon started to fade since the gold stocks were so overbought. Smart traders who’ve dedicated many years to studying and understanding market cycles realized a corrective selloff was increasingly likely after such a big and fast surge. But yet again in late August Trump surprised with still another hike on Chinese tariffs! That sparked and fueled another gold and gold-stock rally that persisted into this week. Related: Central Banks Have Printed $22 Trillion Worth Of New Credit

The result of these three catalyzing Trump-tariff-hike announcements in recent months is the near-vertical gold-stock surge seen in these charts. GDX blasted to its best levels in 3.1 years. That’s not necessarily high absolutely, but it is certainly high relatively. When prices surge really far really fast on major buying as sentiment turns greedy, overboughtness always results. Such blistering rallies inevitably lead to selloffs.

While traders chasing the herd to buy in high later in uplegs practically panic when major selloffs hit, they are actually very healthy. They are essential and necessary to rebalance sentiment, eradicating the out-of-control greed after excessive gains. They force prices lower until technicals grow oversold as popular psychology waxes bearish. That leaves gold stocks relatively low again, a great opportunity to buy back in.

These inexorable upleg-correction cycles are what enable shrewd traders to multiply their wealth in bull markets. The goal is to buy relatively low after the corrections, then sell relatively high after the uplegs. This can only be achieved by doing what’s unpopular, fighting the crowd to do the opposite. When other traders are scared and selling is when to buy low, then when they are excited and buying is when to sell high.

The challenge is defining relatively low and relatively high, seeing oversold and overbought conditions in real-time when they can be capitalized upon. While there are many technical indicators, one of the best is among the simplest. It just looks at prevailing price levels relative to their 200-day moving averages. I call this Relatively Trading, and started developing this system over 15 years ago. It has proven really profitable.

There’s no gold-stock level that can be considered high absolutely across different years and toppings. In early August 2016, GDX peaked at $31.32. From there it would plummet 39.4% over the next 4.4 months in a colossal selloff! That was considered a correction instead of a bear market since gold-stock bull-and-bear cycles are defined by gold’s own. But GDX peaked at $66.63 in September 2011 with gold’s last bull.

Is GDX high at $31, which it again challenged this week, or does it have to get to $67 to be high? Gold stocks’ absolute price levels are irrelevant, as what is exceptionally high or low gradually changes over time. So some kind of reference point is needed to identify overboughtness and oversoldness right as they happen, but that too needs to slowly evolve. I’ve found gold stocks’ 200dma acts as an ideal metric for this.

200dmas aren’t static, they gradually adjust to different prevailing gold-stock price levels. At the same time, they have enough inertia to lag extreme short-term price moves. Calendar months average about 21 trading days, so a 200dma digests the past 9.5 months of price action. Exceptional gold-stock moves stretch current prices far away from their trailing 200dmas. That distance is easily quantifiable to trade upon.

Relativity Trading simply divides daily price closes by their 200dmas and charts the resulting multiples over time. With a sufficiently-long span, especially in trending markets, horizontal trading ranges of these multiples form. After much study and trial and error, I settled with the last 5 calendar years to define Relativity trading bands. Seeing where 200dma multiples trade comparatively offers good buy and sell signals.

Again GDX is much newer than the HUI with a far-shorter price history. And all my years of work applying Relativity to trading gold stocks has used the HUI as their benchmark index. So I’m going to shift back to the HUI for this final chart on gold-stock overboughtness. The Relative HUI indicator, or rHUI, currently has a trading range of 0.80x to 1.50x. This is rendered in this chart with the green and red shaded zones.

Visually a Relativity chart effectively flattens a 200dma, straightening it to 1.00x. Then a price’s multiple to that 200dma oscillates around it over time, in perfectly-comparable percentage terms regardless of the prevailing price levels. No matter where gold stocks are trading, when the rHUI hits 0.80x or 1.50x the actual HUI is trading at 80% or 150% of its current 200-day moving average. Here is this gold-stock bull’s chart.

(Click to enlarge)

Thanks to the gold stocks’ blistering rally this summer, the rHUI shot up as high as 1.362x last week. On Wednesday as this upleg’s latest high was hit, the rHUI still ran 1.354x. In other words, the major gold stocks as a sector are stretched 35% to 36% above their 200dma! That is very overbought, and doesn’t happen very often. Gold-stock uplegs usually only deviate from their 200dmas so greatly when they go terminal.

Bull-market uplegs usually start gradually, with not many traders interested in buying relatively low after major corrections. But as uplegs gather steam and gains mount, traders get excited about the upside momentum and want to buy in. The higher prices climb, the more greed grows and the greater the allure of chasing the herd. Thus upleg gains tend to be back-loaded, the majority accruing quickly as uplegs mature.

So really-overbought readings generally only happen late in uplegs. Actual gold-stock topping levels in rHUI terms still vary greatly though. Back in this bull market’s mighty maiden upleg peaking in summer 2016, the rHUI soared as high as 1.70x before drifting back to 1.62x when gold stocks actually crested in early August. But anytime the major gold stocks stretch 25%+ above their 200dmas, traders need to be wary.

Since there’s so much variability in upleg toppings, I generally haven’t sold trading positions outright. My strategy is usually to ratchet up trailing stop losses as prices get more overbought. That effectively locks in more of our upleg gains, while preserving upside potential if the upleg persists even longer. Although stop losses have their own challenges as they can be whipsawed into tripping early, they help manage risk.

I also consider gold-stock overboughtness in rHUI-multiple terms against the backdrop of how speculators are currently positioned in gold futures. Gold stocks are effectively leveraged plays on gold, and the gold-futures traders dominate gold’s short-term price action. I last explained this in depth in a mid-July essay. For our purposes today, realize gold’s own selloffs driving gold stocks’ are almost always governed by futures.

In the latest weekly data, speculators held their second-highest levels of gold-futures long contracts on record! That left their total longs running 97% up into their gold-bull-market trading range since mid-December 2015, which was topped by July 2016’s all-time-record high. When specs are effectively all-in gold-futures longs, all they can do is sell. Excessive long positions precede major corrections in gold.

After that only time spec longs were slightly higher in mid-2016, gold plunged 17.3% over the next 5.3 months which hammered the gold stocks 39.4% lower per GDX! And on the short side of gold futures, in the latest weekly read specs’ total contracts were running just 11% up into their own gold-bull-market trading range. That means they also have little room to buy gold futures to cover shorts, but lots of room to sell.

The most-bearish-possible near-term outlook for gold happens when total spec longs and shorts swing to 100% and 0% up into their bull-market trading ranges. The latest 97% and 11% as of last Tuesday’s close is getting pretty darned close! Since gold stocks will tank with gold regardless of how overbought they get, their downside risks are high. A major correction is far more likely than additional material rallying.

Rather amusingly, warning of overboughtness and impending selloffs after powerful uplegs always gets people riled up. After these 877 weekly essays, I know my e-mail inbox will be full of people telling me what a fool I am Monday morning. How could gold stocks not soar to the moon? This time is different because... The irony is traders should welcome corrective selloffs as they create new buy-low opportunities.

I opened with the first third of my conclusion from our brand-new monthly newsletter, and here’s the rest. “That will rebalance sentiment, paving the way for far-bigger future gains. There’s no sense redeploying capital high before that inevitable selloff arrives. Don’t let that short-term bearishness cloud the big picture. Gold’s powerful surge higher in the last several months changes everything going forward.”

“It confirms gold is indeed in a secular bull market! That was ignored and disputed for years since gold failed to break out to new bull highs. Gold’s decisive breakout and rallying since ballooned interest in it. So future gold and gold-stock uplegs are going to attract way more capital from way more traders around the world, growing them to much-larger sizes.” This latest upleg was fun, but bigger and better are coming.

The bottom line is gold stocks are very overbought. The powerful counter-seasonal rally in recent months catapulted gold-stock benchmarks far beyond their 200-day moving averages. Such stretched technicals coupled with very-bullish popular sentiment are a warning this recent upleg is maturing. It is likely to roll over into a healthy correction soon to restore balance, driven by gold-futures selling from spec extremes.

All bull markets flow and ebb, with big uplegs followed by major corrections. Fighting the latter is utterly pointless. Ride the bull-market waves rather than drowning in them. Buy relatively low near the troughs, then sell relatively high near the crests. That means buying when everyone else is scared, before selling when everyone else is greedy. After enjoying a great and very-profitable upleg, we can cash out for the next one.

By Adam Hamilton

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