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“Are we there yet?”
I’ve heard this question about gold stocks so often, you’d think we were on a road trip to Grandma’s house.
For the past year, the answer has been a resounding “NO.”
Now – finally – the answer is, “We’re getting close.”
Let me explain why the outlook for gold stocks is finally changing…
In late 2015 and early last year, I personally loaded up on gold stocks. It was the only time in my life I’ve done so. Then, in late July, I sold them all. (This is a quick overview – regular readers know I’ve written about this many times.)
I bought because gold stocks were hated. I sold because they were loved.
It worked out great for me. You can see this in the price action of the leading junior gold-stock exchange-traded fund (ETF) over the past year or so. Take a look…
Since I sold my positions, gold stocks have gone down… As you can see, they’re not far from new 12-month lows today.
So what makes me think we’re finally getting close to another “buy” in gold stocks?
Let me explain…
I like to track the actions of individual gold-stock investors to know when it’s safe to buy. Here’s how I look at it…
Gold stocks peaked last summer. After a peak, individual investors usually give up on an asset class. They stop buying. Typically, they even start selling.
But gold-stock investors are not typical investors… They’re a hardy bunch.
When gold stocks started falling in August, gold-stock investors didn’t sell. Instead, they started buying more.
They didn’t stop…
As gold stocks continued down, gold-stock investors continued buying, all the way down.
For me – as a contrarian investor – the lowest-risk time to buy is typically when even the hardiest investors in an asset have given up.
You can see when this happens by looking at an asset’s shares outstanding. When the number of shares outstanding increases, it tells me that individual investors are not only refusing to give up, they’re doubling down on their losers.
Take a look at the following chart. It shows the shares outstanding for the leading junior gold-stock ETF since the beginning of last year…
Gold-stock investors were adding to their losers for a long time. Then – finally – about two months ago, they started to give up. Shares outstanding started to fall. This is the signal I was waiting to see.
This change in movement tells me that gold stocks have now – finally – moved away from being “overly loved.”
When gold stocks were “overly loved,” I couldn’t in good conscience tell you, “Gold stocks are a buy.” I knew gold-stock investors were still determined to sink money into a failing trade. I couldn’t be a part of that.
Now, we’re finally seeing those investors give up. Since the shares outstanding have started to fall, I am no longer worried that gold-stock investor optimism is too high.
The next big issue is simply the uptrend… We don’t have it yet.
Gold stocks’ up-and-down price movements can be almost manic. Right now, we’re in a “down” move.
I don’t want to try to catch a falling knife. It can keep falling… and falling. How far it can fall is sometimes shocking.
Instead, I would rather wait for it to stop falling, hit the ground, and settle. Then I can safely grab it.
In plain English, I want to see gold stocks start to turn around. I want to see the start of an uptrend before I buy back in again.
The big thing that was holding me back since last summer is no longer a problem. When the uptrend returns to gold stocks, I will be a buyer again. We’re not there yet, but we’re getting close.
I’ll let you know when it’s time to buy.