Gold Stocks Very Overbought
Gold Stocks Very Overbought By: Adam Hamilton via Gold Seek
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. I warned about this Saturday morning in the conclusion to our latest monthly newsletter for subscribers.
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 termsduring 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.