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The Market's Measure
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Gold Miners TOO Bullish?

One hundred percent of gold miner stocks are exhibiting bullish chart patterns, according to

It’s hard to find 100% consensus on any issue, much less investments. Yet, here it is: 100% of gold miner stocks are exhibiting bullish chart patterns, according to, an investor-friendly website that seeks to educate the hoi polloi in all things technical.

You’d think that this would be cause for gold bugs to celebrate, right? Not really. You see, whenever gold miners’ bullish percentage reaches extremes, it’s more likely a sign of an impending reversal than a continuing trend. That’s, at least, what history reveals.


The last time the Gold Miners Bullish Percent Index hit 100% was four years ago. That condition lasted about a week before the miners went on a four-month slide. By November 2016, only 7% of the stocks still looked bullish. Over that time, the VanEck Vectors Gold Miners ETF (NYSE Arca: GDX), a cap-weighted index tracker composed of more than 50 precious metals producers, lost 29% of its market value. Spot gold, meanwhile, slipped 11%.

Gold miners afford investors exposure to both gold’s price and to the equity market. Not equal exposure, mind you. When gold miners lost ground in the second half of 2016, the equity market represented by the SPDR S&P 500 Trust (NYSE Arca: SPY) actually rose 5%. Over the long run, though, gold miners typically exhibit a positive albeit weak correlation to the broader swath of stocks. In the past five years, GDX sported a 0.08 coefficient to SPY. A sister fund, the VanEck Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ), chalked up a 0.15 correlation, while gold bullion posted a -0.01 stat.

Five -Year ETF Performance


Miners’ current bullishness is a likely set-up for a pullback. Will it be on the scale of the 2016 sell-off? That’s hard to say at this point. Once the market heels over—if it heels over—we’ll be in a better position to sight a probable objective. Suffice it to say that the prospect of weakening presents a buying opportunity for those investors who didn’t step aboard the FOMO (fear of missing out) train earlier. That is, if those investors still have confidence in the gold market. After all, miners, proxied by the GDX fund, correlate at 0.63 to bullion currently. As a portfolio diversifier, GDX lags a bit behind gold itself but still has offered fair compensation for its volatility.

There’s a vote of confidence ahead for those already invested in gold miners. Over the past five years, GDX’s average annual return is twice the size of gold’s—21% versus 11%, respectively. Clearly, more cumulative gains are at risk if one holds mining stocks as opposed to bullion. If the 2016 episode is repeated, a whole year’s worth of gains, and then some, could be wiped out. For this reason, some holders of mining stocks will seek out hedge strategies.

Collars—long puts financed by short calls—can be cheaply overlaid on a long miner position, if options are available. All of the U.S.-listed stocks in GDX’s top 10 holdings are optionable, but for investors looking to hedge nonoptionable miners, delta-adjusted GDX collars can be utilized.

Not every account can use options, of course. For those, prospects are more limited. Perhaps there’s enough gain to allow the market’s money to be taken off the table. Or the entire position can be cashed out if confidence now runs thin.

Then there’s the speculator’s approach. If new money can be found, a leveraged short position in gold miners can be undertaken through the ETF market. The Direxion Daily Gold Miners Index Bear 2x Shares (NYSE Arca: DUST) offers -200% exposure to the daily returns of the NYSE Arca Gold Miners Index, the same benchmark tracked by GDX. As with any leveraged product, the impact of daily compounding on DUST’s market value needs to be considered if the position is held over one or two trading sessions. When the market’s falling, the compounding effect will be positive, but will turn to a cost if the market fibrillates.

This week, junior miners moved into a more precarious technical position compared with larger producers. GDXJ’s leveraged inverse counterpart, the Direxion Daily Junior Gold Miners Index Bear 2x Shares (NYSE Arca: JDST), may therefore be the first mover in any sector weakness.

In the past, gold miners have been the canaries in the, um, gold mine—bellwethers of imminent downturns. That said, prudent investors should not ignore the past as they look toward the future.

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