Technically, a Bullish Case for Gold Stocks

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by Rod Blake

Bull markets generally start quietly. They can start so quietly that most investors miss or worse yet sell after the early or first leg up as they feel that they are still in a bear market that may have languished for some time. Such is the case in what I believe is the current long term bull market in gold stocks.

To follow my logic, please refer to the attached GDK Van Eck Gold Miners ETF chart [GDX-NYSE]. As you can see, after an initial run up from US$18 to US$30 last summer – as gold broke up through previous long term resistance of US$1,300 – the GDX plateaued and then gradually fell back to US$26 later in the year. I’ll wager that many investors sold after this rally feeling that, as in recent years, the bull run was once again short and it was now time to take profits for the year and move on other opportunities.

GDK Van Eck Gold Miners ETF chart [GDX-NYSE]
Except, this time it was different. As 2020 approached the GDX rose once again to complete a classic and very bullish ‘Cup & Handle’ formation as the price of gold bullion surprised many a naysayer and approached US$1,600/oz. The confirmation of this bullish pattern came in late February when the GDX rose above the previous September ‘cup’ high of $31 to a new high of US$32 as gold bullion finally reached a new seven-year high of US$1,675/oz.

The first quarter of the year is usually one of strength for gold and gold stocks and all seemed well for investors especially with the yellow metal at a new multi-year high. But as I learned many times over the years as an investment advisor bad news has a recurring habit of killing rising resource markets just when we thought things were finally going our way. (Think Bre-X Minerals, 9/11, the BP Petroleum Gulf of Mexico oil disaster, or the Japanese tsunami).

This year, the good times killer wasn’t a stock fraud, act of terrorism, an engineering operations failure or a natural disaster. This time it was a small localized medical problem in Wuhan, China that suddenly bloomed into the coronavirus and resulting COVID-19 flu pandemic that swept across the world, changing life as we know it and suddenly cratering capital markets to new multi-year lows in its wake.

The GDX was not immune to this run for the exits and violently lost half of its value in a few short weeks in mid-March to just US$16. Once again a very promising bull market for gold was cut short and I’m sure many more investors threw in their towel and exited their precious metal positions thinking that once again the bull market was over. And they were not alone as many market pundits expressed their views that this pandemic would negatively affect the markets for years to come.

Then as March progressed through April and into May, the markets began recapturing some of their losses. But while the broader markets recaptured about half of their losses, the GDX not only recouped all of its losses but actually surged above US$32 in late April to a new high of US$34 as gold bullion rose to another new seven-year high of US1,725/oz. As of early May, the strength and magnitude of this move is prominently featured on the GDX chart in what looks to be the early formation of a very bullish ‘Flagpole & Pennant’ configuration  with the near vertical rise from US$16 to US$34 forming the flagpole and the recent sideways price action forming the pennant. Note that that the top of the pole was above the previous high of US$32 and the resulting pennant is also holding above the old high – another bullish indicator. Technically, the pennant is a consolidation period where the market absorbs the previous rise in price and prepares a base for another potential upleg of the same magnitude.

TSX Venture Exchange Composite Index

I’ve witnessed many resource bull and bear markets. Looking back, there have been many theories (that time and space won’t allow at this time) as to why they began or ended, but begin and end they did. Technically, however, and without economic input, this bull market in gold and gold stocks looks and feels different. What began quietly last June as a seasonal rally formed the right side of a cup, then created a very broad handle to new highs, only to very quickly recoup from a sudden selloff with a higher and very strong flagpole and resulting pennant. The spring months are usually not very endearing to gold and gold stocks. But recent charts indicate this cycle may be different. If the current levels of gold and the GDX hold at or near these levels then technically I would suggest that the market is setting up for another upleg in what could be a very exciting bull market for gold stocks.

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