The
gold miners’ stocks just blasted higher to a major decisive breakout
this week! Driven by gold’s own huge bull-market breakout, the gold
stocks surged well above vexing years-old upper resistance. The
resulting new multi-year highs are a game changer, starting to shift
long-apathetic sector sentiment back towards bullish. This will
increasingly attract back traders, with their buying unleashing a
virtuous circle of gains.
Traders usually track gold-stock fortunes with this sector’s
most-popular exchange-traded fund, the GDX VanEck Vectors Gold
Miners ETF. Launched in May 2006, this was the original gold-stock
ETF. That big first-mover advantage has helped propel GDX to sector
dominance. This week its net assets of $10.5b ran 44.6x larger
than the next-biggest 1x-long major-gold-miners ETF! GDX is this
sector’s leading benchmark.
And
as recently as late May, neither speculators nor investors wanted
anything to do with gold stocks. GDX slumped to $20.42 on May 29th,
down 3.2% year-to-date. That was much worse than gold’s own slight
0.2% YTD decline then warranted. The gold stocks were really out
of favor, largely ignored by apathetic traders. What a
difference a month makes though, as their fortunes changed radically
in June.
The
gold miners started reanimating on May 31st, after Trump unleashed a
bombshell warning to Mexico the evening before. He said tariffs
would be imposed on all of its exports to the US if it didn’t
seriously clamp down on illegal immigration across the US southern
border. While Trump subsequently suspended those tariffs on
Mexico’s promises to take action, that was the catalyzing event that
awoke gold from its slumber.
A
couple weeks ago I wrote an essay on the resulting
mounting
gold-stock upleg, explaining what was going on. But the
developments since have been stunning, a colossal bullish
surprise. Long neglected, GDX kept on marching higher mid-month
leading into last week’s highly-anticipated Federal Open Market
Committee decision. GDX closed at $23.67 the day before, already
15.9% higher in only several weeks.
The
Fed kowtowed to stock traders’ hyper-dovish expectations and shifted
its future rate bias from tightening to cutting, lighting a
fire under gold. In last week’s essay I analyzed the
gold bull
breaking out, which was a momentous sea-change event. Gold
rallied 1.0% to $1360 that day with top Fed officials forecasting a
new rate cut next year. Gold-stock traders just shrugged at gold’s
best close in 2.9 years.
They
only bid GDX 1.4% higher to $24.00 after the Fed’s dovish shift.
That only amplified gold’s gains by 1.4x, far short of the major
gold stocks’ normal upside leverage to gold of 2x to 3x.
While gold was high, it had tried and failed for years to break out
above its $1350 resistance zone. And gold stocks suffered big and
sharp selloffs after those previous forays proved unsuccessful.
Traders didn’t expect this time to be different.
That
Fed-Day evening New York time, Asian markets reopened as their
Thursday morning rolled around. The Asian cultures have a deep
cultural affinity for gold, and aggressively piled on in early
trading. All that buying catapulted gold from $1358 to $1383 in
about an hour! Partially thanks to Iran shooting down a big and
sophisticated US surveillance drone overnight, gold’s Asia gains
held in last Thursday’s US trading.
Gold
closed 2.1% higher that day at $1389, a decisive breakout 1%+
beyond its previous bull-market high of $1365 from way back in early
July 2016! That also happened to be a 5.8-year closing high, so
gold-stock traders realized big changes were afoot. They poured
capital into gold stocks with a vengeance, catapulting GDX 4.4%
higher on 3.5x its 3-month-average daily volume! That propelled it
to $25.05 on close.
That
was a critical technical level, as this GDX chart shows. It looks
at the gold-stock price action of the last several years or so
during gold’s own parallel bull market. GDX is rendered in blue,
its key 50-day and 200-day moving averages in white and black, and
2.5-standard-deviation bands in light yellow. This leading
gold-stock ETF had to decisively best years-old upper resistance at
$25 to prove this time is different.
Since late 2016, GDX has largely been trapped in a giant
consolidation basing trend running from $21 support to $25
resistance. $25 had proven a graveyard in the sky for gold stocks
since November 2016, and needed to be overcome to change bearish
psychology. GDX’s $25.05 close last Thursday on that new secular
gold high was right there. But $25 resistance had to be
broken decisively to impress traders.
Last
Friday gold climbed another 0.7% to $1399 on pure momentum, yet
gold-stock traders were worrying again. So GDX’s resulting 0.6%
rally was pathetic, actually lagging gold. While not a decisive
breakout over $25.25, or 1% above that long-vexing resistance line,
GDX’s $25.21 close was darned close. The major gold stocks as
measured by this ETF hadn’t been higher in 21.4 months. That was
certainly bullish.
Last
Friday and this Monday it was becoming evident that new-high
psychology was taking root in gold. That is a powerful force
motivating speculators and investors to buy. GDX $25 finally being
materially surpassed has long been the key to unleashing this
self-reinforcing sentiment in gold stocks. A couple weeks ago when
GDX had merely climbed to $23.33 at best, I wrote about this
coming critical
breakout.
“The
higher gold stocks climb, the more traders will want to buy them to
ride that momentum. The more capital they deploy, the more gold
stocks will rally. This normal virtuous circle of improving
psychology and buying will become even more exaggerated as GDX $25
is surpassed. Seeing the highest gold-stock levels in several years
will work wonders to improve sector sentiment, unleashing widespread
bullishness.”
“This gold-stock upleg’s potential gains are massive spanning such a
major upside breakout. Remember speculators and investors love
chasing winners, so the higher gold stocks rally the more attractive
they’ll look.” Nothing drives trader interest and thus capital
inflows like major new highs. And GDX was right on the verge
of entering that excitement-fueling zone decisively over $25 as
markets opened for trading this week.
This
Monday gold surged another 1.4% higher to a dazzling $1419 close!
That new 6.1-year high was fueled by sheer momentum, there was
little gold-moving news that day. Gold’s new-high psychology was
already feeding on itself. And that enthusiasm spilled into gold
stocks, with traders bidding GDX another 3.8% higher to $26.17.
That was the long-awaited decisive $25 breakout, with GDX
blasting 4.7% beyond!
The
importance of gold stocks powering through to new 2.7-year highs
cannot be overstated. Major new highs act like magnets
attracting traders’ attention, interest, and capital. They prove
that the long-ignored gold stocks are in bull-market-rallying mode
again, portending massive gains to come. They also garner media
coverage, which greatly increases the number of traders looking to
ride the breakout momentum.
Since late May’s depressing low, GDX had rocketed a huge 28.2%
higher in just 18 trading days! Stock traders would kill for those
kinds of fast gains. And the major gold stocks’ upleg-to-date
advance per this ETF had grown to 48.9% over 9.4 months. That would
be impressive for any sector, but is actually still on the smaller
side for the high-potential gold stocks. Their uplegs have tended
to grow much larger in the past.
The
last time gold was hitting new bull-market highs was in the first
half of 2016. That was the maiden upleg of this bull, where gold
soared 29.9% higher in just 6.7 months. The resulting excitement
fueled a deluge of capital roaring into gold stocks, which
skyrocketed GDX an incredible 151.2% higher in roughly that
same span! While that upleg was exceptionally large, the last major
gold-stock bull’s uplegs were big.
Before GDX came along, the primary
gold-stock
benchmark was the classic HUI NYSE Arca Gold BUGS Index. Like
GDX it tracks most of the same major gold stocks, so HUI and GDX
price action are usually indistinguishable. The last gold-stock
bull straddling GDX’s birth saw the HUI soar 1664.4% higher over
10.8 years between November 2000 to September 2011! Those gains
accrued over 12
separate uplegs.
One
was an anomaly, the epic mean-reversion rebound after late 2008’s
first-in-a-century stock panic. Excluding it, the other 11 normal
gold-stock uplegs in that last bull averaged 80.7% gains over 7.9
months per the HUI! So GDX’s 48.9% upleg-to-date advance as of
early this week remains well below precedent to be mature. Odds are
it will grow much larger in line with past major uplegs before
giving up its ghost.
Gold
stocks paid a terrible price as gold drifted sideways over the last
several years, trapped under that $1350 resistance zone which masked
its in-progress bull. That’s why GDX mostly meandered between those
$21 support and $25 resistance lines since late 2016. That chronic
inability to break out to new highs gradually scared away the great
majority of traders, leaving gold stocks incredibly undervalued.
Gold-stock prices are ultimately determined by gold, because it
overwhelmingly drives their earnings. So one way to measure
gold-stock “valuations” is looking at them relative to gold.
This can be done using the GDX/GLD Ratio, the leading gold-stock
ETF’s price divided by the flagship gold ETF’s price. That of
course is the GLD SPDR Gold Shares. I last wrote about and
analyzed the GGR
in an early-February essay.
This
Monday as GDX finally decisively broke above $25 to close at $26.17,
GLD’s shares closed way up at $133.94. That made for a GGR of just
0.195x at the best gold-stock levels in several years. Yet that was
still really low by historical standards. The last normal
years for the gold market were arguably 2009 to 2012. That stretch
was sandwiched between 2008’s stock panic and the Fed’s
QE3 stock-market
levitation.
The
resulting extreme and irrational stock euphoria had a
devastating
impact on gold. But from 2009 to 2012 before markets became
wildly central-bank-distorted and fake, the GDX/GLD ratio averaged
0.381x. That encompassed all kinds of gold environments, from
strong bull to budding bear. So there’s no better recent span to
approximate gold stocks’ “fair value” relative to gold. Applying
that today is super-bullish.
At
Monday’s $133.94 GLD close, that historical-average fair-value GGR
would put GDX at $51.03. That is a whopping 95.0% higher than its
actual close that day! Gold stocks are literally trading at just
half of where they ought to be at today’s gold prices, meaning they
still need to double just to catch up. And that doesn’t
account for higher future gold prices or the GGR overshooting
proportionally higher after mean reverting!
At
best GDX has powered 151.2% higher within gold’s current bull. But
during gold’s last secular bull, the HUI skyrocketed an astounding
1664.4% higher over 10.8 years! Gold stocks are one of the
highest-potential sectors in the entire stock markets. When
they really start running the resulting gains can truly generate
life-changing wealth. That’s why contrarians are willing to suffer
between their mighty bull runs.
This
week’s long-awaited GDX $25 breakout is a critical technical
milestone that is likely signaling much-bigger gains to come. The
gold-stock surge this month is really special, actually the
strongest early-summer performance for this sector in modern
gold-bull history! Normally this time of year I’d be updating my
gold-summer-doldrums research, highlighting the weakest time
of the year seasonally for gold stocks.
Hopefully I can find time next week. This chart looks at the HUI’s
average summer performances in all modern gold-bull-market years.
Each summer is individually indexed to its final close in May,
keeping gold-stock price action perfectly comparable regardless of
prevailing gold levels. The yellow lines show 2001 to 2012 and 2016
to 2017. Last year’s summer gold-stock action is rendered in light
blue for comparison.
All
these lines averaged together form the red one, revealing the
center-mass drift trend of gold stocks in market summers. Gold
stocks’ current 2019 summer action is superimposed over all that in
dark blue. As you can see, this past month’s action is the best
summer start gold stocks have seen since at least 2001! They
are even tracking better than the summer of 2016 in this gold bull’s
mighty maiden upleg.
This
chart really illuminates how unique gold stocks’ powerful June rally
has been. This is more evidence that a sea-change sentiment
shift is underway in this long-neglected sector. That sure
implies the gains to come will be much larger than traders expect,
driving GDX towards its own new bull highs on balance. In early
August 2016, GDX hit its bull-to-date high of $31.32. That’s 19.7%
higher than Monday’s breakout close.
The
major gold miners’ fundamentals remain strong and bullish too,
supporting much-higher stock prices. After every quarterly
earnings season, I dig deep into the GDX gold miners’ fundamentals.
They finished reporting their
latest Q1’19
results about 6 weeks ago, and I wrote a comprehensive essay
analyzing them. At that point GDX was still really out of favor,
languishing under its $21 multi-year support line.
Stock prices are ultimately determined by underlying corporate
earnings, and for the gold miners that is totally dependent on
prevailing gold prices. Gold-mining costs are best measured in
all-in-sustaining-cost terms. In Q1’19 the GDX gold miners’ AISCs
averaged $893 per ounce. That’s right in line with the prior four
quarters’ trend of $884, $856, $877, and $889. Gold-mining profits
are going to soar with higher gold.
Gold
averaged $1303 in Q1 when the major gold miners were producing it
for $893. That implies they were earning $410 per ounce mined.
$1400 and $1500 gold are only 7.4% and 15.1% higher from there. As
the GDX gold miners’ AISCs reveal, gold-mining costs are largely
fixed from quarter to quarter and don’t follow gold higher. So
assuming flat AISCs, gold-mining profits surge to $507 at $1400 and
$607 at $1500.
That’s 23.7% and 48.0% higher from Q1’19 levels on mere 7.4% and
15.1% gold gains from that quarter’s average price! And as of
earlier this week, gold had already climbed 9.2% of that. The major
gold miners’ fundamentals are already bullish, but improve
greatly at higher prevailing gold prices. With earnings growth
hard to come by in general stock markets this year, the gold stocks
will be even more alluring.
All
the stars are aligning for big gold-stock gains in coming months,
with their technicals, sentiment, and fundamentals all looking very
bullish. This breaking-out gold-stock upleg has excellent potential
to grow much larger later this year, greatly rewarding contrarians
buying in early. More and more traders are becoming aware of this
sector’s huge potential, and their buying will push the gold stocks
much higher.
This
is not the summer to check out, but to do your homework and get
deployed in great gold stocks. All portfolios need a 10%
allocation in gold and its miners’ stocks! Many smaller
mid-tier and
junior miners have superior fundamentals and upside potential to
the majors of GDX. And by the time gold stocks get really exciting
again hitting their own new bull highs, much of the easy gains will
have already been won.
One
of my core missions at Zeal is relentlessly studying the gold-stock
world to uncover the stocks with superior fundamentals and upside
potential. The trading books in both our popular
weekly and
monthly
newsletters are currently full of these better gold and silver
miners. Mostly added in recent months as gold stocks recovered from
selloffs, their unrealized gains were already running as high as
+109% this week!
If
you want to multiply your capital in the markets, you have to stay
informed. Our newsletters are a great way, easy to read and
affordable. They draw on my vast experience, knowledge, wisdom, and
ongoing research to explain what’s going on in the markets, why, and
how to trade them with specific stocks. As of Q1 we’ve recommended
and realized 1089 newsletter stock trades since 2001, averaging
annualized realized gains of +15.8%! That’s nearly double the
long-term stock-market average. Subscribe
today and take advantage of our 20%-off
summer-doldrums sale!
The
bottom line is gold stocks have joined gold with their own decisive
breakout! GDX finally burst back above its long-oppressing $25
upper-resistance line this week. These multi-year highs are a game
changer for gold stocks, ushering back long-absent bullish
psychology enticing traders to return. They’ve been gone for so
long that this entire gold-mining sector is deeply undervalued
relative to prevailing gold prices.
That
portends huge upside potential as gold and its miners’ stocks return
to the limelight on their major breakouts. Traders love chasing
winners to ride their upside momentum, and buying begets buying. Of
course gold-stock uplegs don’t power higher in straight lines,
periodic selloffs to rebalance sentiment are normal and healthy. So
any material gold-stock weakness should be used to accumulate
sizable positions. |