What’s Really Happening with Gold…

Why gold will reclaim its highs very soon…

This story was originally published here.

You know it’s a bull market when a stock falls 5% and I get a rain of emails asking what’s wrong with that company. This is what’s happening in gold stocks lately.

A 5% move is usually no more than a blip. But when the world is watching a sector obsessively … 5% can seem devastating.

Gold miners have eased off their recent highs. You can see what I mean from this chart of the VanEck Vectors Gold Miners ETF (NYSE: GDX):

Chart showing that GDX has risen since march and then been flat since May.

As you can see, from mid-March to mid-May, the fund ripped higher. It rallied nearly 100% over that period. But since then, it has fallen 14%.

At the same time, the price of gold has fallen about 2%. It peaked in mid-April and has moved gently sideways since then. We call that “sandpapering,” because it grinds down investors. And that can drive impatient investors crazy. They can’t stand it when a stock is doing basically nothing.

That’s what happened to GDX shares. Speculators got impatient and sold their shares. We know not just because the price fell slightly — but we can see it in the share count, too, which is down from its April high.

The Gold Miners Fund Is Not Falling

You see, GDX is an exchange-traded fund (ETF) that trades just like a stock. But instead of shares, investors buy units. And while these units can be bought and sold between investors, the fund manages the number of units available. They do this to keep GDX’s asset value close to the actual value of the shares of the companies it owns.

That sounds complicated, but it isn’t. It just means that the number of units available changes depending on investor demand. So, during periods of high demand, GDX issues lots of units. And during periods of low demand, the number of units falls.

That’s what we have seen over the last few weeks … the number of GDX units has fallen. That direction is important because it’s a quick and dirty gauge of investor sentiment. When GDX’s share count is going down, investors are selling.  And the reason is simple, investors are taking profits as the gold price moves sideways.

And that’s not a bad idea…

Editor's Note: Click here to keep reading.

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