The
gold stocks’ young upleg is really growing, on a trajectory to
become major. This contrarian sector is breaking out to the upside
on multiple fronts technically, which is really improving
sentiment. Traders’ extreme bearishness of late summer has mostly
abated, with bullish shoots taking root. Fundamentals certainly
justify the mounting gold-stock buying, with earnings set to surge
on higher gold prices in coming quarters.
This
baby new year should prove far happier for gold stocks than 2018.
This sector’s performance is measured by the share price of the
flagship gold-stock investment vehicle, which is the GDX VanEck
Vectors Gold Miners ETF. This week it held shares worth $10.5b in
46 major and mid-tier gold and silver miners from around the world.
GDX is now 60.1x larger than the next-biggest 1x-long
major-gold-miners ETF!
2018
was rough for the gold miners, with GDX slumping 9.3%. Weaker gold
prices were to blame, as gold is the dominant driver of gold-mining
earnings. While the yellow metal recovered to a mere 1.6% loss last
year, it slumped much lower in late summer. By mid-August extreme
record
gold-futures short selling had pummeled it down 9.9%
year-to-date. That eviscerated gold-stock psychology, scaring
traders out.
The
major gold miners’ stocks suffered a brutal
forced
capitulation in that gold low’s wake as stop losses were
triggered leading to cascading selling. So by mid-September, GDX
had cratered 24.4% YTD. This bloodbath really turned traders off
from this small contrarian sector. But as I warned just days later
back in mid-September near the lows, that extreme selling heralded
the birth of a major new gold-stock upleg.
GDX
has indeed powered higher on balance ever since, rallying 20.0% in
3.4 months by Christmas Eve. That was fueled by the
roughly-parallel young gold upleg that climbed 9.3% by the middle of
this week. Things are really looking up for the gold stocks.
Investors and speculators alike are starting to remember the big
upside this small sector enjoys in major uplegs. Key breakouts
are confirming one is underway.
Several weeks ago I wrote an essay analyzing the imminent
upside triple
breakout in GDX. Closing at $20.12 that day, GDX was on the
verge of surging back over $21. That is an exceedingly-important
level for the major gold miners technically. This updated chart
shows why, and reveals the gold stocks are now enjoying their
longest and best-foundationed upleg in years. And it is going to
grow a lot larger as gold rallies.
Three major upper resistance zones have converged at GDX $21.
This was strong lower support for the gold miners’ stocks in a major
consolidation basing trend that lasted for 21.5 months. It only
failed in early August when gold was pounded by that extreme record
futures short selling. Once they break, old support levels often
become new resistance zones. Traders are wary to buy aggressively
before they are overcome.
GDX
$21 is also where the downward-sloping upper resistance line from
gold stocks’ descending-triangle technical pattern has ended up.
That connected the lower GDX highs that have vexed this sector since
September 2017. The final and most-important resistance zone near
GDX $21 is its key 200-day moving average. This essential line is
usually the most-widely-watched by all the technically-oriented
traders.
Market history has long shown 200dmas often prove the key dividing
line between bull and bear markets. When prices surge back above
their 200dmas after long periods underneath them, traders usually
flood back in driving exploding upside momentum. 200dma upside
breakouts often herald new bull markets or powerful uplegs within
existing bulls. So GDX powering back over its 200dma is a major
gold-stock buy signal.
While GDX has been meandering around $21 since Christmas Eve, that
200dma breakout has already happened! Since this leading gold-stock
ETF’s 200dma is falling, the last time it was actually at $21 was in
mid-November. This week the black 200dma line above has slumped to
$20.72. A decisive breakout is 1% over that level. GDX achieved
this milestone on December 18th, and has mostly maintained it since.
But
with that 200dma still rounding to GDX $21, that is still the
triple-resistance zone traders need to see left decisively behind.
That critical upside breakout is happening before our very eyes!
With GDX closing near $21.50, investors and speculators alike are
going to consider the gold stocks off to the races. They will rush
to buy and chase the upward momentum, accelerating it. This fuels
major gold-stock uplegs.
The
more capital traders deploy in gold stocks, the faster their share
prices rise. The bigger their gains, the more traders want to buy.
This virtuous circle of capital inflows has propelled past
gold-stock uplegs to monstrous proportions. The last example of
gold stocks powering higher out of major secular lows happened in
largely the first half of 2016. The setup for that huge gold-stock
upleg was very similar to today’s.
After being pummeled to a major secular low in mid-January 2016,
selling was exhausted and buyers started to return. GDX began
powering higher, spurred on by a parallel young gold upleg. GDX
blasted up through its 200dma and capital flooded in. By the time
that major buying ran its course, GDX soared an amazing 151.2%
higher in just 6.4 months! Those kinds of returns are what give
gold stocks their allure.
The
necessary psychology to maintain that gold-stock momentum resulted
from a relatively-minor 29.9% gold upleg in roughly the same span.
The major gold miners of GDX leveraged and amplified gold’s gains by
5.1x! That was far better than the usual 2x to 3x because the gold
stocks were so beaten down, trading at
fundamentally-absurd levels when that upleg was born. Yet those
huge gains still weren’t too exceptional.
Despite GDX’s mounting popularity as the leading
gold-stock
benchmark, this ETF is relatively new with a May 2006 birth.
The previous secular gold-stock bull ran for 10.8 years, extending
from November 2000 to September 2011. During that long span the
classic HUI NYSE Arca Gold BUGS Index skyrocketed an astounding
1664.4% higher! The world’s most-hated sector today multiplied
investors’ wealth by nearly 18x.
That
was driven by a parallel 638.2% secular gold bull, which the major
gold stocks of the HUI leveraged by 2.6x. The
individual upleg
cycles within that mammoth gold-stock bull show uplegs in this
sector tend to be very large. Excluding the epic mean-reversion
rebound out of late 2008’s first-in-a-century stock-market panic,
the HUI enjoyed 11 normal uplegs. Their average gain was a
staggering 80.7% over 7.9 months!
That
last secular gold-stock bull offered traders 11 separate
opportunities over 11 years to almost double their capital!
So while GDX’s monster 151% upleg in H1’16 was definitely on the
huge side, the last bull’s 81% average uplegs weren’t tremendously
behind. When investment capital returns to gold stocks in a
material way, their upside is massive. Today’s young GDX upleg
could easily grow to 80%+ later this year.
Even
a full-on doubling is fairly conservative considering how low gold
stocks were hammered in early September’s cascading forced
capitulation. GDX bottomed at $17.57 on September 11th, which was
a deep 2.6-year low. A 100% gain from there would merely
carry it to $35.14. That would be a new high for this gold-stock
bull, as GDX last peaked at $31.32 in early August 2016. But GDX
$35 is still relatively low.
Back
in September 2011 as that last secular gold-stock bull crested, GDX
peaked at $66.63 on close. It averaged $52.61 in the three full
calendar years of 2010, 2011, and 2012. Gold-stock levels have been
much higher on balance in the past. So seeing GDX double
from its recent lows in this young upleg isn’t a stretch at all.
And major gold-stock uplegs aren’t just a
technical-buying-fueling-bullish-sentiment thing.
They
are also supported by fundamentals. Gold-mining costs are
essentially fixed during mine-planning stages. That’s when
geologists and engineers decide which gold ore to mine, how to dig
to it, and how to process that ore to extract the gold. Once
hundreds of millions of dollars are spent to build the mines and
mills, the mining costs generally don’t fluctuate much. Real-world
data abundantly confirms this truth.
Every quarter I wade through the latest financial and operational
reports of the top 34 GDX gold miners. They finished reporting
their latest
Q3’18 results in mid-November, which I painstakingly analyzed in
an essay as usual. The top 34 GDX gold miners accounted for nearly
94% of this ETF’s total weighting. And their average all-in
sustaining costs for producing each ounce of gold ran $877.
That was right in line.
The
previous four quarters’ top 34 GDX gold miners’ average AISCs came
in at $868, $858, $884, and $856 averaging $867. So the major gold
miners’ costs for producing gold don’t change much regardless of
what the gold price is doing. Thus higher gold prices feed directly
through to bottom lines in amplified fashion. Gold stocks’ earnings
surge during gold uplegs, fundamentally justifying monster
gold-stock gains.
In
Q3’18 plenty of major gold miners actually reported that they
expected AISCs to retreat in Q4’18 as production recovered out of
various temporary setbacks. So I expect to see lower average
AISCs among the top 34 GDX gold miners in their upcoming Q4
results. But let’s conservatively assume that Q3’18’s $877 average
AISCs hold into Q4. Higher prevailing gold prices in Q4 portend
bigger gold-mining profits.
The
average gold price climbed 1.4% quarter-on-quarter in Q4 near
$1228. That implies the major gold miners of GDX were earning $351
per ounce at $877 average AISCs. In Q3 the lower average $1211 gold
price drove profits of $334 per ounce. So gold-mining earnings are
likely to climb by at least 5.1% QoQ in Q4’18 results. That is 3.6x
upside leverage to gold, so outsized gold-stock gains are righteous.
No
one knows what gold will average in Q1’19, but I bet it’s going to
be much higher than Q4’s $1228. Gold
thrives during
stock-market selloffs as investors remember diversifying their
stock-heavy portfolios with alternative investments. And with
burning stock markets rolling over into
a young bear
driven by
full-speed Fed quantitative tightening, gold investment demand
is likely to push gold higher for a long time to come.
But
let’s assume gold does nothing on balance in Q1, and merely averages
$1280 when the dust settles. That is still 4.3% higher sequentially
from Q4. At $1280 gold prices and $877 AISCs, gold-mining profits
in Q1 would run $403 per ounce. That is another 14.8% higher
than Q4’s projected level, implying 3.4x earnings leverage to gold.
As long as gold gradually climbs on balance, the gold stocks deserve
to soar.
Because their profits surge much faster than gold, so do gold-stock
prices. Gold stocks again tend to outperform gold by 2x to 3x
during major uplegs. So if gold rallies 30%, GDX will usually power
up 60% to 90%. The major gold miners’ stocks
remain wildly
undervalued relative to prevailing gold prices. Back in
mid-October when GDX was just clawing back out of the $18s, I made
that fundamental case in depth.
But
while GDX is a fine sector investment vehicle with a lot to like,
it’s not without its problems. In Q3’18 for example, the top 34 GDX
gold miners saw their overall
gold production
retreat 2.9% year-over-year. The world’s 4 largest gold miners
Newmont, Barrick, AngloGold, and Kinross suffered annual production
drops of 2.0%, 7.6%, 14.6%, and 10.4% in Q3. Goldcorp’s plunged an
anomalously-extreme 20.5% YoY!
These 5 major gold miners alone accounted for over 30% of GDX’s
total weighting. Other gold miners among its top components are
also struggling with production. While GDX has to own the biggest
and best gold miners no matter how they are faring, their
underperformance really drags down GDX’s upside. The biggest and
fastest gold-stock price gains accrue in smaller mid-tier gold
miners growing their production.
So
instead of buying GDX, far better gains are highly probable from
handpicking fundamentally-superior GDX-component stocks to own.
These include mid-tier gold miners lower in GDX’s rankings that are
still growing their production organically, or through new mine
builds that recently came online or will soon be live. With plenty
of great gold miners in this sector, investors and speculators have
no need to hold laggards.
With
GDX now enjoying a major upside breakout, massive new investment
buying is coming. And the best gains by far will be won in smaller
mid-tier and junior gold miners with superior fundamentals. While
GDX itself will power dramatically higher despite the deadweight in
its holdings, the better gold miners will generate much-greater
wealth creation. Finding and owning these better gold-mining stocks
is essential.
That’s one of my important missions at Zeal, relentlessly studying
the gold-stock world to uncover the stocks with the greatest upside
potential. The trading books in both our
weekly and
monthly
newsletters are currently full of these better gold and silver
miners. Most of these trades are relatively new, added in recent
months as gold stocks recovered from deep lows. So it’s not too
late to get deployed ahead of big gains!
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The
bottom line is this young gold-stock upleg is growing. It is now
surging in a major upside breakout that should unleash a flood of
new buying. With gold climbing on balance too, everything is in
place to fuel a major gold-stock upleg. That could easily portend a
doubling in the major gold miners’ stocks from their recent deep
lows. This sector’s technicals, sentiment, and fundamentals all
support massive gains from here.
The
higher gold stocks are driven, the more traders want to buy them to
chase their outperformance. The more gold stocks rally, the more
bullish sentiment becomes leading to mounting capital inflows.
Higher gold prices justify all that fundamentally, as gold-mining
profits leverage and amplify gold’s gains. This is the best
gold-stock setup seen since early 2016, which led to GDX soaring
151% in just over a half-year. | 
