Boy, that escalated quickly.
Last week we noted that the gold stocks were oversold, but failed to mount any rally even as gold had rebounded as much as $80/oz. Silver, which had been leading gold, consolidated in a bearish fashion.
In the context of a larger correction, that price action was ominous. Once gold peaked, the trap door opened and especially for smaller juniors.
Last week we wrote that it was best to remain patient and let the market reach an oversold extreme.
While the true juniors (non-GDXJ) are extremely oversold, the larger juniors (GDXJ) and larger miners (GDX) are not there yet. GDX remains a good 10% above significant, multi-year support.
Three of the four breadth indicators shown below have reached bearish extremes, while the bullish percentage index (BPGDM) has not. At the four most significant lows since 2015 (January 2016, December 2016, August 2018, and March 2020), BPGDM was below 20%. It’s currently at 40%.
GDX And Breadth Indicators
GDXJ has recently underperformed GDX, but it has yet to test support at $41, a key level dating back to 2014. The breadth indicators are already approaching extremes.
GDXJ And Breadth Indicators
Another level to keep an eye on is the 40-month moving average. It has provided support and resistance for GDX and its forerunner index quite a few times over the past 20 years. It sits at $28.31 for GDX and $39.52 for GDXJ.
Dichotomy In The Precious Metals Sector
There is a bit of a dichotomy within the precious metals sector. The smaller gold and silver juniors are already very oversold. However, the metals and the larger miners are not. They have room for more downside. GDX and GDXJ haven’t come that close to my targets yet.
Hence, it is too early to make a buy call on the sector, even though certain parts are quite oversold. Time will tell but in my view, the ingredients are emerging for a significant bottom over the next few months. That aside, the long-term volatility in this sector within the larger uptrend has been maddening.
In my experience, company selection is extremely important. If one can buy fundamental quality at oversold points and compelling values (like we are starting to see) and hold for several years, they can achieve returns of 500% and more.
I’ve positioned myself in companies with the best combination of upside potential and fundamental quality. These are companies that can add value irrespective of metals prices and have the potential to be 5, 7, and 10 baggers after gold makes a new all-time high.