Investors are wary of overheating, and gold mining stocks followed the sharp decline in gold prices, and “smart money” had already retreated in a big way

The Zhitong Finance App learned that investors who withdrew 669 million US dollars from the biggest ETF tracking gold mining giants last month after gold dived sharply on Tuesday now seem particularly smart. The data shows that after spot gold fell 6.3% weekly, the biggest one-day decline in more than 12 years, Vaneck Gold Mining ETF, which tracks gold miners, plummeted 9.4% on Tuesday, the biggest one-day decline since March 2020.

Among them, Newman Mining (NEM.US), Agnico Eagle Mines, and Barrick Mining (B.US) all fell more than 9%. Newman Mining and Agnico Eagle Mines rebounded the gains of the past week on Tuesday, and Barrick Mining even rebounded the gains of the past month.

The market has previously warned many times that the rise in gold prices is seriously out of touch with fundamental reality. For gold mining companies, the situation is particularly exaggerated. Their stock price increase this year was almost double the price of gold itself. Candice Bangsund, portfolio manager at Fiera Capital Corp., said: “The rise in the gold sector, especially for large mining companies, may have risen too fast and too much, especially considering that the increase in gold prices is only half that.”

This view is widely shared on Wall Street; however, it is equally risky to accurately grasp the timing of a pullback after a strong rise. Market experts say this situation may be a “blow-off top” (blow-off top) in a bull market — that is, the most intense gains in a booming market often occur on the eve of a collapse. Whether Tuesday's sharp decline was the beginning of a long decline in gold and gold mining stocks, or a brief interlude, it is still difficult to determine.

Jay Kaeppel, senior research analyst at SentimentTrader, said, “I'm stuck on the edge of a rocket right now; I just want to be able to eject it in time before I make a U-turn.” “I've seen this trend too many times — it never lasts too long.”

Investors in Vaneck Gold Mining ETF withdrew US$668.6 million in September, the biggest monthly outflow in five months, indicating that some investors are beginning to doubt the sustainability of this wave of gains. Despite this, the fund rose 115% during the year. Among them, the stock price of Newman Mining, the largest gold mining company in the US, has risen 131% so far this year.

Nancy Tengler, CEO and Chief Investment Officer of Laffer Tengler Investments, believes that such a withdrawal of funds is “reasonable.” Nancy Tengler said, “I've been optimistic about gold for years, but the current situation keeps me up at night. Gold is now a 'risk-free trade', and no one questions whether it's overvalued.” She predicts that if the Federal Reserve fails to cut interest rates twice as expected by the market, gold prices and gold mining stock prices may stabilize in the next few months.

What is even more worrisome is that the prices of precious metals such as gold have begun to fluctuate sharply, and this market segment, which has long been regarded as a stable safe haven, is now making a comeback. On Tuesday, the actual volatility of the price of gold relative to the S&P 500 rose to its highest level since 2020.

John Ciampaglia, CEO of Sprott Asset Management, said, “As investors continue to make profits, daily fluctuations will be very sharp in the short term.” However, he added that as long as such fluctuations and sharp price fluctuations do not lead to the chain's forced sell-off, leading to a larger collapse, he still believes that the long-term prospects for gold mining stocks are strong, and the third quarter results will be strong, “because of falling costs, while gold prices are still at record high levels.”

According to reports, Newman Mining will announce its third quarter results on Wednesday, Agnico Eagle Mines will announce financial results next week, and Barrick Mining will not announce the latest results until November.

Of course, traders in the derivatives market are still betting that the price of gold and gold mining stocks will rise further. Last week, the SPDR Gold Shares Fund's options trading volume reached a record high. Mandy Xu, vice president of derivatives market intelligence at Cboe Exchange, said that most of the purchases came from long investors, and “they are chasing the rise in gold through options.”

However, these bets may seem a bit premature now. Jay Kaeppel predicts that although gold mining stocks may continue to benefit from rising gold prices, these stocks are still highly speculative assets, so a stronger dollar could trigger a wave of sell-offs. He said, “When the sell-off comes, my guess is that a month or two of gains may evaporate in just a few days before the market decides where to go next.”