The
gold miners’ stocks have been largely ignored and neglected for
years. Speculators and investors wanted little to do with them for
various reasons. But that apathetic sentiment is finally starting
to shift thanks to last week’s stock-market plunge. Capital is
starting to return to this battered sector as traders begin to
realize how radically undervalued it is. Sentiment mean reversions
can catapult gold stocks far higher.
Sentiment is defined as “a thought, view, or attitude, especially
one based mainly on emotion instead of reason”. We humans are
inherently-emotional creatures riddled with sentiment on almost
everything. That’s especially true in our perceptions of the
financial markets, which heavily influence if not dominate our
trading decisions. We buy and sell stocks when it feels good,
when markets appear to validate our outlooks.
The
core mission of speculation and investment is simple in concept,
buying low then later selling high to multiply one’s wealth. I’ve
given talks to elementary-school kids about trading and they easily
grasp this. But unfortunately actually executing on this in
real-world markets is very challenging because our sentiment
misleads us. Our innate greed and fear relentlessly goad us to buy
and sell at exactly the wrong times.
We
wax greedy and excited after stocks have already rallied massively,
which leads to buying high after most of the gains have already been
won. Then after stocks have suffered major selloffs, our fear and
despair flare brightly convincing us to sell low after losses have
already occurred. Traders who heed their own emotions inevitably
end up buying high then later selling low, which ultimately
decimates their scarce capital.
Our
individual and collective sentiment is overwhelmingly driven by one
thing, prevailing price action. We naturally tend to
extrapolate present conditions out into the indefinite future. So
we assume stocks that are rallying will keep on powering higher
forever, while stocks that are falling are doomed to continue
spiraling lower. Making such linear assumptions in
perpetually-cyclical markets often leads to serious losses.
So
while sentiment might serve us well in other areas of our lives, it
is our worst enemy in the markets. Instead of being embraced, our
inherent greed and fear needs to be ruthlessly suppressed. We can’t
buy low then later sell high if it feels good, because that means
everyone else is doing it at the same time. Instead we have to
fight our hearts and fight the herd, literally buying and selling
when it feels the worst.
Everyone loves the mega tech stocks because they’ve rallied on
balance for many years. But thanks to that very-long bull, they are
dangerously
overvalued. So buying them today may feel good, but their stock
prices are already very high. The time to buy mega tech stocks was
back in March 2009
at the end of the last secular bear when everyone was scared.
Over the next 9.5 years the tech-heavy NASDAQ soared 539.2%.
Leading into March 2009 when mega tech stocks were hated, the elite
NASDAQ 100 stocks sported an average trailing-twelve-month
price-to-earnings ratio of 18.9x. They were relatively cheap with
bearish sentiment peaking. But at the end of last month after that
powerful secular bull, these stocks had an average P/E twice as high
at 37.8x. This is the time to sell high, when traders are exuberant
and euphoric.
The
gold miners’ stocks have the opposite problem. Their prices have
ground lower on balance for so long now that traders have mostly
forgotten about them. They are
incredibly
undervalued and deeply out of favor, choking on suffocating
bearishness. So now is the time to buy low when few others are
willing, which is the secret to multiplying your wealth in the
markets. That’s when stocks are dirt-cheap before big bulls.
The
only speculators and investors able to consistently buy low then
later sell high are contrarians who’ve hardened themselves against
sentiment. They choose to totally disregard their own greed and
fear, and then make the opposite trades of the thundering herd.
They buy low when stocks are unwanted, and then later sell high when
everyone wants them. Contrarian trading is ultimately the
most-profitable way there is!
The
miserable gold-stock sentiment of recent years is starting to shift
because contrarian capital is flowing back into the gold miners’
stocks. This first chart looks at the leading GDX VanEck Vectors
Gold Miners ETF over the past several years or so. It is the
most-popular way to trade the gold-stock sector today, and its
primary benchmark. Historically gold-stock upside has been enormous
when sentiment mean reverts.
Gold
stocks have suffered a rough year which is why their sentiment has
been so darned poor. GDX left 2017 at $23.24 per share, right in
the middle of its consolidation basing trading range running between
$21 lower support to $25 upper resistance. Gold stocks largely
ground sideways this year, leaving them way out of favor.
Speculators and investors love to chase winners to ride momentum,
and gold stocks had little.
Things took a dark turn for the worse in early August, when GDX
started breaking down below that major $21 support line. That heavy
selling soon snowballed into a rare
forced
capitulation, which I explained in depth in a mid-September
essay. At this sector’s echo-capitulation low early that month, GDX
was down a brutal 24.4% year-to-date. So it’s no wonder traders
were very bearish, extrapolating that trend into the future!
Sentiment in gold-stock land was absolutely miserable at that point,
as collective greed and fear are the product of technical price
action. The worse stocks have performed, the more and longer
they’ve fallen, the more bearish traders get on them. The despair
in gold stocks was so thick 6 weeks ago you could cut it with a
knife. Virtually everyone, including professional analysts who
should know better, expected more selling.
Sentiment of course is ethereal, impossible to directly measure.
The only ways to get decent reads on it are to watch what other
people are saying and actually doing with real-world trades. If you
go back and check market commentaries in early September, you’ll
find virtually all of them were very negative on the gold-stock
outlook. I was an exception, writing how
wildly bullish
gold stocks looked the very week they bottomed.
For
decades I’ve been in the financial-newsletter business, researching,
trading, and writing about markets. That blesses me with some
unique ways to analyze prevailing sentiment. First I’m always
getting tons of e-mail questions, thoughts, and feedback from our
subscribers and readers all over the world. The overall tone of
these always gets really bearish and depressed when gold stocks
are carving major bottoms.
The
more dejected people are about gold stocks, the more bullish their
near-term outlook. Conversely when people get excited about the
gold miners, they are usually topping before major selloffs. When
you get dozens to hundreds of personal e-mails every day about the
markets, how traders collectively feel is readily apparent. I try
to share that aggregate sentiment zeitgeist in our newsletters to
help others see it.
Second, our newsletters have always been explicitly contrarian
in focus. We strive to fight the crowd to buy low when few others
will, so we can later sell high when few others can. Interestingly
our hard sales also closely mirror prevailing contrarian sentiment.
When speculators and investors are down on the idea of buying low,
like when gold stocks are really weak, fewer people bother
purchasing our research newsletters.
Over
the past couple decades or so, weakening revenues have been a
telltale sign the gold stocks are bottoming. Unfortunately most
traders are so caught up in their own emotions that they either
don’t seek out or can’t handle contrary opinions. That leads to a
sad ostrich effect in the markets. Most people simply check
out and bury their heads in the sand if prevailing price action
frustrates them, so they miss bottoms.
I’ve
never understood this ill-fated approach. I bought my first stocks
with money earned mowing lawns when I was 12 years old. In high
school I eagerly devoured financial newsletters, which helped me
learn a great deal about markets and trading. If I had only read
about and studied markets when it felt good, I’d have cheated myself
out of all kinds of priceless lessons and essential education. That
makes no sense!
To
gradually grow successful in the exceedingly-challenging realm of
speculation and investment, one can never stop studying and
learning. It’s actually way more important to stay plugged in when
you don’t feel like it, because that’s when markets are bottoming
before massive new bulls. It takes discipline to always stay
abreast of markets, but the ultimate payout in profitable future
trades vastly outweighs the costs.
The
gold stocks indeed started bouncing and reversing following their
deep early-September losses after that forced capitulation ran its
course. Once all the cascading trailing-stop-loss sell orders had
already been triggered, the selling was largely exhausted. So GDX
surged 7.7% higher over the next week and a half or so. But it soon
stalled out near $19, because popular gold-stock sentiment remained
heavily bearish.
That
all started to change last week, when a major inflection point
in the markets was likely witnessed. Out of the blue on October
10th, the flagship US S&P 500 stock index plunged 3.3% on no news!
That was its worst loss by far since a sharp-yet-shallow-and-short
correction in early February, driven by fears of surging 10-year
Treasury yields and hawkish Fedspeak. Such a sharp drop really
spooked complacent traders.
The
S&P 500 had been powering higher on balance for 9.5 years in a huge
bull ballooning to a truly-monstrous 333.2% gain. That was the
longest and second-largest in US stock-market history! That left
traders euphoric, they extrapolated big gains into the indefinite
future. But once their stock-heavy portfolios started getting
whacked, they remembered gold. It is the ultimate portfolio
diversifier, rallying as stocks slide.
Gold
reversed from earlier losses to a minor 0.3% gain that day, no big
deal. But under the surface a big change was happening. After
shunning gold for months as stock markets levitated to new records,
that day American stock investors started buying gold in a
major way. That was evident in the physical-gold-bullion holdings
of the dominant GLD SPDR Gold Shares gold ETF. They surged a
massive 1.2% higher that day!
GLD
acts as a conduit for the vast pools of stock-market capital to
slosh into and out of gold. What GLD’s holdings are doing often
account for the great majority of the changes in global gold
investment demand which drive gold’s price action. I recently wrote
an essay
explaining all this in depth in late September if you need to get up
to speed. When GLD’s holdings are rising, stock-market capital
is flowing into gold.
This
leading gold ETF’s mission is to track the gold price. But the
supply and demand of GLD shares is independent from gold’s own. So
when investors buy GLD shares faster than gold itself is being
bought, its share price threatens to decouple from gold to the
upside. GLD’s managers need to avert this in order to maintain
tracking. So they issue new GLD shares to offset excess demand,
raising capital from those sales.
Then
the proceeds from these GLD-share sales are immediately plowed into
physical gold bullion held in trust for GLD shareholders. So GLD
effectively shunts stock-market capital directly into gold. This
next chart shows GLD’s holdings and the gold price over the past few
years or so. Note the sharp reversal in GLD’s holdings back higher
which ignited that very day the S&P 500 plunged. Gold investment
started to return!
That
1.2% GLD build on October 10th arrested a major multi-month decline
in GLD’s holdings when American stock investors were pulling capital
out of gold on balance. It was a big deal, the first differential
GLD-share buying at all since late July. And it was the biggest GLD
build by far since mid-March. Finally seeing a material
stock-market selloff motivated investors to start redeploying in
gold, a super-bullish omen.
That
wasn’t a flash in the pan either, that investment gold buying
continued with additional GLD builds of 0.8% on Friday the 12th and
0.6% on Monday the 15th. We hadn’t seen sizable capital inflows
into GLD in a multiple-day cluster since early September 2017. So
investor sentiment on gold was starting to shift, potentially in a
major way, on that sharp stock-market plunge. Once that starts, it
tends to run for some time.
After long periods without stock-market corrections, investors grow
way too complacent and forget the risks of stock-heavy portfolios.
They sell down their meager gold allocations to
anomalously-low
levels. So when stock markets inevitably drop again and
rekindle anxiety, they have to do lots of buying to reestablish
more-normal gold positioning to hedge their stocks. So their gold
buying runs for months on end.
Back
in late 2015 a pair of back-to-back S&P 500 corrections ignited a
new gold bull out of major secular lows. While the second selloff
ended in mid-February 2016, the powerful GLD-share buying that
selloff spawned continued virtually unabated until early July
almost 5 months later! Sharp stock selloffs are the trigger for
gold investment demand returning, but that buying soon reaches
critical mass to take on a life of its own.
Gold
powered 29.9% higher in just 6.7 months almost exclusively on that
differential GLD-share buying by American stock investors! That
alone accounted for nearly the
entire annual
jumps in quarterly world gold demand in those two quarters. So
if this latest bout of stock selling persists long enough to get
investors redeploying into gold, we’re likely on the verge of a
major new bull-market upleg. That’s great for gold stocks.
That
sharp 3.3% S&P 500 plunge on October 10th wasn’t the end of that
serious selling, as this leading benchmark dropped another 2.1% the
next day! That’s when gold really caught a bid, blasting up 2.5% on
both investors and
gold-futures
speculators buying aggressively. That was a huge rally, gold’s
best up day since late June 2016’s surprise pro-Brexit vote in the
UK. The gold stocks took off like a rocket on that.
GDX
soared a massive 6.7% higher that day, its major gold miners
leveraging gold’s advance by 2.7x! That shattered this leading
ETF’s recent $19 resistance, paving the way for a return to its
consolidation trend channel of recent years between $21 to $25. And
if gold investment has indeed turned the corner to a new
accumulation phase, the coming gold-stock gains should be huge.
Consider early 2016’s example.
Much
like last month, the gold miners’ stocks were deeply out of favor in
January 2016. This small sector was largely forgotten and despised,
leaving the gold stocks trading at fundamentally-absurd all-time
lows. That very week I fought prevailing sentiment to take the
contrarian side and argue that a
major new bull
was imminent. And indeed GDX skyrocketed 151.2% higher in 6.4
months, leveraging gold’s upleg by 5.1x!
That
massive gold-stock mean reversion higher out of extreme anomalous
lows started when sentiment was overwhelmingly bearish, when
gold stocks were left for dead. As traders’ sentiment started to
shift back to neutral and eventually bullish, that psychological
change fed on itself. The more gold stocks rallied, the more
traders wanted to buy them. The more traders bought them, the more
gold stocks rallied.
Given the magnitude of these new gold-stock and gold surges on last
week’s stock-market plunge, and the crucial confirmation of strong
gold investment buying via GLD by American stock investors, there’s
a good chance sentiment is again shifting. Seeing the mighty S&P
500 plummet 5.3% in just two trading days after widely being
considered riskless is a major, jarring discontinuity. It
has to really taint sentiment.
And
if investors start worrying these lofty stock markets are getting
riskier, they will naturally start upping their tiny portfolio
allocations to gold. As gold powers higher on that, the gold stocks
will return to favor. They are actually
the last cheap
sector in these entire stock markets, likely the only sector
refuge if the S&P 500 rolls over into a long-overdue new bear. The
Fed’s record QT
tightening virtually assures that outcome.
The
greatest gains in the next gold-stock upleg won’t be won in the
popular ETFs like GDX and GDXJ, as they are far-overdiversified and
burdened with way too many under-performing gold miners. So it’s
much more prudent to deploy capital in the best individual gold
miners with superior fundamentals. Their gains will handily trounce
the ETFs, further amplifying the
already-huge
upside potential of this sector as a whole.
The
key to riding any gold-stock bull to multiplying your fortune is
staying informed, both about broader markets and individual
stocks. That’s long been our specialty at Zeal. My decades of
experience both intensely studying the markets and actively trading
them as a contrarian is priceless and impossible to replicate. I
share my vast experience, knowledge, wisdom, and ongoing research
through our popular newsletters.
Published weekly
and monthly,
they explain what’s going on in the markets, why, and how to trade
them with specific stocks. They are a great way to stay abreast,
easy to read and affordable. Walking the contrarian walk is very
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realized gains including all losers is +17.7%! That’s double
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and get invested before gold stocks soar way higher!
The
bottom line is gold-stock sentiment looks to be shifting. It was
naturally very bearish following the recent forced capitulation,
which left this small contrarian sector despised. But gold stocks
soon started recovering from those extremely-oversold and
absurdly-undervalued lows. Then last week they surged with gold as
the general stock markets plunged. That may prove a major
sentimental inflection point.
American stock investors suddenly remembered gold, aggressively
buying it to diversify their bleeding stock-heavy portfolios. Once
gold started moving, the gold stocks nicely leveraged its gains like
usual. All this suggests speculators and investors are just
starting to warm to gold and gold stocks again. That portends a
sentiment mean reversion and overshoot, fueling massive new uplegs
in gold and its miners’ stocks. |