The
gold miners’ latest quarterly earnings season will soon get
underway, with their full Q3’21 results due out by mid-November.
These fundamental reports are invaluable to traders, revealing how
companies are actually faring operationally and financially.
Despite Fed-tightening fears hammering gold and gold stocks last
quarter, the miners are likely to collectively report outstanding
results further lowering their valuations.
After a rough stretch technically this past summer, gold-stock
sentiment remains down in the dumps. This battered sector has few
bulls left, with the vast majority of speculators and investors
either ignoring the gold miners or despising them. This
overwhelmingly-bearish psychology resulted from a sharp gold-stock
selloff between early June to late September. That trying time
tested the mettle of contrarian traders.
The
gold miners weren’t market pariahs earlier this year. Their leading
sector benchmark, the GDX VanEck Gold Miners ETF, powered 28.4%
higher in just 2.5 months between early March to mid-May. That
solid young upleg was starting to win some converts, with herd
sentiment shifting back towards bullish. Unfortunately that
promising start was torpedoed by extreme gold-futures selling
on Fed-tightening fears.
That
bullishness-slaying calamity unfolded over several separate
episodes, which I’ve analyzed in depth
from a gold
perspective. First in mid-June, a third of individual Fed
officials forecast maybe two rate hikes way out into year-end
2023. That hawkish FOMC dot-plot unleashed huge gold-futures
selling, crushing this metal and its miners’ stocks. But gold
stocks soon started recovering from that vicious sucker punch.
Then
another body blow followed in early August, after an upside surprise
in monthly US jobs. That data reignited gold-futures speculators’
perennial Fed-tightening fears. They short-sold aggressively,
including unleashing a rare gold-futures shorting attack that
Sunday evening. So the major gold stocks per GDX again plunged to
new selloff lows. While sector sentiment damage was severe,
hardened contrarians remained.
Thus
gold stocks recovered again into mid-September, when a nasty
uppercut spawned a capitulation knockout. Heavy sustained
gold-futures selling erupted again after a big beat in US retail
sales, implying the Fed would have to start slowing its colossal
quantitative-easing money printing sooner rather than later. Gold
and especially gold stocks wilted as the Fed’s QE4-taper
pre-announcement soon came to pass.
Those gold-futures cannon blasts felt like they blew gold stocks to
smithereens. GDX ultimately plunged 27.1% in 4.4 months by late
September, hitting levels last seen emerging from March 2020’s
brutal stock panic. Gold-stock bulls were all but extinct. Of
course when things feel the worst are the best times to buy
low before later selling high, which is necessary to multiply wealth
in the markets. That was a major bottoming.
As
this GDX chart shows, gold stocks have screamed higher since in a
powerful surge unlike anything seen since mid-June. Over the last
several weeks,
GDX has bounced hard soaring 13.7% higher at best! That
blistering run included two major breakouts, above downtrend
resistance and more importantly this leading gold-stock benchmark’s
50-day moving average. This massive reversal is capturing
attention.
Those Fed-tightening-fear catalysts driving heavy-to-extreme
gold-futures selling in recent months are shown in red. While those
hyper-leveraged speculators were right in the sense that the Fed is
going to soon start slowing its epic money printing, they largely
exhausted their selling firepower in anticipation. Gold stocks
were just bludgeoned in a
preemptive
QE-taper tantrum, which finally passed in late September.
That
removed the withering downside pressure drowning gold miners, so
like beach balls no longer held underwater they shot higher. This
powerful mean reversion is just getting started, with vast room to
run far higher. GDX still has yet to regain its 200-day moving
average, and is a long way from recovering to pre-June-FOMC-meeting
levels challenging $40. It will take big gold-stock gains to
restore herd bullishness.
The
gold stocks were just pummeled to
deeply-undervalued levels relative to gold, making for a strong
fundamental case for much-higher prices. The gold miners’ imminent
Q3’21 earnings season really ought to bolster that. They are likely
to report really-strong operational and financial results,
leaving this sector even cheaper in price-to-earnings-ratio terms.
That will underscore what incredible bargains gold stocks are.
And
when really-bullish fundamentals align with really-bullish
technicals and sentiment, massive gains are almost certain. Gold
stocks are famous for those. This current secular bull’s first four
uplegs averaged awesome 99.2% GDX gains each over 7.6
months! If this past spring’s Fed-interrupted upleg stub is
considered the fifth, they still averaged excellent 85.0% gains
each. Those are par for the course for gold stocks.
Their previous secular bull straddling the first decade of this
century saw literally one-dozen gold-stock uplegs averaging similar
87.5% gains each over 7.8 months! While usually overlooked or
ridiculed, the gold miners are a phenomenal sector to multiply
wealth. The legions of weak hands who always flee in terror
near capitulation bottomings lack this essential perspective. So
they fail, selling low for big losses.
Some
are really going to kick themselves after gold miners’ coming
earnings season. Gold mining is a simple business fundamentally.
These companies wrest gold from the bowels of the earth, which they
generally sell at market prices. So the difference between
prevailing gold prices and gold-mining costs are this sector’s
profits. And those all-in sustaining costs are inversely correlated
with miners’ output levels.
So
these three variables of quarterly average gold prices along with
gold miners’ likely average costs and production levels are
sufficient to predict how their latest results should look. While
the latter couple take some understanding and estimation, the first
one is set in stone. In the just-completed third quarter of 2021,
gold averaged $1,789 on close. That’s somewhat surprising
considering how miserable gold felt.
While that heavy-to-extreme gold-futures selling on Fed-tightening
fears pounded gold 9.6% lower from early June to late September,
most of that happened in June. That month alone as speculators
cowered in fear at maybe seeing two little quarter-point rate hikes
over a couple years into the future, over 3/4ths of gold’s
total recent-months selloff accrued. Gold plunged 7.0% in June
alone, the lion’s share of its drop!
Of
course June was the final month of Q2’21, where gold still averaged
$1,814. While it’s hard to believe with herd sentiment overriding
all rationality, gold actually fared really well in Q3’21.
Last quarter gold just edged a trivial 0.8% lower! That’s
blasphemy, right? Surely gold is doomed if the Fed is going to
taper QE. The super-bearish gold and gold-stock psychology from
that foolish belief really tainted perceptions.
Last
quarter’s $1,789 average gold price was actually excellent, the
fifth-highest on record behind some recent quarters. Q3’20 averaged
$1,912, Q4’20 $1,876, Q2’21 $1,814, and Q1’21 $1,793. Q3’21 came in
close to the latter couple, not far from being the third-best ever
witnessed. Sequentially quarter-on-quarter in Q3’21, the average
gold price merely slumped 1.4%. And goofy traders still
cried the sky is falling.
For
the major gold miners of GDX, $1,789 is a heck-of-a-profitable price
to sell their production! That is evident relative to all-in
sustaining costs, the best measure of the total expenses necessary
for extracting each ounce of gold. AISCs not only include all cash
costs of mining, but add on everything else that is needed to
maintain and replenish gold-mining operations at current output
tempos. I’ve studied them for years.
After every quarterly earnings season, I dig through the latest
results from the top 25 GDX and GDXJ gold miners. Their key numbers
are fed into a mammoth spreadsheet for data crunching and analysis,
then I write essays summarizing the results. I’ve been doing this
hard work for 21 quarters in a row now, and can’t wait to get to
Q3’21 numbers. I analyzed the
GDX top 25’s
Q2’21 fundamentals in a mid-August essay.
Then
these elite major gold miners’ all-in sustaining costs averaged
$1,037 per ounce, the best proxy for gold-mining costs as an
industry. That was right in line with the last four reported
quarters before that, which had an average of $1,029. So odds are
the upcoming Q3’21 results from the GDX gold miners will reveal
similar AISCs. That would make for a very-profitable quarter
despite the wailing and gnashing of teeth.
Quarterly-average gold prices of $1,789 less flat $1,037 average
major-gold-miner AISCs would yield fat unit earnings of $752 per
ounce! Those would prove the fourth-highest ever seen after Q3’20’s
$884, Q4’20’s $838, and Q2’21’s $778. Such colossal earnings would
fuel profit margins of 42%, lofty levels most industries would die
for. Recent months’ heavy gold-stock selling certainly wasn’t
fundamentally-righteous.
And
amazingly the gold miners’ earnings will likely prove even bigger
once their Q3’21 results are in and collated. I’ve been actively
speculating and investing in gold stocks for over two decades now,
earning fortunes. This high-flying sector with massive
upleg-correction cycles to ride has been very good to me and our
newsletter subscribers. As I find gold mining really interesting, I
actually like reading quarterlies.
One
common theme stuck out a couple months ago when I was wading through
Q2’21 reports. A sizable fraction of the GDX-top-25 gold miners
were forecasting considerably-higher production in Q3 and sometimes
Q4. Many of these companies had full-year output guidance weighted
to the back-half of 2021. Some reasons included chewing through
lower-grade ores earlier on the way to higher-grade ones later.
There were also expansions coming online that would boost production
at individual gold mines. So it is likely the major gold miners’
output will grow sequentially from Q2 to Q3. That should
proportionally lower unit mining costs, spreading the big fixed
expenses of producing gold across more ounces. Interestingly rising
output in the middle of calendar years has proven a long-established
phenomenon globally in this industry.
The
World Gold Council publishes the best-available worldwide gold
fundamental data in its outstanding quarterly Gold Demand Trends
reports. I can’t wait for Q3’s installment which should be released
late next week. It will reveal how gold investment demand fared
last quarter in the face of that heavy gold-futures selling. For
our purposes today, these GDTs include total global gold-mining
production each quarter.
Going back a full decade, the sequential output growth from Q2s to
Q3s has averaged an amazing 6.7%! That is massive, and the
best quarter-on-quarter growth by far. Q4s to Q1s averaged 8.2%
declines, Q1s to Q2s 4.4% growth, Q2s to Q3s that awesome 6.7%
surge, and Q3s to Q4s stabilized there up 0.4%. Third quarters of
calendar years have long proven the ones with the best
gold-production growth. Why is that?
A
variety of factors come into play. Mine managers get new budgets to
maintain and upgrade gold-mine infrastructure as new years dawn.
That contributes to downtime in Q1s as that work is done. Q1s also
contain peak winter months in the northern hemisphere where most of
the world’s gold mines are found. Cold temperatures slow the
chemical processes used in heap leaching to recover gold from
crushed ores.
Conversely Q3s have the warmest months on the top half of the
planet, speeding up gold recoveries. By that time of the year the
maintenance and light-expansion work is usually done, allowing
production to run uninterrupted. And mine managers often choose
to sequence higher-grade ores during Q3s, boosting their
outputs. That’s because Q3 results are the last-reported ones
before year-end bonuses are calculated.
Higher gold-stock prices heading into year-ends often increase
compensation for mine managers, so they game ore grades
accordingly. If they have to dig through lower-grade ores, they try
to schedule them for first halves of years so better grades are
available in second halves. Whatever the reasons, gold miners’
production often swells considerably in Q3s. That 6.7% Q2-to-Q3
average growth since 2010 is incredible.
That
should materialize again as Q3’21 is reported over this next month
or so. Exactly where GDX-top-25 gold-output growth will shake out
to is a crapshoot. But to be conservative, assume sequential growth
last quarter comes in just over half the global decade-long average
at 3.5%. From reading the quarterlies and press releases I suspect
the actual Q2-to-Q3 growth will prove higher, but 3.5% is easy to
defend for a preview.
As
industry all-in sustaining costs are generally inversely
proportional to gold production, that implies the major gold
miners’ average AISCs will also contract on the order of 3.5%
quarter-on-quarter. That would leave last quarter’s estimate near
$1,001 per ounce, which is still on the high side. During the last
21 quarters, the GDX-top-25 gold miners reported average AISCs over
$1,000 in just 5. Those aren’t low costs.
Q3’21’s $1,789 average gold prices less $1,001 AISCs yields unit
profits of $788 per ounce. That would rank as the third-highest
on record after Q3’20’s $884 and Q4’20’s $838! And these
massive earnings are coming with gold stocks often already trading
at very-low or even dirt-cheap conventional valuations. I look at
their trailing-twelve-month price-to-earnings ratios right after
earning seasons in my quarterly analyses.
GDX
exited Q2’21 at $33.98, well above last quarter’s average close of
$32.58 as that heavy gold-futures selling ravaged gold-stock
prices. This dominant gold-stock ETF left Q3’21 pounded way down to
$29.47, an ugly 13.3% quarterly loss. That was
ridiculously-overdone compared to gold’s own mere 0.8% Q3’21
slump, revealing how foolishly-emotional gold-stock traders as a
herd have acted during recent months.
Yet
at the end of Q2 the GDX-top-25 gold miners’ TTM P/Es were already
the lowest I’d ever seen, with plenty trading in the teens and a
fifth deep down in the single-digits! With gold-stock prices
falling far in Q3, and quarterly earnings almost certain to prove
very strong, sector valuations had to have fallen even lower.
The gold miners’ incredibly-bullish fundamentals will amplify their
gains as traders inevitably return.
There’s a good chance excellent-to-amazing quarterly reports will
prove catalysts sparking big buying in individual gold-mining stocks
before this latest earnings season runs its course. More important
for gold-stock buying will be the fortunes of gold. It too is
recovering out of gold-futures speculators’ taper-tantrum selling in
recent months. So far gold’s mean reversion higher has been lagging
the gold stocks’ powerful bounce.
Capital inflows into gold should really accelerate as it powers
higher, since traders love chasing upside momentum. The raging
inflation savaging Americans should greatly increase awareness of
the critical importance of the ultimate-inflation-hedge gold for
prudently diversifying stock-heavy portfolios. Even if the
Fed’s QE4 taper goes according to plan, vastly more Fed money
printing is still baked into the pipeline.
In
coming years,
gold will follow the money supply way higher. Over the last
19.6 months since March 2020’s pandemic-lockdown stock panic, this
profligate Fed has ballooned its balance sheet by a terrifying
103.9% or $4,322b! That doubling of the monetary base has
proportionally mushroomed the worldwide US dollar supply. And if
the Fed gradually slows QE4 until the middle of next year, another
$660b is still coming.
Aboveground gold supplies barely grow, rising on the order of just
1% annually through mining. Thus far more fiat dollars are
available to bid up the prices on relatively-far-less ounces of
gold. The more inflation worries fester with investors, the more
capital they will deploy in gold. And higher gold prices will
greatly increase traders’ interest in buying gold stocks, which are
ultimately leveraged plays on the metal they mine.
So
if you don’t have sufficient gold-stock portfolio exposure yet,
there’s still time to deploy before this new upleg grows way bigger
and matures. Our newsletter trading books are full of great
fundamentally-superior
mid-tier and
junior gold miners. Their upleg gains trounce the GDX majors
since they can ramp output faster off lower bases. Buying low
requires adding great gold stocks before everyone else rushes in
later.
At
Zeal we walk the contrarian walk, buying low when few others are
willing before later selling high when few others can. We overcome
popular greed and fear by diligently studying market cycles. We
trade on time-tested indicators derived from technical, sentimental,
and fundamental research. That has already led to realized gains in
this Fed-interrupted upleg as high as +51.5% on our recent
newsletter stock trades!
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multiply your wealth trading high-potential gold stocks, you need to
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The
bottom line is gold miners’ imminent Q3’21 results should prove
really strong. Prevailing gold prices stayed high last quarter
despite those extreme gold-futures-selling bouts. That portends
some of the best earnings this sector has ever seen even if
production costs are stable. But gold-mining output tends to grow
considerably in Q3s, which should proportionally lower unit costs.
That would drive even-fatter profits.
These powerfully-bullish fundamentals are happening with gold-stock
prices already beaten down to deeply-undervalued levels. So great
Q3 reports could act as catalysts spurring big buying, accelerating
gold stocks’ blistering mean-reversion rally higher. Gold-stock
prices remain far too low relative to current gold prices and the
huge profitability they drive. And gold itself is heading way
higher on crazy money printing. |