Gold Miners ETF (GDX)

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Gold Stocks Clawing Back 2
By: Adam Hamilton | October 13, 2023

The battered gold miners’ stocks are clawing back from their recent unusual breakdown. That was fueled by heavy gold-futures short selling slamming gold in the wake of the latest FOMC meeting. Speculators’ resulting excessive shorts had to soon be covered, and that tragic terrorist invasion in Israel proved the igniting catalyst. Both gold and GDX are rebounding sharply, poised to soon regain their interrupted uptrends.

My essay last week analyzed gold’s violent breakdown in depth. In a nutshell, top Fed officials slashed their forecast for 2024 rate cuts in half from 100 basis points to 50bp. Despite these dot-plot projections being notoriously inaccurate, traders viewed that shift as very hawkish. So afterwards they flooded into the US dollar as Treasury yields soared, which unleashed withering gold-futures shorting hammering gold lower.

Gold was looking solid technically before that late-September FOMC meeting, still in its strong upleg’s uptrend and still above its 200-day moving average. But over the next nine trading days following those shifting year-end-2024 dots, gold plunged 5.5% on a parallel 1.5% US Dollar Index surge! Both of gold’s key support zones were shattered, and its festering pullback was stretched into a formal correction exceeding 10%.

With gold’s powerful 26.3% upleg that nearly carried it to new nominal record highs slain, the gold stocks weren’t going to take that well. Gold miners’ profits are highly leveraged to prevailing gold prices, so gold-stock prices amplify whatever their underlying metal is doing. During that nine-trading-day post-FOMC span, the leading GDX gold-stock ETF collapsed 12.3%. That made for 2.2x downside leverage to gold.

GDX is dominated by the largest major gold miners, and their stocks tend to amplify material gold moves by 2x to 3x. So this small contrarian sector’s latest plunge was actually on the light side relative to gold. But that recent drop sure had an outsized psychological impact, with bearishness soaring as a months-old selloff deepened. Gold’s pullback had started from $2,050 in early May, and GDX’s from $35.85 in mid-April.

With gold stocks seriously of favor today, traders have forgotten their last upleg. That powered up a nice 63.9% over 6.5 months, leveraging gold’s underlying one by 2.4x. Before the last several weeks and that hawkish-2024-dots scare, GDX remained in this upleg’s uptrend despite selling off with gold since early May. This chart superimposes GDX and some of its key technicals over gold during the last several years.



Gold stocks’ unusual breakdown in recent weeks is striking, knifing well below uptrend support. That extended GDX’s total selloff since its latest upleg peak to 27.7% over 5.7 months. While steep, that was normal leveraging gold’s roughly-parallel pullback-then-correction by 2.5x. But gold’s sharp drop wasn’t sustainable, as I explained in last week’s essay written right at gold’s lows. My contrarian conclusion then was...

“The bottom line is gold just suffered a violent technical breakdown, trashing sentiment. But gold’s latest plunge was driven by massive gold-futures selling, leaving speculators’ positioning exceedingly-bearish. These super-leveraged traders have probably about exhausted their capital firepower available for selling. Their shorts in particular are likely challenging major secular highs, which are never sustainable for long.”

“That guarantees huge mean-reversion short-covering buying is imminent, which will catapult gold sharply higher. As specs rush to cover or face financial ruin, the much-larger long-side specs will pile on to chase gold’s upside momentum. The sparking catalyst for all this will be some Fed-dovish data shifting traders’ federal-funds-rate expectations, which could come any day. Battered gold stocks will soar as gold recovers.”

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