My mom is talking to me again.
She was quiet when she visited last Thanksgiving. She celebrated Christmas with her other son. And, when I called a few weeks ago to say “Happy Valentine’s Day,” I got her voicemail.
Mom wasn’t happy with me.
I talked her out of buying gold stocks last year. That was when GDX – the exchange-traded fund that tracks the action in the major gold miners – was trading near $28 per share. I was cautious, even bearish, on gold stocks back then because the commercial traders, the smart money in the gold business, had amassed a record large short position in gold futures.
Now… I’ve been following the action of commercial gold traders for more than 20 years. And, while I’ve known them to often be early at major turning points in the gold market, I’ve never known them to be flat-out wrong. So, I told mom that she might want to wait a bit before piling her savings into the gold stocks.
GDX traded above $31 per share just three weeks ago. All of her friends in the church choir were making money on their gold stocks. Mom was sitting on the sidelines. She was following my advice, and she wasn’t happy about it.
Mom finally called me back on Friday. All it took was the largest, broad-based stock market selloff in 33 years, and a complete meltdown in the gold sector.
Gold stocks are under pressure, partly because of the mass selling pressure that has been hitting the broad stock market, and partly because the price of gold has dropped more than $150 per ounce over the past three weeks.
Gold stocks, which are levered to the price of gold, have given up all of the gains they made in 2019. GDX is trading back down to where it was in December 2018. Here’s an updated look at the chart…
This is perhaps the most severe decline I’ve ever seen in the gold sector. GDX lost the support of the $26 level on Wednesday, and the sector went into free-fall. The stock closed at $19.30 on Friday – at about the same level at which it was trading in December 2018.
The strange thing is… In December of 2018, the price of gold was $1,250 per ounce. It closed Friday at $1,516.
In other words, gold is trading more than 20% above where it was in December 2018. But, the gold stocks are trading at the same depressed level.
So, either gold stocks are cheap relative to gold – and are likely to bounce – or gold is expensive relative to the gold stocks and is likely to fall. Or, maybe we’ll see some combination of those two scenarios.
Either way, I told mom she could do much better by buying gold stocks here at a 20% discount to what her friends were paying last summer.
“No thanks,” she said. “I don’t need the stress.”
“You’re probably right,” I said. “Besides, I’d rather you not screen my call when I phone you on Easter.”
Best regards and good trading,
Jeff Clark
Reader Mailbag
What do you see happening with gold? Will you be selling into the current weakness, or buying gold on sale? Send us your thoughts at feedback@jeffclarktrader.com.