The
battered gold miners’ stocks are languishing deeply out of favor
again, drifting listlessly through their summer doldrums. They were
flying high a couple months earlier, before being crushed by a
big-and-fast gold plunge. But the heavy gold-futures selling
driving that has passed, leaving speculators’ positioning very
bullish for gold. They will soon buy back in to normalize their
bets, fueling a big gold and gold-stock ramp.
Traders are a myopic what-have-you-done-for-me-lately lot, endlessly
chasing short-term momentum. Fixated on whatever is happening
immediately, they quickly lose essential perspective on broader
trends. They tend to extrapolate current conditions out into
infinity, expecting them to continue indefinitely. So the recent
tough bearish gold-stock action has relegated this small contrarian
sector back to pariah status.
Between mid-April to mid-May, gold stocks’ leading benchmark the
GDX VanEck Gold
Miners ETF just collapsed 26.2% in 0.8 months! That
brutal plunge culminated in a capitulatory mass-stopping, ravaging
sentiment. All bullishness was obliterated, displaced by
overwhelming universal pessimism. Weak price action over the
following month didn’t help. After a bounce fizzled, GDX slumped
another 1.6% into mid-June.
That
marginal new low last week extended gold stocks’ total correction to
27.3% over 1.9 months. Now traders are mostly convinced this sector
is doomed to grind considerably lower. But herd psychology is
always wrong near inflections, when short-term trends reverse.
Once gold-futures buying returns driving gold and its miners’ stocks
higher, big gains rapidly accrue. The last truncated gold-stock
upleg showed that.
Between late January to mid-April, GDX blasted 39.5% higher in just
2.6 months! As it forged ahead over $40 just a couple months ago to
achieve gold stocks’ best levels in 17.4 months, bullishness was
building on this high-flying sector. But all that was smashed when
an anomalous monster parabolic US-dollar surge erupted on
extreme Fed hawkishness. That spawned heavy gold-futures selling
bludgeoning gold stocks.
This
sector’s roller-coaster ride in 2022 is readily-evident in this
longer-term GDX chart. Gold stocks have rapidly fallen from grace
since mid-April, leading to their current bombed-out technicals.
But recent $30ish levels have proven strong support since September
2021. The major gold stocks dominating this ETF have bounced near
these levels five times since. A sixth is highly-likely given
today’s gold-futures setup.
Before the Fed’s
most-hawkish pivot ever launched the US dollar stratospheric,
GDX’s young upleg this year was growing impressive. Even after
gold’s Russia-invading-Ukraine geopolitical spike peaked at
very-overbought levels in early March, the gold stocks kept
marching higher on balance. Their own crest wasn’t seen until
almost six weeks later in mid-April, when that heavy gold-futures
selling suddenly flared.
As I
analyzed in my essay last week on this
topping dollar
being gold-bullish, the US Dollar Index soared on extreme Fed
hawkishness. Top Fed officials were aggressively jawboning
about really accelerating their new rate-hike cycle, with bigger
50-basis-point hikes at coming Federal Open Market Committee
meetings. They were also laying out plans for big
quantitative-tightening bond selling at unprecedented levels.
Over
three FOMC meetings starting in mid-March, Fed officials hiked their
federal-funds rate by 25bp, 50bp, and 75bp! Early May’s 50bp hike
was the first since May 2000, while last week’s massive 75bp beast
was the first since November 1994! At both recent meetings the Fed
chair himself said more 50bp hikes are very likely at coming
meetings. Resulting much-higher US-dollar yields drove a stampede
into it.
And
in early May, the FOMC also laid out its aggressive QT2 plans to
start unwinding QE4’s ludicrous $5,016b of money printing. QT2
would start in June with $47.5b of monthly bond runoffs, then
double just three months later in September to a $95b-per-month
terminal pace! That dwarfs QT1, which ramped way slower taking an
entire year to reach $50b monthly. Monetary destruction on QT2’s
scale is unprecedented!
The
Fed has never before lurched so hawkish so fast in its entire
109-year history. That catapulted the US dollar vertical,
unleashing withering gold-futures selling. That hammered gold 8.4%
lower from mid-April to mid-May, directly driving GDX’s ugly 26.2%
parallel plummeting. But speculators puking out massive amounts of
gold futures has exhausted their capital firepower available for
selling, which is very bullish for gold.
This
next gold-futures-positioning chart was analyzed in depth in last
week’s essay on the dollar and gold. But it is equally as important
for gold stocks’ fortunes. Speculators’ total gold-futures
contracts on both the long and short sides are published weekly in
the famous Commitments of Traders reports. They have returned to
excessively-bearish levels that birth major gold uplegs. Gold
stocks will amplify gold’s coming gains.
Specs’ total gold-futures longs and shorts in recent years are
rendered in green and red here. They are both trending in ranges, a
wide consolidation for longs and a modest uptrend for shorts. Since
mid-April when the US Dollar Index started shooting parabolic,
speculators have done huge gold-futures selling! The green
longs line has collapsed to major support, while the red shorts line
surged near major resistance.
CoT
weeks are reported current to Tuesday closes, and there’s a
five-CoT-week span from mid-April to mid-May that encompasses those
brutal 8.4% and 26.2% plunges in gold and GDX. Specs jettisoned
59.8k gold-futures long contracts during that month-plus, while
adding another 21.4k short ones. That added up to the equivalent of
252.6 metric tons of gold spewed into global markets during that
brief timeframe!
That
was way too much too fast to absorb, so gold plunged dragging
the gold stocks down with it. The reason both gold’s and GDX’s
bounces since mid-May failed is this gold-futures selling moderated
but persisted. In the four reported CoT weeks since then, specs
dumped another 21.3k longs and sold 7.0k more shorts. That made for
more gold-equivalent selling of 88.1t during this past month,
keeping gold down.
During the nine reported CoT weeks since mid-April when gold was up
over $1,975 and GDX neared $41, speculators’ gold-futures
gold-equivalent selling ran -39.1t, -81.6t, -54.3t, -12.7t, -64.9t,
+15.8t, -37.0t, -0.5t, and -66.3t! That’s a lot of gold vomited
into world markets in a short span of time, fully explaining why
gold and its miners’ stocks corrected hard. But all this selling
paved the way for big mean-reversion buying.
Gold’s recent improving price action relative to the USDX proves
specs’ gold-futures selling is mostly-exhausted. From mid-April to
mid-May, this leading US-dollar benchmark skyrocketed 4.9%
higher! That is a blistering monster rally for the world’s
reserve currency, which usually meanders at a glacial pace. During
that span, gold lost 7.8% on heavy gold-futures selling which
blasted GDX a brutal 25.9% lower.
While the extraordinarily-overbought USDX retreated after
that shocking parabolic surge, big dollar buying reignited in early
June. That was leading into another red-hot CPI headline inflation
report, and fears the FOMC would abandon its earlier forward
guidance for mid-June’s meeting for a 50bp hike in favor of that
huge 75bp one. So in just over a couple weeks, the USDX blasted up
3.8% to a lofty 19.5-year secular high!
That
latest monster dollar surge was even more intense, averaging daily
gains of 0.34% which were much faster than the 0.25% from mid-April
to mid-May! Yet with speculators running out of
gold-futures-selling firepower after that earlier dump, gold only
fell a much-milder 2.5% in early June. GDX amplified that to a
much-smaller 8.6% loss. Again that compared to -7.8% for gold and
-25.9% for gold stocks into mid-May.
So
the yellow metal and its miners’ stocks have shown way more
relative strength against this incredibly-strong dollar in
recent weeks. That’s because spec gold-futures selling is rapidly
exhausting. These hyper-leveraged traders have dumped about as many
gold contracts as they can. Back to the spec-longs trading range in
this chart, major support is near 312k contracts. Last Tuesday
total spec longs hit 312.3k!
That’s the latest-available CoT data when this essay was published,
as CoT reports current to Tuesdays aren’t released until late Friday
afternoons. Spec longs are unlikely to head much lower, as the
traders willing to sell gold futures are mostly out based on this
multi-year trend. Total spec shorts were running way up at 133.8k
contracts last Tuesday, nearing the 138k upper-resistance line of
their own multi-year uptrend.
So
speculators’ available capital firepower to keep dumping
gold-futures longs and adding shorts looks to be mostly spent.
I analyze specs’ overall gold-futures positioning each week in our
popular newsletters, to help game high-probability-for-success
gold-stock-trade entries and exits. An indicator recasts this CoT
data into past-year-trading-range terms, looking at spec longs and
shorts compared to their 52-week trends.
The
latest-available CoT had June-14th data, the eve of that last FOMC
meeting with that huge 75bp rate hike. Total spec longs were
running just 6% up into their past-year trading range, while total
spec shorts were fully 75% up into their own! That was nearing
the most-bullish-possible short-term setup for gold, which is 0%
longs and 100% shorts. With longs sold-out and shorts maxed, that
leaves room for nothing but buying.
And
since total spec longs outnumbered their shorts by 2.3x, they are
proportionally-more-important for the coming price action in gold
and gold stocks. Likely within the next few weeks, some catalyst
will ignite big gold-futures buying to normalize specs’
excessively-bearish bets on gold. It will likely be the
radically-overbought USDX rolling over, probably on something that
moderates the Fed’s uber-hawkish jawboning.
Maybe a monthly US jobs report or headline-inflation print will come
in way below expectations, taking pressure off the FOMC to keep
hiking its FFR so fast. Maybe corporate-profits warnings for the
upcoming Q2 earnings season will pound the US stock markets deeper
into bear territory, scaring Fed officials into backing off their
crazy-hawkish rhetoric. And maybe it will simply be no more
hawkish surprises from the Fed.
Its
most-extreme hawkish pivot ever is over, that can’t keep goosing the
US dollar. Traders already expect more 50bp-to-75bp rate hikes
coming, those are already priced-in. And there’s no way the Fed
will risk accelerating its aggressive QT2 campaign with stock
markets already in bear territory. The FOMC
caved on QT1 way
prematurely soon after it hit its terminal velocity in Q4’18, as
the stock markets threatened a bear.
The
US dollar is getting more competition on the yields front too, with
other major central banks starting to hike their own rates.
Aggressive rate-hike cycles are already underway at the Bank of
Canada, Bank of England, and Swiss National Bank. And the European
Central Bank has signaled launching its own rate-hike cycle at its
next meeting in late July. The ECB’s euro dominates the USDX at
57.6% of its total weighting!
So
the US dollar’s days of shooting parabolic are over, leaving it
increasingly likely to retreat rapidly to normal levels. That
will unleash big gold-futures buying, soon catapulting the yellow
metal and its miners’ stocks way higher. As this chart shows,
specs’ latest positioning leaves massive room to buy back gold
futures. The upper-resistance line in spec-longs’ wide sideways
trend is now way up near 413k contracts.
That
leaves room for a huge 100.7k contracts of buying from last week’s
depressed levels! And the lower-support line in spec-shorts’
narrower uptrend is down near 90k contracts, leaving room for
another 43.8k contracts of short-covering buying. That adds up to
an enormous 144.4k contracts of buying potential in the
coming few months, a staggering 449.2 metric tons in gold-equivalent
terms! That would fuel big upside.
During its last upleg which peaked at overbought levels in early
March after Russia invaded Ukraine, gold surged 18.9% higher in 5.3
months partially driven by just 116.8k contracts of spec
gold-futures buying! Investors love chasing upside momentum, so
they pile into gold with their vastly-larger pools of capital once
gold-futures buying drives gold convincingly higher. Gold’s next
upleg could easily power up 25%+.
The
major gold stocks of GDX tend to amplify material gold moves by 2x
to 3x, so that implies 50%-to-75% upside potential. And spec
gold-futures mean-reversion buying usually unfolds rapidly, so those
uplegs are likely to run about three-to-six months. A 25% upleg off
gold’s mid-June low would catapult it way up to $2,259, generating
great precious-metals excitement which entices in big
investment-capital inflows.
And
the resulting 50%-to-75% GDX upleg would carry it way up between $45
to $52! And these are very-conservative projections given the
raging inflation unleashed by the Fed’s epic QE4 money printing.
The resulting
first inflation super-spike since the 1970s is like rocket-fuel
for gold. During the couple plaguing that decade, monthly-average
gold prices nearly tripled during the first
then more than quadrupled in the second!
Today’s battered gold-stock prices are an anomaly, an outstanding
contrarian buying opportunity. Their recent plunge was totally
driven by heavy gold-futures selling, which has already exhausted
itself. That in turn was spawned by a monster US-dollar surge,
leaving it extraordinarily-overbought. The Fed’s most-extreme
hawkish pivot ever fomented that, but no surprises are left
with traders expecting big rate hikes and QT.
All
these extremes are on the verge of reversing hard. A
weakening mean-reverting USDX will soon ignite big gold-futures
buying, which will feed on itself and soon attract in parallel
investment capital inflows. Gold stocks will soar as gold regains
its footing and resumes marching higher. Recent big GDX up days
prove plenty of traders are still watching this sector, ready to
rush back in as gold mean reverts higher.
As
the USDX blasted higher again in the month leading into the FOMC’s
mid-June meeting, gold enjoyed three good rallying days with 1.3%,
1.2%, and 1.2% gains. Though not even particularly large by gold’s
up-day standards, GDX soared 5.6%, 4.3%, and 4.8% on those days
where gold enjoyed strong upside momentum! So make no mistake, lots
of capital is waiting in the wings to flood back in when gold
green-lights it.
A
gold-stock futures ramp nears, and the biggest beneficiaries won’t
be the GDX majors but the smaller fundamentally-superior
mid-tier and
junior gold miners. They enjoy much-better production growth at
their lower scales, and are mostly holding the line on costs. That
means higher gold prices will generate huge earnings growth, which
these smaller-market-capitalization stocks will amplify to
big-and-fast gold-upleg gains.
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The
bottom line is a major gold-futures-buying-fueled gold-stock ramp is
nearing. A monster US-dollar rally driven by an extreme hawkish Fed
pivot unleashed big gold-futures selling in recent months. That
hammered gold and thus its miners’ stocks sharply lower. But that
gold-futures puking has exhausted itself, leaving room for massive
mean-reversion buying to normalize specs’ excessively-bearish bets
on gold.
That
will catapult gold prices much higher in coming months, and gold
stocks will amplify their metal’s gains like usual. The
extraordinarily-overbought US dollar rolling over will ignite that
gold-futures buying. That’s likely soon with the Fed’s ability to
hawkishly surprise traders now passed. They already expect both big
rate hikes and big QT. Today’s bombed-out deeply-undervalued gold
stocks are a great buying opportunity. |