The Gold Miners Bullish Percent index (BPGDM) is severely oversold, but…
Many people know, but some do not; the BPGDM is a measure of overbought or oversold conditions for the gold mining sector. It is not a direct sentiment indicator. Oversold readings like the current one sure do imply poor (contrary bullish) sentiment, but that is a theoretical result of such oversold conditions.
Also, be aware that this post highlights just one of many indicators. No single indicator or market signal is a be-all, end-all. It is a tool to be used with other tools. Or in old fashioned mining terms, it’s a pick, along with which you need a shovel, a sifter and/or pan and a never say die attitude. Oh, and a loaded shotgun might come in handy as well. :-)
As to the “but” in the subtitle above, there are a few of them. The short-term state of the Gold Miners Bullish Percent index is quite bullish on a contrary basis, and a rally is probably likely to begin in the coming days or weeks. But… there is more to the picture.
The BPGDM illustrates that a major bull market is still in place (ref. the “bull market” in the green 200 day moving average). That’s obviously quite positive on the big picture.
But…
- A major correction within the bull market could take the SMA 200 quite far down over time. It could decline all the way to 40 +/- (currently 76) and maintain its bull market trend.
- Comparable deep down-spikes in the BPGDM occurred three previous times in the bull market that began in 2016. Leaving aside the deep bear market signals of 2014-2015, the 2016 low was barely tradable, the 2020 low led a notable buying opportunity. But only the 2022 spike was the precursor to a major bullish phase. And it took a couple more years of grinding for a majority to catch on to the bull.
- Fundamentally, the war and its upward pressure on oil prices is a negative that will eventually eat away at not only gold miners, but all miners, which are energy-intensive operations. If that does not show up in a material way in this quarter’s results (Newmont, for example, did fine), it will if the “excursion” in the Middle East extends indefinitely further.
Bottom Line
We have an indicator showing a contrarian buy opportunity on an oversold sector. It is just one indicator, among others we use. An oversold bounce or tradeable rally is likely at some point. But there are still plenty of “buts” in the picture.
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