Gold stocks are nearing a critical support level that could spark a significant rally. The sector has faced tough conditions recently, with the GDXJ ETF, which tracks mid-tier and junior gold miners, dropping 26.9% from its late August high of $135.89 to last Thursday's close of $99.35. Despite this selloff, the fundamentals for smaller gold miners remain strong, with GDXJ components trading at an attractive 11.6x trailing-twelve-month price-to-earnings ratio.
The recent decline in gold stocks has been driven by a 14.4% correction in gold prices over the past two months. This correction was largely fueled by a surge in Fed rate-hike expectations, which triggered selling in gold futures. However, gold's downside leverage to GDXJ has been relatively mild at 1.9x, suggesting resilience in the sector.
Gold appears to be finding major support around the $4,000 level, with last week's low of $3,996 marking a potential bottom. The metal has shown signs of stabilization, trading between $4,100 and $4,200 for nearly a month before last Thursday's breakdown. This breakdown was likely driven by geopolitical tensions, as a New York Times article discussed potential US and Israeli airstrikes against Iran.
Technical indicators also suggest a potential reversal for gold. The metal's oversoldness, with gold trading at just 88.6% of its 200-day moving average, is a rare extreme that often precedes a violent mean reversion. Similarly, GDXJ is testing major support levels between $90 and $100 per share, with $95 being a key midpoint. As gold reverses, GDXJ is likely to follow, amplifying gains as it has done in the past.