Gold Stocks Retest Lows

CPA, Principal & Co-Founder of Zeal LLC
February 19, 2021

The gold miners’ stocks have had a tough week, sinking to marginal new correction lows.  So far this is a technical retest, driven by a parallel one in gold.  While uncommon and unpredictable, these retests are very challenging psychologically.  The resulting drawdowns in gold-stock positions shake out the weak hands, spawning widespread capitulation.  But holding on through retests rather than selling low is prudent.

Trading stocks is hard, which is why the majority of people who try it end up losing money.  The mission is simple, buy low then sell high.  But actually executing on that is difficult, as it requires constantly battling your own emotions.  It’s hard to buy low, because that’s only possible when prices have already fallen and nearly everyone else is scared and bearish.  Correction-low retests create this psychological landscape.

Selling high isn’t much easier, as that requires exiting profitable trades after big runs higher.  Those are the times when nearly everyone else is excited and greedy, extrapolating continuing gains indefinitely.  To be successful, traders have to both buy and sell when they least want to and when popular consensus argues those are bad decisions.  It takes strong discipline and mental toughness to fight your heart and the herd.

I’m blessed to live in beautiful Colorado, and love the rugged mountains here.  My family does plenty of hiking, camping, and skiing to enjoy the high country.  My kids have learned countless lessons up there about the paramount importance of perseverance through hard conditions.  The best example is hiking Colorado’s fourteeners, mountains with summits over 14,000 feet.  I’ve done dozens, and they are all hard.

You have to get to the trailheads hours before first light, because these trails are often 7-to-15-mile round trips!  You have to haul lots of gear, including sufficient water, food, and winter clothes.  Temperatures at summits can be 50 degrees colder than their bases.  Once you get above the tree line around 11,500 feet, winds are often stiff and insufficient oxygen makes exertion hard.  Hiking fourteeners is utterly exhausting.

But man, the peak views and feelings of accomplishment for overcoming challenges is unparalleled!  You never forget those hard days.  My daughter hiked her first fourteener at 6 years old, 7 miles all on her own feet.  Whenever my kids face challenges in life, I always remind them of fourteeners.  Perseverance is the key, always trudging forward no matter how hard it is.  You can always take one more step, then another.

A couple Sundays ago I went skiing with a friend.  The forecast was 60mph sustained winds with 90mph gusts, all above 10,800 feet!  Although we dressed in arctic gear, we weren’t sure how long we could last in such extremes at elevation.  It proved a hard day, but incredible as I saw sights I’ve never seen in decades of mountain experience.  Big evergreen trees were waving like grass, whipped by fierce snow whirlwinds!

Trading stocks reminds me of being in the mountains.  Both are challenging and fulfilling, but provide little comfort.  Like hiking a fourteener, once you commit to a trade you are in for the full ride.  The only thing capitulating early at the first signs of hardship guarantees is failure and losses.  Few things test the mettle of traders like correction-low retests, revealing who is mentally-tough enough to weather inevitable drawdowns.

The leading and dominant gold-stock benchmark and trading vehicle is the GDX VanEck Vectors Gold Miners ETF.  In the middle of this week as this sector retested its latest correction low, GDX commanded fully 64% of all the capital deployed in all the US-traded gold-stock ETFs!  As this GDX chart shows, the gold stocks have been grinding lower on balance for six weeks now.  That has devastated psychology.

The gold stocks skyrocketed out of last March’s COVID-19-lockdown-fueled stock panic, with GDX utterly soaring 134.1% higher in just 4.8 months!  Naturally such a big-and-fast upleg left this sector extremely overbought, necessitating a healthy correction to rebalance sentiment and technicals.  And that is exactly what happened over the next 3.6 months, when GDX lost 24.9% falling back under its 200-day moving average.

By that point this latest gold-stock correction sure looked like it had run its course technically.  The main reason was gold’s own parallel correction which drove the gold stocks’ looked to be mature.  Gold is this sector’s dominant primary driver, as gold-mining earnings are highly leveraged to prevailing gold prices.  So gold-stock uplegs and corrections naturally mirror and amplify the underlying ones in the metal they mine.

Gold’s own healthy correction after soaring to extraordinarily-overbought levels in early August extended to 13.9% over 3.8 months in late November.  That hammered gold back under its own 200dma, which is where corrections tend to bottom.  And it was right in line with precedent from this gold bull’s earlier three corrections, which averaged 14.3% losses over 4.1 months.  Gold had sold off sufficiently for a rebalancing.

So we started layering into new high-potential fundamentally-superior gold-stock and silver-stock trades back in late November.  Gold stocks were deeply out of favor then, with bearishness rampant after that correction.  That’s the only time when they can be bought at relatively-low prices, when most people want nothing to do with them.  Buying low demands fighting the fear in your own heart and emanating from the herd.

As always it is impossible to know in real-time exactly when and where an upleg is topping or a correction is bottoming.  Trading is a probabilities game, always rife with uncertainty.  On that fourteeners analogy, it reminds me of weather forecasts.  No matter how good the odds are for a sunny day, at elevation intense thunderstorms can quickly flare anytime.  Decades ago I was trapped by brutal lightning on top of Longs Peak.

I’ve never been so scared before or since, that lightning was constant all around my friends and me with deafening instant thunder.  We ran for the edge of that totally-exposed summit to flatten ourselves into the relatively-small rocks until that dangerous storm passed.  From that day on, I had a lot more respect and fear for fourteeners.  I learned aborting ascents is prudent if thunderheads on the horizon are building too fast.

In stock trading, the best protection against the unexpected is running trailing stop losses.  Last week I explained them in detail in a popular essay on timing gold-stock trades.  With trailing stops deployed, it doesn’t really matter where and when a correction actually bottoms.  Stop losses strip all emotions from sell decisions, short-circuiting the urge to capitulate in drawdowns like during this week’s correction-low retest.

Even after doing your homework and buying in relatively-low after a mature correction, gold-stock prices could still grind lower.  That’s no big deal, as looser trailing stops are usually not tripped once corrections have largely run their courses.  The goal at that point is staying deployed to ride the subsequent upleg, even if it is delayed.  Running stops protects from catastrophic losses if corrections cascade much deeper.

After GDX bottomed in late November, its new-upleg thesis was confirmed in early January after a major multi-day breakout above this leading ETF’s correction-downtrend resistance and 50-day-moving-average lines.  At that point GDX had surged 15.2% higher in 1.3 months, which was much larger and longer than a typical sharp-yet-fleeting countertrend rally within an ongoing correction.  The gold stocks were thriving.

But despite those sunny skies in the first few hours of that hike, thunderheads were building.  Gold stocks are again dependent on gold’s fortunes, and gold plummeted 3.5% out of the blue on January 8th.  As its price fell below the psychologically-heavy $1,900 level in overnight trading, super-leveraged gold-futures speculators were forced to start liquidating their long contracts.  That self-reinforcing process persisted since.

Total spec gold-futures longs slumped to 367.4k contracts in the latest-reported Commitments-of-Traders week ending last Tuesday, down from 411.7k in early January.  That selling forced gold from $1,949 then to $1,836 as that CoT week wrapped up.  Exacerbating the downside pressure on gold, that festering 5.8% pullback scared gold-ETF traders into dumping GLD and IAU shares faster than gold was being sold.

That ongoing gold-futures and gold-ETF-share selling seemed to snowball into capitulation territory this week, driving gold to a retest of its own correction low.  After bottoming at $1,775 in late November, gold’s own nascent upleg had surged 9.8% higher by early January.  But in the six weeks since running into this Wednesday, gold lost 8.9% slumping all the way back down to $1,775.  That’s why gold stocks have been hit.

Interestingly these gold lows, that original correction one and this new retest one, occurred 2.6 months apart.  Technically that sure increases the odds that gold’s correction really effectively bottomed back in late November.  In ongoing corrections, it is rare to see prices go longer than six weeks or so without seeing new lower lows.  But this Wednesday’s happened nearly eleven weeks later, which isn’t correction behavior.

Instead gold’s young upleg has rolled over into a low consolidation, a technical basing paving the way for this metal’s next bull-market upleg.  So naturally the gold stocks per GDX are doing the same thing.  Their young upleg has slumped into a low consolidation, collateral damage from the selling in gold futures and gold-ETF shares.  This Wednesday GDX edged to a new correction low, for the first time in 2.8 months.

GDX’s mid-week $33.22 close was 0.6% below November 24th’s $33.42.  Just like in gold, it is quite rare to see an ongoing gold-stock correction take so long to force new lows.  Corrections fuel such widespread bearishness that they generally hammer prices lower fairly rapidly.  So technically gold stocks’ correction-low retest looks way more like a basing low consolidation than a resurgent correction likely to spiral much lower.

This marginal new GDX low extended the total gold-stock selloff from 24.9% over 3.6 months to 25.3% over 6.4 months.  That’s not much lower over a nearly-doubled duration!  Yet seeing new correction lows is really freaking out gold-stock traders.  As a herd they are really scared, with bearish psychology utterly dominating the popular gold-stock outlook.  Gold-stock prices are now widely expected to cascade way lower.

Maybe they will, but the probabilities are certainly against that.  Gold and gold stocks both carved decisive correction bottoms in late November in line with bull-market precedent.  Then they both started to power higher in solid young uplegs.  While those rolled over since early January into these low-consolidation basing patterns, none of that is correction-like at all.  These are perfect conditions to birth major bull uplegs.

With trailing stop losses deployed for recent gold-stock and silver-stock trades added relatively-low, there is no reason to worry about this retest.  If GDX holds around these levels then starts marching higher again, staying deployed despite the drawdowns should prove super-profitable.  This bull’s prior four gold-stock uplegs averaged huge GDX gains of 99.2% over 7.6 months!  Why risk selling low and missing a doubling?

And if that low-probability gold-stock plunge erupts, the freak mountain thunderstorm on a sunny day, then trailing stop losses will automatically exit trades before losses get too extreme.  Getting stopped out by market conditions is totally unemotional, having nothing to do with personal or herd fear or greed.  On stoppings, traders can reevaluate market conditions while safe in cash to analyze whether to redeploy or hold off.

Given gold stocks’ strong track record of massive uplegs, it seems more prudent to stay deployed after a mature correction and subsequent retest.  In the gold-stock bull before today’s which ended in September 2011, the older HUI gold-stock index predating GDX enjoyed a dozen uplegs averaging awesome 87.5% gains over 7.8 months!  I sure wouldn’t want to miss out on another wealth-multiplying opportunity like those.

With stop losses in place, the overall portfolio drawdown in a correction-low retest isn’t a serious threat to capital preservation.  Gold stocks’ young upleg before rolling over dragged up many of those stop losses to higher levels, so the overall stopped-out worst-case drawdown risk might be on the order of 10% to 15% depending on when trades were added and what stop percentages were used.  That’s manageable.

As always, we can never know what’s coming next in the markets.  Maybe gold stocks will soar in their next mighty upleg, maybe they will largely grind sideways, and maybe they will collapse in an anomalous plunge.  But as traders we don’t have to worry about that with trailing stop losses in place.  But given all the technical action in gold and gold stocks since early August, probabilities favor a new upleg being born.

Correction-low retests shouldn’t scare traders into capitulating and selling low, guaranteeing losses.  They are usually parts of longer basing periods from which subsequent uplegs launch.  These retests are a big test of traders’ mettle.  Are they mentally-tough enough to weather a drawdown without caving?  Or will they join the herd in succumbing to popular fear and exiting at the wrong time?  Perseverance is the key.

Some of Colorado’s fourteeners are connected by high saddles, so you can summit two or three in one longer hike.  One time when I was in college some friends and I were knocking out three in a single day.  I was hauling a heavy and generous two gallons of water for myself.  Yet I still ran out, got dehydrated, and from being so high for so long started suffering from hypoxia.  Low oxygen impairs judgment, risking disaster.

Thankfully my friends recognized my predicament, and shepherded me down the mountain that day.  I don’t know what would’ve happened had I been alone, but I’d never risk hiking fourteeners solo because so much can go wrong.  Like high-elevation hiking, in stock trading experience really matters.  In decades of gold-stock corrections, later retests seldom rekindle those selloffs to plunge to much-deeper major new lows.

Usually correction-low retests are just that, marginally-lower lows lasting just long enough to shake out weak hands and spawn unsustainable bearishness.  With nearly everyone susceptible to being scared into selling low already capitulating out, that leaves only buyers to drive gold-stock prices back higher.  So with the protection of trailing stop losses in place, the prudent course is to persevere through these retests.

So that’s what we’re doing, holding on to fundamentally-superior gold-stock and silver-stock trades we’ve added since gold stocks’ original correction low in late November.  In our weekly and monthly newsletters we are currently up to 18 and 8 new trades since then, with big potential to soar during gold stocks’ next bull upleg.  Thanks to this correction-low retest, most of these remain great buys today at relatively-low prices.

The bottom line is gold stocks look to be retesting their correction lows, dragged back down by gold doing the same thing.  The resulting drawdowns are really trying psychologically, as is the resulting bearishness flaring.  Yet technically both the metal and its miners’ stocks are carving low consolidations, strong bases from which their next bull uplegs can launch.  Historically uplegs usually follow such correction-low retests.

With trailing stop losses in place protecting recent trades added at relatively-low prices after corrections, there is no need to fear retests.  If their selling soon exhausts itself paving the way for major uplegs, staying deployed is essential to riding those to big gains.  And if a retest triggers a rare deeper correction, those stop losses will minimize the losses.  Either way, there’s no sense succumbing to fear and giving up.

At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can.  We overcome popular greed and fear by diligently studying market cycles.  We trade on time-tested indicators derived from technical, sentimental, and fundamental research.  That’s why all 1178 stock trades recommended in our newsletters since 2001 averaged hefty +24.0% annualized realized gains!

To multiply your wealth trading high-potential gold stocks, you need to stay informed about what’s going on in this sector.  Staying subscribed to our popular and affordable weekly and monthly newsletters is a great way.  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!  Early in a young gold-stock upleg is a great time to get deployed.

Adam Hamilton, CPA

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Adam Hamilton, CPA, is a principal of Zeal LLC, which he co-founded in early 2000 as a pro-free market, pro-capitalism, and pro-laissez faire contrarian investing and speculating Information Age financial-services company. Hamilton is a lifelong contrarian student of the markets who lives for studying and trading them.

A medical study in France during the early twentieth century suggests that gold is an effective treatment for rheumatoid arthritis.
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