Gold has been trading less like a safe haven asset and more like a meme stock lately.

Prices surged in a matter of weeks, miners have jumped higher, and momentum readings show that investor enthusiasm is running high.

That’s great news for anyone who caught the move early. (And if you’ve been following our research at Paradigm Press, that may include you!)

But when gold starts behaving like a momentum play, discipline matters more than ever.

Today, I want to look at what’s driving gold’s sharp rise, what it reveals about investor sentiment, and how to protect your profits before the excitement fades.

When Gold Miners Become Momentum Stocks

Check out this recent price chart of the largest gold mining stock ETF, the SPDR Gold Shares (GLD).

You can see that over the past year, it’s gone from $250 to over $400 per share earlier this week. That’s a +60% return.

Look more closely, and you’ll see that shares were +25% in just the last two months. That’s an annualized return of +280%.

At the bottom of the chart is my favorite technical indicator, the relative strength index (RSI). This is a useful measure of how overbought or oversold a stock is.

An RSI score over 70 indicates high investor enthusiasm, while a score over 80 indicates extreme enthusiasm — and will often lead to a pullback.

The weekly RSI of gold itself recently hit an all-time high, also showing these overheated conditions.

Combine extreme price performance (280% annualized in two months!) with high RSI, and gold miners had entered the realm of momentum stocks.

Now, you might hear “momentum stock” and think rampant speculation. And that’s not wrong; speculation is what can drive momentum stocks to such great returns.

However, I don’t look at it as inherently bad. While the volatility can be difficult to manage, trading momentum stocks is one of the most profitable endeavors in the stock market.

With these types of stocks, you can make a year’s (or 10!) worth of returns in just a few months.

But the challenge is that these stocks don’t take a break by going sideways — they always go down.

Allow me to explain…

The Psychology Behind Momentum Stocks

It’s important to understand the "cohorts" of stock ownership, or who owns the stock at what price. The moving averages can tell us a lot about the cohorts.

What’s unknowable, however, are the motivations of those particular cohorts at any given moment. 

What I can tell you is that when we see this kind of momentum, buyers are stepping in because they expect it to go up (and soon). 

These buyers look at how much it has increased in the past day, week, month, or quarter and say, "Wow!"

Exactly two months ago, you could have bought GLD for $306 a share. It was +25% year-to-date but had been flat for several months.

Then GLD began to trade sharply higher. By this Monday, it was above $400, or up +25% in just those two months. Again, that’s a +280% annualized return.

Many individual gold miners were up much more than that, but investors who bought in recent weeks are flat or underwater. That was NOT their expectation.

As more days of sideways movement go on, they lose their motivation for buying. This is the most recent cohort of momentum stock buyers.

How do we know this? Because when you see a market correction in an overbought stock, it doesn't correct sideways. 

These investors lose their motivation to own and move on to selling. This removes the interest of new incremental momentum buyers, and even more investors get bored. 

As the shares drift lower, you see more investors underwater and begin to panic. They want to keep their gains or limit losses, as many bought higher. 

Elements of this psychology happen in any stock, but are magnified in momentum stocks a hundred times. 

Does this mean that gold has put in a top and is not going higher? Not at all!

I still agree with many of my colleagues that gold could double, triple, or even go up tenfold from current levels.

What it does mean is that the cohort of momentum stock investors may need to rotate out of the stock.

Momentum situations can yield a lot of money. They can go much higher than anyone ever expects.

The key is making sure you keep those profits. So respect the physics of momentum stocks and take some profits.