Gold miners’ stocks were just slammed sharply lower as high-flying started wobbling. Gold stocks’ great leverage to gold is a double-edged sword, amplifying rallies and selloffs alike. These serious blows suffered by gold stocks have given traders pause, leaving them wondering if this was a temporary blip or harbinger of a much-bigger drawdown. As always, gold stocks’ near-term fortunes depend on their metal’s.
Late last week, the leading gold-stock ETF soared to another dazzling all-time-record-high close of $84.44. GDX had skyrocketed an epic 149.0% year-to-date on a parallel massive 64.5% gold surge! That’s wonderful to see, a magnificent reversal from gold stocks’ dreadful underperformance last year. In 2024 GDX only eked out a 9.4% gain despite gold’s powerful 27.2% rally, for horrendous 0.3x upside leverage.
Normally the major gold miners dominating GDX amplify material gold moves by 2x to 3x, with YTD 2025 running 2.3x at that latest gold-stock peak. Back in early January, my first essay of 2025 was called Gold Stocks’ Revaluation Year. With gold stocks deeply out of favor near major lows, I concluded “2025 has great potential for gold stocks to enjoy a major-paradigm-shift revaluation higher. Gold just experienced one…”
Fully expecting gold stocks to way outperform their metal. Yet just in this last month or so, gold and its miners’ stocks have grown seriously-overheated. More speculators and investors have increasingly flooded in to chase their phenomenal upside, quickly forcing both sector technicals and sentiment to unsustainable extremes.
So we tightened the trailing stop losses on all our open trades in anticipation of the necessary and inevitable rebalancing selloff. In late September I wrote an essay GDX Super-Overbought warning of the serious downside risks in gold stocks. At that point GDX had stretched an extreme 54.4% above its baseline 200-day moving average, a key measure of overboughtness. That would soon grow even worse.
Last Thursday when GDX hit that latest $84.44 record, it had soared 62.9% above its 200dma! This was exceedingly-rarefied territory, far beyond extreme. GDX was the first real gold-stock ETF, born way back in mid-May 2006 fully 19.4 years ago. It quickly became the gold-stock benchmark of choice for traders. Its 200dma was first established in mid-March 2007. GDX’s recent overboughtness challenged records.
That 1.629x-its-200dma close last Thursday ranked as its third-highest ever! Only two days in early July 2016 were slightly more extreme at 1.646x and 1.630x. So one more day of rallying would’ve just catapulted gold stocks to their most-overbought-ever in GDX’s multi-decade lifespan. Gold stocks had rarely been more overbought before March 2007 in their earlier HUI and XAU indexes, but last week was exceptional.
Compounding the downside risks for gold stocks at such crazy extremes, gold was also exceedingly-overbought. That day GDX crested, gold had soared 32.7% above its own 200dma! Gold’s mighty cyclical bull had grown into its biggest ever, as I analyzed in depth in a popular essay last week. That proved gold’s eighth-highest overboughtness episode on record since 1971, when the dollar was severed from gold!
Based on their own historical precedents, both gold and its miners’ stocks had soared way too far too fast to be sustainable. That didn’t mean they couldn’t rally more yet on traders flocking to chase, but the more overbought they grew the more their downside risks shot up. High-flying gold finally started wobbling last Friday, falling 1.9% in its worst down day since mid-May. All that selling came early on and wasn’t news-driven.
That definitely spooked gold-stock traders, who hammered GDX 6.8% lower on close. That was also its worst down day since mid-May, and ranked as 47th largest in GDX’s entire history or top 1.0%! That day gold stocks’ downside leverage to gold soared to 3.5x, which isn’t unusual. When gold drops enough to scare traders, gold stocks tend to suffer disproportionately. Holding them when gold is falling is really risky.
Gold immediately recovered from that wobble this Monday, soaring 2.8% to another record $4,350 which was 33.0% above its 200dma! Weekend reports of silver shortages in India looked to fuel big overnight buying in Asia and Europe. But concerningly gold-stock traders didn’t rush back, GDX merely climbed 2.1% for ugly 0.7x upside leverage. Friday’s sharp plunge had apparently damaged greedy herd sentiment.
Then this Tuesday, things got really nasty. Gold was pummeled overseas heading into the US session, with no apparent news catalyst. By the time the dust settled, gold had plummeted 5.3% in that single day! That was its biggest daily drop in 5.2 years, and shockingly one of its largest ever. It clocked in as gold’s 39th-largest daily loss since January 1971, making it top-0.28% across that vast 54.8-year span of time!
Gold certainly wasn’t low at that $4,120 close, levels it had first seen just five trading days earlier. But gold-stock traders wilted, slamming GDX a massive 9.4% lower that day! That stopped us out of almost all of our gold-stock trades, with good-to-huge realized gains thanks to our ratcheted-up stop losses. GDX’s pummeling made for its worst down day since in March 2020’s COVID-lockdown stock panic.
That also proved GDX’s 14th-biggest daily drop in its entire history, ranking as top-0.29% which was remarkably close to gold! There was a silver lining though, as GDX merely leveraged gold by a mild 1.8x on that carnage-ridden day. At its usual 2x to 3x, GDX would’ve plummeted 10.6% to 15.9%! GDX has suffered three 15%+ daily crashes in its history, so they aren’t unheard of. But 9.4% was still super-ugly.
By Wednesday’s data cutoff for this essay, gold’s total drawdown grew to 5.7% over two trading days while GDX’s extended to 13.8% over a slightly-offset three trading days. Gold stocks’ downside leverage to their metal was normal at 2.4x. Such sudden and huge reversals are leaving traders wondering what is likely next. Despite GDX’s big-and-fast selloff, gold stocks remain really high still extremely-overbought.
Gold stocks’ necessary revaluation higher this year was strong and sustainable until the end of August, with GDX remaining in its uptrend. That was an ideal setup for traders, as we were accruing big gains in gold stocks with relatively-minor reversal risk. The gold miners would soon report their best quarterly results ever for the finishing Q3, which would fuel big fund buying. That was the best of times in gold-stock-land.
Then on August’s final trading day, gold broke out from recent months’ high-consolidation trading range. I wrote an essay earlier that week Gold Breakout Nears, predicting such a breakout. That really galvanized gold-stock traders, who flooded in catapulting GDX sharply higher. As this chart shows, right then about eight weeks ago is when gold stocks started shooting more vertical later threatening to launch parabolic.
While such participation-broadening momentum-chasing episodes are validating and fun to ride, they often drive up prices too far too fast to be sustainable. They attract in too many near-term buyers too soon, exhausting their capital firepower for buying. That leaves only sellers, who largely unopposed can force big reversals. Such a pivot sure looks to have happened this week given the magnitude of selling.
Huge down days are always problematic, yanking herd sentiment sharply bearish. They are never a good omen, especially after massive bull runs resulting in extremely-overbought technicals accompanied by greedy-and-euphoric sentiment. So odds are gold is entering an overdue corrective phase, likely a major drawdown necessary to rebalance all the recent extremes. That certainly doesn’t bode well for its miners’ stocks.
In last week’s essay I analyzed all gold’s cyclical bulls since 1971. With updated numbers for Monday’s latest record gold close, this gargantuan 139.1% gold bull over 24.5 months ranks as gold’s largest ever! And again relative to gold’s 200dma, at 1.330x today’s gold bull hit the eighth-highest overboughtness levels in that long secular span! After other massive cyclical bulls in the last half-century, gold sold off hard.
The next-ten-largest gold bulls after today’s champion were followed by average drawdowns of 20.8% over 2.1 months! A similar selloff today would bludgeon gold back down near $3,445 sometime around late December. Instead widening the sample to the next-24-largest gold bulls doesn’t help much, they averaged subsequent drawdowns of 20.2% over 4.7 months. That 20%ish number crops up everywhere.
On Monday gold stretching 33.0% above its 200dma was the most overbought it had been since mid-May 2006. That capped gold’s sixth-largest cyclical bull ever, a 92.3% monster over a similar-to-today’s-bull 23.9 months. What happened next? Gold collapsed 21.9% in a blistering 1.1 months! GDX was just being born then, but the older HUI gold-stock index cratered 30.6% in that short span and could’ve been worse.
Gold’s last 40%+ upleg which qualifies it as monster-status crested in early August 2020 at 40.0% gains and 1.260x its 200dma. The former ranked it as gold’s 18th-largest cyclical bull since 1971. Though far smaller than today’s anomalously-colossal specimen, gold still suffered an 18.5% drawdown over the subsequent 7.0 months. In roughly that same span, GDX fell 30.5%. It had hit 1.450x its 200dma as gold peaked.
So other large gold bulls since 2000 were followed by 20%ish selloffs in gold and 30%ish in its miners’ stocks. A similar drawdown today would drag GDX way back down near $59, which is another 19% below mid-week levels. Yet plenty of big gold bulls were followed by gold-stock drawdowns amplifying their metal by that 2x to 3x, which implies 40% to 60%! I doubt it will get that bad, but precedent says it could.
There’s no denying both gold and GDX just soared to exceedingly-overbought extremes, too far too fast to almost-certainly-unsustainable levels. This Monday’s huge selloffs argue a necessary reversal is underway to rebalance super-stretched technicals and bleed off excessive greed. If gold nears that 20% drawdown in a couple months or so, GDX only falling 30% would be a best-case scenario. It could get way uglier.
Gold’s strongest support zone for drawdowns after massive overheating bulls is its 200dma. That is currently running down near $3,284, but climbing fast each day with gold so high. GDX’s own 200dma is under $53, but also rising rapidly. Both could very well bottom near their respective 200dmas in a couple months or so. That would be very bullish for gold technically, laying a foundation for its secular bull to resume.
So odds are both gold and gold stocks face much more selling ahead in these drawdowns. Even 20% in a couple months is fairly-gradual, averaging out to daily gold declines under 0.5%. That will be lumpy too, periodic sharper selloffs between longer modestly-rallying or sideways-drifting spans. The latter prematurely convince inexperienced traders these selloffs have run their courses, leaving them eager to buy the dips.
We’ll start redeploying in great fundamentally-superior mid-tier and junior gold miners when it looks like gold is bottoming. Many factors will feed into that assessment, including how far and long gold’s selloff has run, where gold is relative to its 200dma, and how speculators are positioned in gold futures.
American stock investors’ capital flows in the leading gold ETFs will also play a role, as will the coming Q3 report from the World Gold Council detailing global gold demand. How the US dollar and US stock markets are faring may come into play, as well as Fed-rate-cut odds being shaped by economic data. Determining when gold is likely bottoming, or if it is consolidating high like earlier in this gold bull, will be complex.
Gold’s current mighty bull has proven remarkable in many ways, including not yet suffering a single 10%+ correction despite three previous episodes of extreme overboughtness! Those were instead followed by high consolidations over some months including pullbacks in the 7%-to-8% range. Maybe gold can pull another rabbit out of its hat, but eluding a correction after far-greater extremes would be nigh-on miraculous.
The bottom line is gold stocks were just slammed hard on a huge gold down day. Both daily drops ranked in their top-0.3% historically, exceedingly-rare. Such massive selloffs out of extremely-overbought levels after mighty bull runs are never a good omen. They flag major reversals likely to soon grow into major drawdowns. The last 55 years of cyclical-gold-bull precedent argues these selloffs average around 20%.
That’s a big warning sign for gold stocks, which also amplify gold’s downside. Gold stocks have long tended to leverage material gold moves by 2x to 3x, implying 40% to 60%. Yet GDX has managed smaller 30%ish drawdowns after some modern large gold bulls. Either way, gold stocks likely have lots more near-term downside ahead. Traders should prepare accordingly, and get ready to redeploy when gold is bottoming.
