You know it’s a bull market when a stock falls 5% and I get a rain of emails asking what’s wrong with that company. This is what’s happening in gold stocks lately.
A 5% move is usually no more than a blip. But when the world is watching a sector obsessively … 5% can seem devastating.
Gold miners have eased off their recent highs. You can see what I mean from this chart of the VanEck Vectors Gold Miners ETF (NYSE: GDX):
As you can see, from mid-March to mid-May, the fund ripped higher. It rallied nearly 100% over that period. But since then, it has fallen 14%.
At the same time, the price of gold has fallen about 2%. It peaked in mid-April and has moved gently sideways since then. We call that “sandpapering,” because it grinds down investors. And that can drive impatient investors crazy. They can’t stand it when a stock is doing basically nothing.
That’s what happened to GDX shares. Speculators got impatient and sold their shares. We know not just because the price fell slightly — but we can see it in the share count, too, which is down from its April high.
The Gold Miners Fund Is Not Falling
You see, GDX is an exchange-traded fund (ETF) that trades just like a stock. But instead of shares, investors buy units. And while these units can be bought and sold between investors, the fund manages the number of units available. They do this to keep GDX’s asset value close to the actual value of the shares of the companies it owns.
That sounds complicated, but it isn’t. It just means that the number of units available changes depending on investor demand. So, during periods of high demand, GDX issues lots of units. And during periods of low demand, the number of units falls.
That’s what we have seen over the last few weeks … the number of GDX units has fallen. That direction is important because it’s a quick and dirty gauge of investor sentiment. When GDX’s share count is going down, investors are selling. And the reason is simple, investors are taking profits as the gold price moves sideways.
And that’s not a bad idea. Readers of my Real Wealth Strategist newsletter have seen me recommend gold throughout this bull market. And I just recommended that they take profits on a couple of big winners. We just sold half our positions in the biggest winners. That way, we have less risk and huge upside.
And in this market, limiting our risk is key. But we don’t want to sell all of our position because the gold price will come out of this sandpaper period and move higher again.
It must, because the Federal Reserve Chairman Jerome Powell told the world that America’s central bank won’t raise interest rates for at least two years. That means investors, looking for higher interest rates, will sell their dollars. This makes the dollar’s value fall, in terms of other currencies, including gold and other precious metals. Which makes the gold price go up, in dollars.
So, it’s a matter of time before gold prices begin to run higher again. And it’s not just gold followers like me who are saying so. Technical traders are getting in on the action too. My colleague Chad Shoop, our resident technical trading master, sees gold rallying as soon as this month.
So, take some cash off the table now, but don’t sell all your gold miners … because 2020 is the year gold breaks its 2011 high price.
Good investing,
Matt Badiali
Editor, Real Wealth Strategist
