Gold: GDX Super-Overbought

Gold stocks have soared in recent months, accruing massive gains.  While fully justified fundamentally, such fast rallying has left their leading sector benchmark super-overbought.  That argues a sizable selloff is imminent to rebalance extreme technicals and sentiment.  Traders with existing gold-stock positions can prepare by tightening trailing stop losses.  This healthy selloff will spawn a good mid-bull buying opportunity.

The GDX gold-stock ETF was having a good year into mid-July, just before gold miners started reporting Q2 results.  Those proved phenomenal, shattering all records!  So traders led by fund managers started deploying significant capital in this sector, fueling powerful upside momentum.  By late August just over five weeks later, GDX had surged a big 20.5% wildly outperforming gold’s parallel little 1.2% rally in that span.

Then on August’s last trading day, gold finally broke out of its 4.2-month-old high-consolidation trading range.  The yellow metal resuming powering to new records after a mostly-drifting summer supercharged gold-stock demand.  So over the next several weeks, GDX blasted up another 21.2% on gold’s big 9.5% breakout surge.  That extended GDX’s total gains from mid-July to late September to an enormous 45.4%!

That amplified gold’s own 11.8% rally by 3.8x, much better than major gold stocks’ usual upside leverage to gold of 2x to 3x.  But 45% gains compressed into just nine weeks is a heck of a lot.  That catapulted GDX deep into extreme-overbought territory.  Historically after similar episodes, major gold stocks sold off hard to normalize super-stretched technicals and sentiment.  GDX has soared too far too fast to be sustainable.

After a quarter-century-plus intensely studying and actively trading this high-potential sector, my favorite overboughtness measure is a simple one.  It simply looks at GDX closes relative to their underlying 200-day moving average.  This most-common long-term moving average forms an ideal baseline.  It changes slowly enough that big price moves really deviate from it, yet still gradually evolves to reflect prevailing prices.

Dividing GDX’s closes by their 200dmas yields a construct I call the Relative GDX or rGDX.  The resulting multiples effectively flatten GDX’s 200dma to horizontal, and render price deviations around it in perfectly-comparable percentage terms.  Charted over time, these rGDX multiples tend to form horizontal trading ranges.  On this chart those are rendered in red, with the raw GDX and its key technical lines superimposed.

Gold stocks’ rocket-like ascent since mid-July sure stands out here.  They have soared in a massive breakout rally shooting vertical.  That has stretched GDX an extreme and quite-precarious 54.4% above its 200dma as of Monday!  Such rGDX levels are exceedingly-rarefied territory running way back to its birth in mid-May 2006.  Starting 200 days later when its 200dma first formed, GDX has had 4,670 trading days since.

Throughout that entire lifespan, GDX has closed 54%+ above its 200dma on only 20 of them.  So in hard empirical terms, this leading gold-stock benchmark just soared to top-0.4% levels of overboughtness!  While gold stocks have rarely gotten here before, such extremes never lasted long.  The last episode is a good case in point.  GDX hasn’t been so overbought since way back in early August 2016, fully 9.1 years ago.

That situation was remarkably analogous to today’s.  Starting in late May that year, GDX soared 40.6% in just 2.2 months.  The catalyst was an underlying big 12.5% gold surge, which GDX amplified by a great 3.3x.  That catapulted this dominant gold-stock ETF way up to 1.567x its 200dma.  Interestingly fully 16 of GDX’s 20 trading days closing 54%+ above its 200dma happened within roughly a month of that episode!

The major gold miners’ fundamentals were quite strong back then, as evident in their Q2’16 results which I analyzed at the time.  There was no reason they needed to sell off other than just experiencing extreme overboughtness.  Normally gold-stock price action simply leverages gold’s, and gold itself wasn’t super-overbought and didn’t need to correct.  When GDX peaked in early August 2016, rGold was merely 1.134x.

We’ll circle back to gold overboughtness shortly.  Over the next month or so, gold sold off 4.0% which was pretty mild.  Normally that wouldn’t be enough to spook gold-stock traders.  Yet because GDX had just blasted to such extraordinarily-overbought levels, gold stocks dropped hard.  Over that same one-month span, GDX plunged 18.6% amplifying gold’s downside by a brutal 4.6x!  That was a real kick in the teeth.

Gold stocks didn’t need to correct fundamentally, but they still fell precipitously out of super-overbought extremes.  Whenever prices run so far so fast that they shoot vertical, those gains are usually followed by a symmetrical collapse.  That doesn’t erase all the rapid gains, but often the large majority.  In that August-2016 episode, GDX retraced 64% of its preceding surge!  Reckonings always follow extreme overboughtness.

The driving psychological dynamics are easy to understand.  When prices rally too far too fast, they attract in all-available buyers too soon.  As prices soar, so does herd greed motivating traders to rush to chase those rapidly-accruing gains.  But once near-term buying firepower is exhausted, that leaves only sellers.  They are quick to flee once gold stocks start retreating, and that selling soon mounts then cascades.

Just like surging gold stocks make traders want to buy more, plunging gold stocks quickly scare them into dumping more.  By the time the dust settles in a month or two, GDX has collapsed in a sharp inverted-V shape.  Soaring too far too fast is never sustainable, and usually ends this way.  Extreme overboughtness and extreme greed have to be rebalanced away by subsequent selloffs, restoring sustainable norms.

Fast-forward to today, and GDX again just skyrocketed 45.4% in only 2.2 months leaving it stretched a whopping 54.4% above its 200dma!  Making matters worse, gold is much more overbought now than it was in early August 2016.  This week gold blasted up to 19.8% above its own 200dma.  Last week I wrote a whole essay on gold being pretty stretched technically, analyzing its current overboughtness and implications.

Gold has remarkably evaded corrections in its mighty bull since early October 2023, which grew to a jaw-dropping 106.8% mid-week!  Gold has yet to see a single 10%+ correction in this entire span!  Instead of big-and-sharp corrections after its own extreme-overbought episodes in these last couple years, gold has instead drifted sideways.  High consolidations also rebalance technicals and sentiment, but much more slowly.

Gold’s pullbacks within these drifts have still run between 4% to 8% bull-to-date.  It is highly-probable gold will soon experience another selloff of at least this magnitude, and it could be bigger.  If gold retreats say 6% and GDX amplifies that by 4x which is common when gold selloffs scare gold-stock traders, we could be staring down the barrel of a 25%ish drawdown in gold stocks!  That implies GDX falling back under $56.

As evident on this chart, that would reverse about 4/5ths of gold stocks’ recent blistering surge.  At about 2/3rds like that last similar super-overbought episode in early August 2016, GDX would drop under $59.  Such big retracements likely to unfold rapidly over a month or two would eliminate GDX overboughtness and eradicate herd greed, leaving this sector rebalanced.  Such periodic healthy selloffs are inevitable in bulls.

If you are ready for these psychologically, they spawn excellent opportunities.  Ratcheting up stop losses before them in extreme overboughtness preserves more big unrealized gains as selloffs unfold.  To give some context, we last aggressively added new fundamentally-superior smaller mid-tier and junior gold-stock trades in our subscription newsletters from late June to late July.  That was mostly before this latest surge.

As of midweek, our unrealized gains on these young trades are running as high as +97%!  I’m hesitant to sell outright because gold stocks and gold can grow more overbought still if a popular speculative mania erupts, but I don’t want to risk such big gains.  So tightening stops protects more of them while letting us stay deployed just in case.  Any stoppings yield capital we will use to refill our trading books as GDX bottoms.

Over the past quarter-century-plus I’ve written plenty of these essays warning of imminent gold and gold-stock selloffs due to extreme overboughtness.  Invariably I get a lot of flak for them, from traders buying in late to chase these massive gains.  They grow convinced gold stocks are soaring much higher, that this time is different.  Maybe it is, but prudence demands we trade with historical precedent rather than hope.

Even the most-powerful bull markets are never linear, taking two steps forward before retreating one step back.  Strong uplegs are inevitably followed by corrections, which are great because they offer the best mid-bull buying opportunities.  Expecting super-overbought gold stocks to correct hard is simply a short-term tactical call.  These have nothing to do with fundamentals or strategic longer-term bulls’ longevity.

Even if a 25%ish GDX plunge is imminent, the longer-term bullish case for gold stocks remains fantastic.  In mid-August, I wrote an essay analyzing the top-25 GDX gold miners’ latest Q2’25 results.  They were epic, shattering all records.  Over the last eight reported quarters ending in Q2, the GDX top 25’s average implied unit earnings have skyrocketed 87%, 47%, 31%, 75%, 74%, 78%, 90%, and 78% year-over-year!

No other sector in all the stock markets comes close to gold miners’ towering earnings growth.  And in this current almost-over Q3, the GDX-top-25 gold miners are again tracking to achieve more record profits with at least 82% YoY growth!  Gold stocks’ colossal underlying earnings streams support way-higher stock prices ahead.  The gold stocks remain seriously-undervalued relative to gold, even after soaring so far.

Shockingly just a couple weeks ago GDX achieved its first record close in a staggering 14.0 years!  This leading gold-stock benchmark had just regained levels first seen way back in early September 2011.  Yet the GDX top 25’s average implied unit profits in Q2’25 and Q3’25 are running about 2.6x higher than Q3’11’s!  Those phenomenal fundamentals argue gold stocks ought to at least double again from here, lots more bull!

Technicals also support much-bigger gold-stock gains to come.  Again gold’s mighty cyclical bull soared a huge 106.8% over the last couple years.  The major gold stocks of GDX tend to amplify gold bull runs by 2x to 3x, with leverage improving the bigger gold’s bull.  During gold’s previous 40%+ monster upleg that crested in early August 2020, GDX amplified gold’s gains by 3.4x.  Seeing 3x+ ultimately this time is a shoo-in.

Yet so far at best during gold’s current bull, GDX has merely rallied 187%.  That remains far under the 320% implied at 3x today’s gold gains, let alone where it is headed!  The gold miners can keep rallying on balance for years as long as gold doesn’t roll over into a secular bear.  And gold’s fundamentals suggest that’s highly unlikely.  Gold demand remains strong around the world, with investors really under-allocated.

The strategy for trading this mighty gold bull is simple.  Buy gold stocks after their metal has sold off or drifted to work off overboughtness.  Then ratchet up stops as gold soars into extreme overboughtness again.  Take any resulting gains and redeploy later in great gold stocks well lower after that has bled off.  This buy-relatively-low sell-relatively-high method really multiples achievable gains as gold stocks follow gold.

But executing this well requires great experience.  Gold’s biggest selloff during this entire bull was 8.0% into mid-November 2024.  During that span, GDX merely fell 14.5% for mild 1.8x downside leverage.  Yet that was part of a broader 23.4% GDX drawdown from late October to late December or 2.9x gold’s.  There are many factors feeding into deciding if enough overboughtness has been worked off to start redeploying.

You could learn by spending a quarter-century studying markets all day every day while actively trading gold stocks.  But that’s impractical for most, so why not capitalize on all that hard-won experience which is distilled into our popular newsletters?  They will keep you up to speed on what is happening with gold and miners, and recommend good specific trades as appropriate.  Reading them costs little time and money.

Successful trading demands always staying informed on markets, to understand opportunities as they arise.  We can help!  For decades we’ve published popular weekly and monthly newsletters focused on contrarian speculation and investment.  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.

Our holistic integrated contrarian approach has proven very successful, and you can reap the benefits for only $10 an issue.  We extensively research gold and silver miners to find cheap fundamentally-superior mid-tiers and juniors with outsized upside potential.  Sign up for free e-mail notifications when we publish new content.  Even better, subscribe today to our acclaimed newsletters and start growing smarter and richer!

The bottom line is gold stocks just soared to super-overbought extremes.  GDX is trading at all-time top-0.4% levels of overboughtness, rarefied territory.  After the last time this happened over nine years earlier, gold stocks plunged hard and fast.  Selloffs are normal and healthy after extremes, serving to rebalance technicals and sentiment maximizing bulls’ ultimate longevity.  Gold-stock drawdowns are par for the course.

Bulls aren’t linear, but meander upwards taking two steps forward before one step back.  Yet despite the high chances of an imminent gold-stock selloff, miners’ fantastic fundamentals support bigger gains to come.  Their epic record earnings continued to soar on these high prevailing gold prices, while their gold-bull gains remain small compared to precedent.  So any gold-stock selloff is a good mid-bull buying opportunity.

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