This Corner of the Gold Market Is Ready for a Breather

One of the world's biggest gold authorities is predicting tough times ahead for miners...

Gold prices have risen 12% year to date. And mining stocks have stormed higher, too. The gold-mining sector has soared about 21% since March.

We expect this huge gold rally to continue from here. But at least in the short term, trouble is on the horizon for mining businesses...

According to John Reade, the chief market strategist at the World Gold Council, the precious metal is getting harder and harder to find. And gold mining has reached a bottleneck as a result.

As Reade told CNBC last week...

After 10 years of rapid growth from around 2008, the mining industry is struggling to report sustained growth in production.

Not only that, but gold miners are facing another headwind today...

Based on history, the sector has hit a temporary ceiling. And mining companies will likely take an extended breather from here.

If you bought and held the broad gold-mining sector since 2008 – without picking and choosing companies – you'd have lost about 1% a year...

That's a disappointing long-term investment. For comparison, the S&P 500 Index returns about 7% average annually. And a money-market fund could return roughly 5% risk-free today.

But with the right timing, you can take advantage of gold miners' boom-and-bust nature for a chance at much higher profits.

Today, this sector is booming – up double digits since March.

We can track this performance using with the VanEck Gold Miners Fund (GDX), a broad basket of gold-mining companies...

GDX has soared over the past three months. But now, it looks like a pullback is likely based on one measure... the bullish percent index ("BPI").

To put it simply, this indicator tells us what percentage of stocks in a sector are generating bullish signals. A BPI of 0 means every stock in the sector is in a bearish pattern... and a BPI of 100 means that every stock in the sector looks bullish.

When the BPI rises to 70 or above, it generates an "overbought" signal. When this signal appears, nearly all the stocks in the sector are in a bullish pattern. And that means a reversal is possible.

Today, gold miners are in overbought territory based on this metric. Take a look...

Gold miners are currently sitting at a BPI of 79. But the measure was as high as 89 at the end of last month.

I wanted to know what similar BPI readings meant for gold miners going forward. So I found instances where gold miners reached a BPI of 80 or more going back to 2008. Then, I tested each instance to see what the signal meant for future GDX performance.

Now, it's unusual for gold miners to be this overbought – we've only seen BPI readings above 80 on 9% of days in the past 16 years.

But once the signal appears, we typically see a muted performance for the miners in the short term. Check it out...

Because of gold miners' boom-and-bust nature, GDX has fallen about 1% in a typical six-month period. This proves timing is crucial when it comes to investing in these businesses. And if you buy when the BPI is at 80 or more, that's one example of bad timing...

These stocks fell an average of 4% in the six months after the overbought signal. What's more, 58% of those signals returned losses after six months, which are worse odds than a coin flip.

We should see future gains for mining companies as the gold rally continues. But if you've been debating buying into the boom, you might want to wait a bit longer before joining in... And if you are invested in miners, keep an eye on your position, and expect some volatility ahead.

History shows this sector is due for a cooldown. The next few months could be rough for these businesses before calmer waters return.

Good investing,

Sean Michael Cummings

Further Reading

The AI and cryptocurrency booms require a lot of energy. And the energy grid will need changes to keep from buckling under the strain. But one crypto might have an answer to this problem in the coming "energy supercycle"... Read more here

The health care landscape has dramatically changed in recent years. More companies are getting FDA approval to move forward with their groundbreaking drugs. And that's creating huge opportunity for investors... Learn more here.

Market Notes



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SLB (SLB)... oil and gas
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