Gold-Stock Volume Divergence

The gold miners’ stocks have blasted higher in this young new year, far outpacing the broader markets. But surprisingly gold stocks’ trading volume has diverged from their powerful rally. Volume has actually been waning on balance since gold stocks’ newest upleg was born in mid-December. While volume is a complex nuanced indicator, this bullishly suggests that major gold-stock buying hasn’t even started yet.

Naturally price action is the most-important technical indicator, exposing underlying supply-and-demand trends for anything. The shares of precious-metals miners and explorers have surged this year because investor demand exceeds supply. The capital flowing into this beaten-down sector is overwhelming the numbers of shares sellers are willing to part with, bidding up stock prices and driving their sharp rally.

But the strength of rallies isn’t fully apparent through their price moves alone. Trading volume, how many shares change hands daily, is a critical secondary indicator. The strongest rallies advance on big high-volume buying, showing growing investor interest and broadening capital inflows. The more volume that drives any rally, the greater its momentum, staying power, and ultimate gains. Volume reflects vigor.

One of the many problems plaguing today’s radically-overvalued Fed-levitated stock markets is the low-volume buying driving recent years’ gains. Low volume reveals low conviction, traders begrudgingly buying shares in moderation since they doubt a rally’s durability. Low-volume rallies are often more the result of a lack of sellers than any meaningful buying. That’s what’s happening in gold stocks so far in 2017.

This is readily apparent in the leading gold-stock trading vehicle, the GDX VanEck Vectors Gold Miners ETF. In this increasingly ETF-dominated stock-trading world, GDX commands an insurmountable lead over its competitors. This week, GDX’s net assets of $11.9b were a staggering 63x larger than those of the second-largest normal 1x-long major-gold-miners ETF! GDX is truly this category’s only ETF that matters.

GDX pioneered gold-stock ETFs when it was launched way back in May 2006, giving it a big first-mover advantage. This ETF’s slowly-growing popularity leading to total ascendancy has made it one of the most-important gold-stock benchmarks, rivaling the traditional HUI NYSE Arca Gold BUGS Index.  Since GDX holds a voluminous 51 component gold stocks, this flagship ETF well represents its underlying sector.

The simplest way to measure GDX trading volume is the raw number of shares changing hands each day. Such traditional price-and-volume charts are ubiquitous on the Web. But they suffer a crippling limitation when considering spans of time beyond the very-recent short term. As share prices naturally shift over time, trading volume isn’t equivalent or meaningfully comparable at different prevailing share prices.

At GDX’s all-time high near $67 in September 2011, 1000 shares were worth $67k. Not a lot of traders wield that kind of firepower for single trades. But at GDX’s all-time low just over $12 in January 2016, the same 1000-share block was only worth $12k. In terms of the capital flows that ultimately drive stock prices, high-share-price volume is more important and significant than the same low-share-price volume.

This problem is easily overcome by looking at capital volume instead of raw volume. Capital volume is a simple construct that multiplies shares traded each day by that day’s share price. That renders volume in equivalent, comparable terms even across long spans of time. The amount of dollars traded in GDX or any stock is far more important than the number of shares. Capital volume offers a purer read on trends.

These charts look at GDX capital volume. For share price, I averaged each day’s intraday high and low instead of going with the closing price. That’s slightly more accurate in a sector as highly volatile as the gold stocks. Since capital volume itself varies wildly from day to day, it is best smoothed for analysis. So GDX capital volume’s 21-day moving average, one month, is superimposed in yellow over the red raw data.

Gold stocks’ strong new upleg since mid-December has proven quite powerful. GDX is up 34.6% at best in just 1.8 months, trouncing the rest of the sectors in these Trumphoria-riddled stock markets. But the trading volume behind this recent rally has proven quite weak by this past year’s standards.  I’ve been watching this mounting volume divergence with increasing interest in recent weeks, trying to understand it.

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