Gold Stocks Still Undervalued

Gold Stocks Still Undervalued by Adam Hamilton for Zeal, LLC

Gold miners’ stocks rocketed out of mid-March’s stock panic, breaking out to major new bull-market highs in mid-May.  Such blisteringly-fast gains, and gold stocks’ upleg stalling out since, have left many traders nervous about this sector.  Calls for a serious selloff are mounting.  But arguing in favor for more near-term gains to come, gold stocks never grew overvalued in this post-panic upleg and are still undervalued today.

The recent gold-stock action is best understood through this sector’s most-popular benchmark, the GDX VanEck Vectors Gold Miners ETF.  Holding the world’s biggest and best gold miners, it dominates gold-stock-ETF capital flows.  GDX’s world-leading $15.1b in net assets this week are triple the size of its little-brother GDXJ mid-tier gold miners ETF!  No other gold-stock ETFs come remotely close to GDX’s scale.

And the major gold stocks of GDX have been on a wild ride in recent months.  As gold itself got sucked into mid-March’s stock panic, which was fueled by fears of the economic impact of COVID-19 lockdowns, the gold stocks plummeted.  GDX collapsed 38.8% in 0.6 months into mid-March.  And the final couple days of that were technically a full-on crash, a 20%+ cratering in 2 days.  GDX crashed 24.5% in that span!

That left gold stocks radically oversold and absurdly undervalued, so they immediately staged a violent V-bounce.  The mean reversion out of the panic’s exceedingly-anomalous lows was wildly profitable for traders who added gold-stock positions in that brutal carnage.  That included our newsletter subscribers, as we started aggressively buying and recommending fundamentally-superior gold stocks right after those lows.

From there GDX skyrocketed 95.8% higher in just 2.2 months into mid-May!  That rare opportunity to ride a quick doubling was awesome.  Hardened contrarians tough enough mentally to buy in crazy-low when everyone else was fleeing in terror multiplied our wealth fast.  But since then gold stocks have weakened on balance.  By last week GDX had slumped into correction territory, with a 12.8% loss in the post-peak month.

This gold-stock-bull-technicals chart illustrates this sector’s neck-snapping crashing and savage V-bounce higher.  GDX not only soared, but broke out to major new bull-market and secular highs in this massive post-stock-panic rebound.  With gold-stock price levels undeniably high in the context of this bull, traders are worried a serious selloff is brewing.  Many have been exiting gold-stock positions since mid-May’s peak.

 

 

There’s no doubt a near-doubling in a couple months or so really stretched gold stocks technically.  When GDX hit a 7.1-year secular high of $37.21 in mid-May, it was far above its 200-day moving average.  The relationship between prices and their 200dma baselines illuminates overboughtness and oversoldness.  At gold stocks’ latest interim high, GDX was trading way up at 1.311x its 200dma.  That was very overbought.

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