Gold-Stock Sentiment Shifting

The gold miners’ stocks have been largely ignored and neglected for years. Speculators and investors wanted little to do with them for various reasons.  But that apathetic sentiment is finally starting to shift thanks to last week’s stock-market plunge. Capital is starting to return to this battered sector as traders begin to realize how radically undervalued it is. Sentiment mean reversions can catapult gold stocks far higher.

Sentiment is defined as “a thought, view, or attitude, especially one based mainly on emotion instead of reason”. We, humans, are inherently-emotional creatures riddled with sentiment on almost everything. That’s especially true in our perceptions of the financial markets, which heavily influence if not dominate our trading decisions. We buy and sell stocks when it feels good, when markets appear to validate our outlooks.

The core mission of speculation and investment is simple in concept, buying low then later selling high to multiply one’s wealth. I’ve given talks to elementary-school kids about trading and they easily grasp this. But unfortunately actually executing on this in real-world markets is very challenging because our sentiment misleads us. Our innate greed and fear relentlessly goad us to buy and sell at exactly the wrong times.

We wax greedy and excited after stocks have already rallied massively, which leads to buying high after most of the gains have already been won. Then after stocks have suffered major selloffs, our fear and despair flare brightly convincing us to sell low after losses have already occurred. Traders who heed their own emotions inevitably end up buying high then later selling low, which ultimately decimates their scarce capital.

Our individual and collective sentiment is overwhelmingly driven by one thing, prevailing price action. We naturally tend to extrapolate present conditions out into the indefinite future. So we assume stocks that are rallying will keep on powering higher forever, while stocks that are falling are doomed to continue spiraling lower. Making such linear assumptions in perpetually-cyclical markets often leads to serious losses.

So while sentiment might serve us well in other areas of our lives, it is our worst enemy in the markets. Instead of being embraced, our inherent greed and fear needs to be ruthlessly suppressed. We can’t buy low then later sell high if it feels good, because that means everyone else is doing it at the same time. Instead, we have to fight our hearts and fight the herd, literally buying and selling when it feels the worst.

Everyone loves the mega tech stocks because they’ve rallied on balance for many years. But thanks to that very-long bull, they are dangerously overvalued. So buying them today may feel good, but their stock prices are already very high. The time to buy mega tech stocks was back in March 2009 at the end of the last secular bear when everyone was scared. Over the next 9.5 years the tech-heavy NASDAQ soared 539.2%.

Leading into March 2009 when mega tech stocks were hated, the elite NASDAQ 100 stocks sported an average trailing-twelve-month price-to-earnings ratio of 18.9x. They were relatively cheap with bearish sentiment peaking. But at the end of last month after that powerful secular bull, these stocks had an average P/E twice as high at 37.8x. This is the time to sell high, when traders are exuberant and euphoric.

The gold miners’ stocks have the opposite problem. Their prices have ground lower on balance for so long now that traders have mostly forgotten about them. They are incredibly undervalued and deeply out of favor, choking on suffocating bearishness. So now is the time to buy low when few others are willing, which is the secret to multiplying your wealth in the markets. That’s when stocks are dirt-cheap before big bulls.

The only speculators and investors able to consistently buy low then later sell high are contrarians who’ve hardened themselves against sentiment. They choose to totally disregard their own greed and fear, and then make the opposite trades of the thundering herd. They buy low when stocks are unwanted, and then later sell high when everyone wants them. Contrarian trading is ultimately the most-profitable way there is!

The miserable gold-stock sentiment of recent years is starting to shift because contrarian capital is flowing back into the gold miners’ stocks. This first chart looks at the leading GDX VanEck Vectors Gold Miners ETF over the past several years or so. It is the most-popular way to trade the gold-stock sector today, and its primary benchmark. Historically gold-stock upside has been enormous when sentiment mean reverts.