Gold Stocks Too Far Too Fast?

The gold-mining stocks have skyrocketed this year, radically outperforming every other sector. Smart contrarians who bought them low late last year and in January have seen their capital doubled, tripled, and even quadrupled! But such blistering gains raise the ominous specter of crippling overboughtness, conditions preceding major toppings. Have gold stocks come too far too fast to continue their epic run?
The magnitude of recent months’ gold-stock surge is simply stunning. Between mid-January and the end of April, this sector’s flagship HUI NYSE Arca Gold BUGS Index blasted 131.8% higher in merely 3.3 months! This was largely mirrored by the leading gold-stock ETF, the GDX VanEck Vectors Gold Miners ETF. GDX saw stupendous gains of 107.1% over this same span. Gold stocks have been on fire!
But naturally such fast gains have left this sector severely overbought by nearly every measure. That includes the moving-average convergence-divergence indicator, the distance of gold-stock prices above their 50-day moving averages, these same 50dmas’ gap over gold stocks’ 200dmas, and the lofty heights of gold-stock prices relative to their 200dmas. All these indicators also apply to gold-stock indexes and ETFs.
Any technician could easily make the case that gold stocks are positioned for an imminent collapse in light of their extremely-overbought technicals. In fact, that’s the only rational interpretation for analysts focusing exclusively on this sector’s current situation. But as always in the markets, broader context is absolutely essential. Making trading decisions without considering the bigger picture usually ends poorly.

This post was published at ZEAL LLC on May 6, 201.