The
gold miners’ stocks are still languishing deeply out of favor,
largely left for dead. Their low prices are collateral damage from
this past summer’s anomalous pair of extreme gold-futures-selling
episodes on Fed-tightening fears. But this bombed-out sector is due
for a major mean reversion higher. Gold stocks’ technicals,
sentiment, and fundamentals are all aligned to fuel a strong
resumption of their interrupted upleg.
The
leading gold-stock benchmark, the GDX VanEck Gold Miners ETF, was
set up for a good summer. Between early March to mid-May, it
powered 28.4% higher in a solid young upleg. With its four previous
uplegs during this secular gold bull averaging massive 99.2%
absolute gains over 7.6 months each, the gold stocks had great
upside potential. But their mounting fifth upleg was torpedoed in a
surprise attack.
In
mid-June the Fed’s Federal Open Market Committee met, as it does
eight times per year. The FOMC didn’t do anything that day, neither
slowing its colossal quantitative-easing money printing nor hiking
its federal-funds rate off the zero-lower-bound. The Fed didn’t
even hint at any coming QE tapering or a new rate-hike cycle. Yet
unofficial distant-future rate projections by top Fed
officials came in slightly-hawkish.
Just
a third of those guys expected to maybe see two quarter-point rate
hikes way out into year-end 2023, about 2.5 years into the
future! That somehow freaked out hyper-leveraged gold-futures
speculators, who fled in a torrent of long selling. That hammered
gold sharply lower, which the gold stocks leveraged like usual
really damaging sentiment. Normally GDX amplifies gold’s
significant price moves by 2x to 3x.
Gold
soon resumed grinding higher on balance out of that
Fed-tightening-fears anomaly, and gold stocks eventually followed.
Then unbelievably in early August another extreme episode of
gold-futures selling erupted! A modest upside surprise in monthly
US jobs ignited a US-dollar rally as traders expected the Fed to
start slowing its QE money printing sooner. Some large trader
seized that for a manipulation op.
In
super-illiquid Sunday-evening trading, they slammed gold by short
selling an enormous amount of gold futures all at once. Brazen
manipulation is the only explanation for such a huge slug of
shorting unloaded instantly at such an odd low-volume time. That
rare gold-futures shorting attack was an attempt to run
long-side stops, unleashing cascading selling. It wasn’t too
successful, but still hit gold and its miners’ stocks hard.
When
the dust settled on that reporting week, speculators’ gold-futures
shorting had skyrocketed near an all-time record! With gold
anomalously bludgeoned for a second time in just 7 weeks, gold-stock
sentiment continued to deteriorate. Bearishness exploded, which
soon climaxed in heavy capitulation washout selling in mid-August.
The gold stocks were wholesale abandoned, with contrarian traders
fleeing in droves.
The
technical damage in this sector was severe, as seen in gold stocks’
summer seasonals. This chart is updated from my
summer-doldrums
research thread. It looks at sector performance during all
modern gold-bull years during market summers. The older HUI
gold-stock index is used since GDX’s history is insufficient for
this longer study. All summers are individually-indexed in
perfectly-comparable percentage terms.
May’s final close is set at 100, then gold-stock price action is
recast off that common baseline. Incredibly those two anomalous
bouts of extreme gold-futures selling pounded gold stocks into one
of their worst summers ever! That implies this sector is way
oversold, and due to mean revert much higher back into more-normal
territory. There’s a massive deviation from where gold
stocks are and where they ought to be.
The
gold stocks were consolidating high in early June before that
FOMC-dot-plot hawkish surprise ignited the first round of extreme
gold-futures selling. That crushed this sector well under the lower
support of its normal summer trading range, which runs +/-10% from
May’s final close. Gold stocks finally started to recover soon
before early August’s US-jobs upside surprise provided cover for
that gold-futures shorting attack.
That
stoked bearishness to such irrational extremes that heavy
capitulation selling flared violently a couple weeks later, even
though gold prices were stable. As a result, the gold stocks
plunged to an indexed level of just 75.2! They had lost a quarter
of their value summer-to-date, their worst performance ever at that
point in all 18 modern gold-bull years. On average their seasonal
low is just 98.6 back in mid-June.
There were only two other summers where the gold stocks carved some
lower lows, 2002 and 2009. In the former year, this sector
collapsed as low as 67.2 indexed in late July. The culprit was
again extreme gold-futures selling battering gold lower. But
gold stocks soon mean-reverted sharply higher out of those deep
summer lows. By early September this sector had soared 45.3% to
regain 97.6 in indexed terms!
In
the latter year, the gold stocks collapsed to 78.6 indexed in early
July. That was more righteous then, as that older HUI index had
just skyrocketed 162.7% higher in only 7.2 months out of October
2008’s brutal stock panic! So a correction was necessary to
rebalance sentiment, and it happened during that summer. Yet out of
that anomalous summer low, the gold stocks still soon mean reverted
sharply higher.
By
mid-September 2009, this sector had blasted 42.1% back higher to
achieve 111.8 indexed! The principle here is clear. After extreme
selling episodes hammer gold stocks to deep anomalous lows over
summers, they tend to soon mean revert sharply higher.
There’s a massive deviation between where the gold stocks were this
week at 78.5 indexed and where they normally are now way up at 108.3
on average.
Gold
stocks’ powerful
autumn rally driven by gold’s own parallel one normally gets
underway earlier in summers before gathering momentum later in
summers. That August-and-September timeframe has long proven one of
the seasonally-strongest spans for gold miners. So technically they
have vast ground to make up after getting pummeled so low in
mid-August. And that mean reversion is increasingly likely.
Markets abhor sentiment extremes, which are always necessary to
force technical extremes. When gold stocks are trading at
deeply-oversold lows, fear and despair are overpowering. That
forces weak-handed traders to flee in droves, giving up at exactly
the wrong time to sell out near major durable lows. But that heavy
capitulation selling soon burns itself out, as everyone susceptible
to being scared into selling low is gone.
That
redistributing flushing leaves only buyers, hardened contrarian
traders tough enough to fight the herd and buy low. These guys have
spent many years studying the markets, coming to understand the
endless flowing and ebbing of gold-stock cycles. They have
multiplied their wealth many times in those massive-gold-stock-upleg
doublings. Their buying is tentative at first, but soon accelerates
as gold stocks rally.
The
more contrarians buy in low, the faster gold stocks bounce out of
extreme lows. The stronger that inevitable mean-reversion rebound
grows, the more additional capital this sector attracts. This
powerful virtuous circle of buying begetting buying is what fueled
gold stocks’ big-and-fast 45% and 42% rebounds out of those
anomalous lows in the summers of 2002 and 2009. That magnitude of
mean reversion fits today.
To
claw all the way
back up to September’s average modern-gold-bull-year high of
111.5 indexed, the HUI would have to rocket up 48.2% from
mid-August’s deep low! That is right in line with past summers’
mean-reversion precedent from anomalous extreme selling. This last
summer’s GDX closing low on August 20th was $30.83, down 21.8%
summer-to-date. A 40% rally would carry GDX back above $43.
This
technical and sentimental case for a massive gold-stock mean
reversion higher is bullish enough to stand on its own. If this
were the entire story, this left-for-dead sector would be a
screaming buy right now. But interestingly the fundamental case for
regaining much-higher gold-stock prices is actually even stronger.
The gold miners also happen to be deeply undervalued relative
to today’s prevailing gold prices!
Stock prices ultimately have to normalize to reflect some reasonable
multiple of underlying corporate earnings. The economics of this
industry are simple, average gold prices less average production
costs drive profitability. The gold miners earned hefty profits
in their
recently-reported Q2’21 results, which I analyzed and wrote
about in a mid-August essay. They are earning money hand over fist
at these gold levels!
That
was readily apparent in trailing-twelve-month
price-to-earnings-ratio terms, with many of the GDX gold miners
trading at cheap multiples in the teens and even single-digits!
In my decades studying and actively trading gold stocks, they are
as cheap fundamentally as I’ve ever seen. Gold-stock prices need to
power way higher to reasonably reflect their fat earnings driven by
today’s still-high prevailing gold prices.
A
great proxy for sector earnings is calculated by subtracting GDX
gold miners’ average all-in sustaining costs in a quarter from its
average gold prices. Those numbers ran $1,037 AISCs and $1,814 gold
in Q2’21, working out to huge unit profits of $778 per ounce. That
proved the third-highest on record for the gold miners! And
remember mid-June within Q2 is when that first extreme gold-futures
selling hit post-FOMC.
Despite early August’s crazy gold-futures shorting attack, gold is
still averaging an impressive $1,797 quarter-to-date in Q3. That is
running a trivial 0.9% under Q2’s lofty levels. On top of that,
many of the GDX gold miners are forecasting higher production in
Q3 and Q4 as ore grades improve and expansions ramp up. Better
production lowers unit costs proportionally, so this current
quarter’s AISCs should retreat.
So
the gold miners’ latest earnings in Q3 should either hold near Q2’s
great heights or even improve! If gold itself mean reverts higher
as it ought to through the rest of this quarter, gold-miner profits
will grow even larger. So with gold stocks trading at dirt-cheap
prices relative to gold, their fundamental outlook remains strong.
That really amplifies their mean-reversion upside potential as their
interrupted upleg resumes.
Gold-stock earnings and thus valuations are overwhelmingly driven by
gold’s fortunes. So considering gold-stock price levels relative
to gold’s own offers insights on whether gold stocks are
undervalued or overvalued. One ratio distilling out this core
fundamental relationship looks at GDX’s prices divided by those of
the leading and dominant GLD SPDR Gold Shares gold ETF. This
quantifies mean-reversion upside.
As
secular gold bulls gradually march higher, traders increasingly
believe those uptrends are sustainable. So they deploy more capital
in gold stocks, slowly pushing up their valuations. This uptrend is
readily evident in this GDX/GLD Ratio or GGR in recent years. While
gold-stock cycles are volatile with massive uplegs and corrections,
on balance miners are regaining ground relative to gold.
This uptrend context is key.
But
gold-stock valuations can greatly deviate from this GGR uptrend at
times. They get way overbought after major uplegs, leaving the
miners overvalued compared to their metal. And they get deeply
oversold after major corrections, which pummel gold stocks down to
super-undervalued levels. But those valuation extremes never last
for long, they soon peak and give way to major mean-reversion
reversals in opposite directions.
March 2020’s pandemic-lockdown stock panic slammed gold stocks so
mercilessly the GGR plummeted way down to 0.133x! That deep
sub-support time was short-lived though, as a massive new upleg soon
erupted. As usual the gold stocks way outperformed gold’s own
upleg, with GDX skyrocketing 134.1% in just 4.8 months! That pushed
the GGR well above its uptrend’s resistance to a 4.0-year high of
0.241x.
That
gold-stock overboughtness and overvaluation fueled by extreme greed
soon yielded to a downside mean reversion in a major correction.
Whenever the GGR is pushed or pulled well out of its uptrend, a big
reversal swing in the opposite direction soon gets underway.
That’s another reason why gold stocks look so darned bullish today.
In late August the GGR collapsed way down to 0.185x, well under
uptrend support!
Such
seriously-undervalued levels relative to gold imply another major
mean reversion higher is imminent in this battered sector. Gold
stocks should outperform enough during gold’s resumed upleg to drive
this GDX/GLD Ratio back up to upper resistance which is
running over 0.24x. Run the numbers on that, and it portends big
coming upside based on gold miners’ fundamentals. Gold stocks are
due for a major upleg.
As
usual that will be driven by gold’s own upleg, which will also be
the fifth in this secular bull. The first four averaged big 33.3%
gains. Unlike gold stocks, this past summer’s couple of
extreme-gold-futures-selling episodes didn’t force gold to a deeper
correction low. The yellow metal decisively bottomed at $1,681 back
in early March. Another average 33.3% upleg from there would
ultimately propel gold to $2,241.
There are plenty of strong arguments that this bull’s fifth upleg
should grow much larger. One is the Fed’s epic money printing.
Since that March-2020 stock panic, the Fed’s balance sheet has
ballooned by an astounding 93.6% or $4,037b! Nearly doubling the
US-dollar supply in just a year-and-half leaves wildly more
money to compete for and bid up gold. Its aboveground supply only
grows 1%ish per year from mining.
The
raging price inflation that radically-unprecedented deluge of new
money has spawned isn’t going away unless the Fed unwinds its
colossal bond buying through
quantitative
tightening. But that would kill these lofty stock markets
levitated by trillions of dollars of QE. Gold investment demand can
only grow as that flood of money keeps forcing prices higher.
Investment buying easily overwhelms gold-futures selling.
But
to be conservative, even a mere 20% gold upleg would push this metal
back up to $2,017. That is still under its last upleg’s peak of
$2,062 in early August. Translated into GLD terms, that yields a
gold-ETF share price around $189. Apply that GGR-uptrend-resistance
valuation ratio of 0.24x to that GLD level, and it implies a GDX
target of $45.36. That lowballed outlook is still 40.9% above
this week’s GDX prices!
Plug
in numbers for a larger gold upleg, the rising GGR resistance line,
and an overbought overshoot as gold stocks’ next major upleg peaks,
and the GDX upside targets are way higher. As last year’s
mighty post-stock-panic specimen proved, gold-stock uplegs born out
of anomalous valuation lows tend to grow massive before giving up
their ghosts. Another mean reversion upleg is due today, and is
likely to get big.
So
despite the vast majority of traders either hating or ignoring gold
stocks now, they should be pouring capital into this battered
sector. Incredible bargains abound with gold stocks’ technicals,
sentiment, and fundamentals all strongly supporting resuming this
sector’s extreme-gold-futures-selling-interrupted upleg. While it
is never easy to fight the herd and buy in low, those great entry
prices lead to much-larger gains.
Thanks to gold-futures speculators freaking out about both
distant-future Fed rate hikes and QE tapering slowing money
printing’s pace, it’s been a rough summer in gold stocks. We
suffered stoppings in some of our newsletter trades on those
anomalous selloffs. But with gold and gold-stock outlooks remaining
so bullish, we redeployed in fundamentally-superior
mid-tier and
junior gold miners to keep our trading books full.
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 current young upleg as high as +51.5% on our recent newsletter
stock trades!
To
multiply your wealth trading high-potential gold stocks, you need to
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The
bottom line is gold stocks are due for massive mean reversions after
this past summer’s anomalous extreme gold-futures-selling episodes.
That bashed gold stocks to deeply-oversold levels technically, which
spawned super-bearish sentiment. And with gold miners’ earnings so
strong, their valuations were also crushed to dirt-cheap levels.
These excesses aren’t sustainable, portending another major upleg
coming.
Market extremes are soon followed by sharp reversals in the opposite
direction to normalize relationships. Both gold’s and gold stocks’
parallel uplegs interrupted by mid-summer
distant-future-Fed-rate-hike fears are set to resume powering
higher. That means beaten-down gold stocks should see major upside
during coming months. As always the biggest gains will be won by
the contrarian traders buying in early and low. |