When will it be time to buy gold stocks again?

The simple answer is, “When GDX (the bellwether gold stock ETF) returns to the green zone.”

But what could make that happen? Most likely, the return of an inflationary mindset. Or barring that, a new breakout of deflation fear, which makes the fiat currency printing presses go crazy.

Gold stocks tend to zig when other industries zag. They perform well at strange times relative to the rest of the market. And when the rest of the market is doing well, gold stocks tend to get ignored.

An extreme example of this was the period between 1929 and 1933 — one of the darkest times in history for U.S. equities.

In the years following the 1929 stock market crash, global trade collapsed due to tit-for-tat trade tariffs … deflation reared its ugly head … and the stock market fell off a cliff.

Except for Homestake Mining, one of the largest and longest-running gold miners in the United States (until merging with Barrick Gold in 2002) and the first mining stock to list on the New York Stock Exchange in 1879.

In that dark time between 1929 and 1933, Homestake Mining rose 474 percent (according to Casey Research). Dome Mines, another gold miner of the day, rose 558 percent.

How is that possible? Because the price of gold was fixed … but deflation led to a huge drop in operating costs. The combination of a fixed price for gold and declining operating costs meant gold miner profits exploded to the upside.

This is what makes gold stocks somewhat unique. In periods of extreme inflation — or deflation too, depending on what’s happening with currency values — swings in the gold price (or operating costs) can cause huge run-ups in miner profits.

But the flipside to this is that gold stocks can sit out in the cold while the rest of the market is doing well … and they can stay in the cold for a really, really long time.

You might say the worst backdrop for gold stocks is a “goldilocks” type environment — not too hot and not too cold in terms of inflation or deflation — and that is what we’ve seen the past few years.

When investors are excited about tech stocks and small caps and American businesses, and they aren’t worried about inflation or deflation at all, gold stocks tend to get ignored — or sold.

You can see this in the chart of the bellwether GDX gold stocks ETF (as shown below). GDX went into the red zone in December of 2016 and has stayed there since. After 18 months of grinding sideways action, taxing the patience of long-suffering gold stock investors, GDX then added insult to injury by falling further.

VanEck Vectors Gold Miners ETF (GDX) In SSI Red Zone since December 2016

You may hear pundits saying gold stocks are a great buy at these depressed levels. But here’s the trouble: they were saying the same thing six months ago … and 12 months ago … and 18 months ago!

The reality is we just don’t know how much further gold stocks will fall.

We do know, however, that gold stocks could be a hugely bullish investment opportunity when inflation or deflation fears return to the fore (and in the long run, they always do — because everything moves in cycles).

So, how to know when gold stocks are a buy again?

Besides monitoring investor sentiment and general developments, we can just watch for a new SSI Green Zone signal in GDX. When that signal finally comes, it will tell us momentum is finally building in gold stocks for another upside run.

Until that day, however, we don’t have to sit in gold stocks and endure the pain like sitting in a dentist’s chair without novocaine. We can deploy our capital in more attractive places, and wait for a new green zone signal in GDX.