The gold miners’ stocks are suffering from universal and overwhelming bearishness today, with nearly everyone expecting further selling. That’s the natural reaction following this sector’s recent massive correction, which climaxed in one of its biggest daily plummets ever witnessed. But within bull markets, there’s no better time to buy aggressively than deep in a major selloff that’s riddled with great doubt and fear.
The core mission of speculation and investment is so simple even children can easily grasp it, buy low sell high. The great challenges arise not from understanding, but execution. Actually buying low then selling high in real markets is exceedingly unnatural and uncomfortable. It requires traders to overcome their own greed and fear to do the exact opposite of everything their own instincts are screaming to do.
The only times speculators and investors want to buy aggressively is when it feels great to do so. That only happens late in powerful rallies, when everyone can clearly see how strong a sector’s performance has been. Traders then commit one of trading’s cardinal sins, extrapolating recent performance out into the indefinite future. They assume a red-hot sector will keep on rising, and eagerly rush to buy high after a rally.
That’s exactly what happened in gold stocks this past summer. This battered sector finally skyrocketed higher in 2016 after hard years of neglect. By early August, the flagship HUI NYSE Arca Gold BUGS Index had blasted an incredible 182.2% higher in just 6.5 months! Who wouldn’t love a sector that had nearly tripled in just over a half-year? Epic performance like that dwarfs everything else in all the stock markets.
So excited traders greedily threw capital at the gold stocks, succumbing to herd groupthink to believe this sector was on the verge of soaring even though it already had. That wasn’t buying low, but buying high. I warned in early July as gold stocks were starting to peak that a major correction was inevitable after such a radical surge higher. While it tarried for a few more weeks, it eventually arrived with a vengeance.
Buying high into widespread greed after a powerful rally is very foolish, as markets always experience sharp reversals soon after popular emotional extremes. The only traders who rode gold stocks’ mighty new bull to multiply their wealth were the smart contrarians who bought in low early in 2016. That was when gold stocks were universally despised, languishing at fundamentally-absurd price levels relative to gold.
Traders only want to buy when it feels good, when they’re excited like everyone else, after a sector has already rallied dramatically. But buying high almost always ends in major losses and many tears. This whole game demands buying low, which means when it feels bad. Any sector including gold stocks is only relatively cheap after a major selloff when most traders have already fled due to exceeding popular bearishness.
This demands contrarianism, a tough discipline of actively suppressing and fighting your own emotions that can only come from hard years of experience. Instead of doing what you want to do in the markets, you have to do the exact opposite. You buy stocks when it feels very uncomfortable, after a major selloff everyone is convinced will keep spiraling lower. Buying stocks low is always riddled with internal conflict.
The forging of battle-hardened contrarians able to multiply wealth in the markets by actually buying low and selling high is a difficult and demanding road. I’ve been trudging along it for decades now, and it truly never gets easy. For the past 17 years I’ve been sharing my own extensive market research and real-world trades through our financial newsletters, helping others overcome their own greed and fear.
One of the greatest challenges of this business is the great majority of speculators and investors still get excited about or ignore a particular sector at exactly the wrong times. They didn’t want anything to do with gold stocks back in January near 13.5-year secular lows, totally ignoring my contrarian pleas then to buy aggressively. Instead they foolishly stuck their heads in the sand, missing an epic buying opportunity.
The same thing is happening again today to a lesser degree. Gold stocks are screaming buys right now after a massive correction within their powerful young bull market. Yet traders are so wrapped up in their own fear, so influenced by groupthink herd fear, that they are blind to this incredible opportunity. While they refuse to buy low now, they will foolishly again eagerly rush to buy high after gold stocks double from here.
I’ve found the best thing to combat internal and prevailing fear is perspective. The gold-stock technicals indeed look rotten over the past couple weeks and months, and that’s what traders are extrapolating forward which is breeding today’s excessive bearishness. But within broader context, the technical and fundamental situations in the gold miners’ stocks today are amazingly bullish. Now is the time to buy Buy BUY!
Last week this leading benchmark HUI gold-stock index plummeted 10.1% in a single trading day! That was the result of cascading selling driven by gold-stock stop-loss orders being triggered, which itself was driven by the same thing happening in gold futures. Last week I explained this running of the stops in gold and its miners’ stocks in depth if you need to get up to speed. It was a supremely-disheartening event.
This extreme selling anomaly that has decimated gold-stock sentiment truly erupted out of the blue with zero warning. The gold stocks had already corrected sharply in August, plunging 22.0% in just under a month per the HUI. Then they spent all of September grinding higher on balance along support of their strong bull-market uptrend. An entire month of higher lows confirmed technically their correction was over.
So last Tuesday’s brutal 10.1% plummet knifing through that late-August low like nothing was a big and ugly surprise. Such extreme down days in gold stocks are exceedingly rare, and therefore impossible to predict. Since 2001, the entire modern era, there have been 3976 trading days. And that was a volatile span for gold stocks, seeing them skyrocket 1664% higher at best in a mighty secular bull running 10.8 years!
Then after their September 2011 peak, the gold stocks spent the next 4.4 years plummeting a staggering 84.1% in a brutal bear. So volatility is no stranger to this sector. Yet since 2001, the HUI only suffered worse daily plunges than last Tuesday on 10 other trading days! That works out to a minuscule one-quarter-of-one-percent chance of a down day of that extreme magnitude. That’s wildly too seldom to be predictable.
On top of that, 7 of those top-10 HUI down days since 2001 came in the fourth quarter of 2008 during that first stock panic in a century. So excluding that exceedingly-anomalous epic maelstrom of fear, the HUI’s 11th-worst down day of the modern era last Tuesday is more like the 4th worst seen in non-panic normal market conditions. Something that radically abnormal and rare defies any attempt to model it.
When gold stocks plummet 10%+ in a single trading day, pretty much everyone prudently running stop-loss orders is going to be forced to sell. This spawns a gold-stock-downside feedback loop that quickly snowballs. The more gold stocks are driven to stop-loss levels leading to automatic selling, the farther they drop triggering still more stops. While very rare, cascading stop-loss selling is a downside juggernaut.