"This week's capitulation beat the flagship HUI gold-stock index back down near 375. The first time the HUI exceeded 375 in this secular gold bull was way back in September 2007. Where was gold then? It had just approached $720 for the first time in this bull! So this week, gold stocks were trading as if gold was at $720 when this metal was really 2.1x higher near $1540! Crazy.
As you can see above, the indexed blue HUI line and white GDX line are virtually identical. But the red GDXJ performance is radically different. This premier junior ETF was obliterated this week, falling to the lowest levels it's ever seen since its birth in November 2009. The highly-speculative juniors are a great weathervane for gold-stock psychology in general, and they were wildly out of favor this week.
Gold juniors have long been our specialty at Zeal, and we own plenty of them thanks to gold stocks languishing at stock-panic levels relative to gold in recent months. During this week's capitulation, even though many of these stocks were already near major multi-year lows, some plummeted by 10% to 20% on a single trading day with no news! Extreme selling from lows, for no reason, is a capitulation.
And the jaw-dropping magnitude of the recent gold-stock selloff is crystal-clear on this zeroed indexed chart. The gold stocks, big and especially small, have just cascaded lower in a waterfall decline. The psychological angst, pain, and pressure such a brutal selling event spawns are nearly impossible to resist for all but the most battled-hardened contrarians. Gold stocks have just fallen off a cliff lately.
Such immense selling has only been seen one other time before in recent history, during 2008's epic stock panic. Gold stocks plummeted then, again dramatically outpacing gold's own decline. They ended up at absurdly-oversold levels that I pointed out at the time were a once-in-a-lifetime buying opportunity. And indeed this sector soon started surging, the HUI more than quadrupling in the next 3 years!
The stock-panic plunge leading into that amazing time to fight the scared herd and buy aggressively is provocatively the only other recent event remotely comparable to this latest gold-stock capitulation. Extreme weakness, shaking out every last trader who can't withstand the intense pressure of fundamentally-sound positions plunging for emotional reasons, paves the way for enormous rallies.
Could the HUI actually quadruple again in the coming 3 years? Absolutely. As I've discussed in many essays since the stock panic, this index had an average ratio to gold of 0.511x in the 5 years before 2008's stock panic. This week the HUI/Gold Ratio plunged to 0.244x, levels only briefly seen during the panic's dark heart. If gold merely stays flat near its recent lows, the HUI would have to more than double just to regain its pre-panic HGR!
But given gold's bullish fundamentals globally, this metal certainly isn't likely to languish near lows in the coming years. With mine supply growth still heavily constrained and investors including central banks still seriously under-allocated to this unique asset, gold's secular bull ought to have years left to run yet. And by the time we see that popular-mania parabolic gold-bull climax, the HUI will likely easily more than quadruple."