The
gold miners’ stocks have been grinding sideways for several weeks,
after getting whacked by mid-June’s hawkish Fed surprise. While
this low drift has really stoked bearish sentiment, the gold stocks
are winding up like a coiled spring. Their strong technicals and
fundamentals are storing big upside energy, which should soon fuel a
sharp rebound rally. Traders will rush back in as gold stocks start
surging again.
Gold-stock psychology remains really impaired, with fear and apathy
reigning. That ignited at the latest FOMC meeting in mid-June, and
has been festering ever since. As expected the Fed did nothing,
leaving both its zero-interest-rate policy and $120b per month of
quantitative-easing bond monetizations in place indefinitely. Both
ZIRP and huge QE are the most-extreme forms of easing,
super-bullish for gold and its miners.
But
along with that nothingburger of an FOMC decision, the Fed released
the latest unofficial federal-funds-rate projections from its
individual top officials. Merely a third of those guys thought
there might need to be two quarter-point rate hikes fully 2.5 years
into the future, way out heading into year-end 2023. That
so-called dot plot was more hawkish than expected, goosing the US
dollar which scared gold-futures speculators.
So
they puked out a massive amount of gold-futures selling,
slamming gold 5.2% lower in just three trading days starting with
that FOMC decision! I wrote a whole essay on that
Fed gold-futures
purge that week. As gold stocks are ultimately leveraged plays
on the metal they mine, the leading GDX VanEck Vectors Gold Miners
ETF collapsed 9.2% in that short span. That gutted confidence in
this contrarian sector.
It
really shouldn’t have though. The major gold stocks’ downside
leverage to gold was just 1.8x on those hawkish dots. Normally GDX
amplifies material gold moves by 2x to 3x. And as I explained that
week, speculators’ gold-futures positioning going into that event
pretty much guaranteed that selloff would be short-lived.
These leveraged traders didn’t have the capital firepower available
to sustain big selling for long.
That
huge gold-futures purge indeed exhausted itself just two trading
days after that FOMC decision. Gold’s closing low on the Friday
after that Wednesday Fed meeting was $1,763, which has essentially
held since. And GDX’s closing low of $34.13 in the immediate wake
of the FOMC has proven reasonably solid too. While this primary
gold-stock benchmark slumped 1.4% lower in late June, it quickly
rebounded.
So
the major gold stocks have been grinding sideways on balance
ever since that ridiculous hawkish-dots surprise on the prospects of
a couple rate hikes way out in the distant future. As a
financial-newsletter guy, I hear from dozens of traders a day.
Based on my e-mail flows since then, a sizable-if-not-large fraction
of gold-stock traders are so discouraged they are either giving up
and exiting or sorely tempted to.
That
will likely prove a big mistake given the continuing super-bullish
backdrop for the yellow metal and the companies that wrest it from
the bowels of the earth. Since the March 2020 stock panic on all
those pandemic lockdowns, the Fed has ballooned its balance sheet by
an absurdly-extreme 87.4% or $3,767b! The US central bank has
nearly doubled the US dollar supply in just 15.6 months,
ludicrously unprecedented.
That
hyper-inflationary money-supply growth means far more dollars are
available to compete for and bid up gold. Its own global mined
supply only grows on the order of 1% annually, vastly slower than
not just the US dollar’s mushrooming but all other major fiat
currencies’. The Fed deciding to gradually taper QE, which is
merely slowing money’s rate of increase, doesn’t even start to
unwind all that astounding inflation.
Thanks to that violent purge, speculators’ gold-futures positioning
is now super-bullish for gold in coming weeks and months. They’ve
exhausted their likely selling potential, leaving little room
to dump more but massive room to buy back in. And gold investors
have largely ignored those hawkish dots,
resisting being
spooked into selling by gold’s sharp plunge in mid-June.
They’ll resume buying as gold mean reverts higher.
While you wouldn’t know it from all the whining in gold-stock land,
both their latest upleg and secular uptrend remain intact. This
chart shows GDX over the past several years or so, superimposed over
a technical indicator called the Relative GDX. It looks at this
gold-stock benchmark as a multiple of its key 200-day moving
average, which reveals when this sector is overbought or oversold
relative to its own precedent.
Before that distant-rate-hikes boogeyman roared, the major gold
stocks dominating GDX were enjoying a young bull-market upleg. This
sector benchmark had surged 28.4% higher in just 2.5 months, which
had necessitated a perfectly-normal high consolidation to digest
those big-and-fast gains. That happened for about a month before
that fateful FOMC decision. GDX was trading at $37.59 on the eve of
that meeting.
That
was only down 5.3% from this upleg’s latest interim high of $39.68
achieved in mid-May. That is just pullback territory after a sharp
surge, nothing worrying. In the month after that high-water mark,
GDX had averaged a high and solid $38.90 on close. Such mid-upleg
pauses to rebalance sentiment are healthy, preparing the way for the
next surge higher. Gold stocks weren’t overbought leading
into the FOMC either.
Over
the past five calendar years, GDX has tended to meander between 80%
to 150% of its 200dma. That is the current Relative GDX trading
range. At most in early June well before those hawkish dots, this
rGDX indicator had crept up to 1.075x. Historically gold stocks
need to exceed 1.30x to even start looking overbought. Bull uplegs
generally aren’t at risk of rolling over into corrections until the
rGDX shoots over 1.40x.
The
mission of trading is buying in relatively-low then later selling
relatively-high to multiply capital. In rGDX terms, gold stocks
should be bought when that indicator nears 0.80x. While gold stocks
weren’t pummeled down that far, the Relative GDX has slumped as low
as 0.927x in recent weeks. That is well into oversold territory,
which means gold-stock traders should be rushing to buy instead of
capitulating to sell low.
That
post-FOMC gold-stock hammering on gold’s own also stopped right at
the support line of GDX’s strong secular uptrend. At worst late
last month, GDX had retreated 15.2% from this upleg’s latest interim
high in mid-May. While definitely a severe artificially-boosted
selloff, that neither torpedoed gold stocks’ latest upleg nor their
longer-term secular uptrend. Both remain very much intact as this
chart reveals.
So
technically gold stocks are winding up like a coiled spring again,
basing and storing upside energy that will rapidly be
released catapulting them higher. The triggering catalyst will be
gold rebounding on its own strong fundamentals. While gold-stock
traders can sulk and ignore gold strength for a little while, it
always soon attracts them back. Once gold stocks really start
moving, traders rush in to chase the momentum.
The
major gold miners’ strong fundamentals will add to the upside
pressure on their battered stock prices. With Q2’21 just finished,
the gold stocks’ earnings season will soon be underway. They
generally report their latest quarterly results from three-to-six
weeks after quarter-ends. This coming round should prove solid if
not strong for several reasons. That will boost gold-miner
earnings, pushing low valuations even lower.
While gold exited Q2 on a sour note thanks to that crazy
distant-future-rate-hikes scare, it actually had a good quarter.
The yellow metal averaged $1,814 on close in April, May, and June,
which was 1.2% better than Q1’s $1,793. Gold miners’ profitability
leverages gold price moves, so better gold prices drive much-better
earnings. Those are the difference between prevailing gold levels
and miners’ production costs.
The
best measure of the latter are all-in sustaining costs, and they are
likely to retreat in Q2 even as gold is advancing. The main reason
is higher gold output. Gold miners tend to see big sequential
production growth between Q1s and Q2s. And the more ounces
yielded to spread mining’s big fixed costs across, the lower unit
costs and the better profitability. This Q1-to-Q2 output boost is
well-established empirically.
The
best global gold fundamental data is published quarterly by the
World Gold Council. It includes world mined-gold production. In
the last 11 Q2s starting in 2010, total global gold mined surged an
average of 4.6% sequentially from Q1 to Q2! That is a large jump
for relatively-static mine output, and it is actually skewed low by
Q2’20. Plenty of gold mines had to shutter a year ago due to
national COVID-19 lockdowns.
Excluding Q2’20’s extremely-anomalous 5.9% sequential plunge, the
world’s gold miners averaged huge 5.6% output growth from Q1
to Q2 in the prior 10 years! There are multiple reasons for this,
mostly the result of lower Q1 production. Gold miners tend to
schedule maintenance and upgrades in Q1s, which slows output as
equipment is temporarily taken offline. Operations are back up to
normal speed in Q2s.
Mirroring the world’s land masses, most of the gold mines are in the
northern hemisphere. So winter and monsoon seasons can adversely
impact operations in Q1s. Also gold deposits have varying ore
grades, and mine managers often choose to feed lower-grade mixes
through their mills in Q1s lowering gold output. They do this early
in years because Q1s are a long ways from year-end bonuses based on
share prices.
So
lower Q1 gold production bounces back in Q2, driving big sequential
output growth. Since most gold-mining costs are fixed, output and
unit costs are generally inversely proportional. If the
major miners’ gold produced surges 5% in Q2’21 from the prior
quarter, their AISCs should be about 5% lower. Those averaged
$1,067 per ounce for the
GDX-top-25 gold
miners in Q1, so 5% less would lop that down to $1,014.
That’s reasonable, fairly in-line with their past four quarters’
average AISCs of $1,029. For our purposes today, let’s assume the
major gold miners’ all-in sustaining costs come in around $1,025
last quarter. That implies unit profits of $789 per ounce, which
would be the third-highest on record! And AISCs could easily
prove considerably lower further boosting earnings, as Q1’s were
unusually high for temporary reasons.
So
the gold miners’ fundamentals remain strong too, adding to their
coiling spring of upside potential. A good-or-maybe-even-great Q2
earnings season would help attract traders back to this sector,
bidding up gold-stock prices. Traders are going to increasingly
realize it made little sense to flee for the exits after that
mid-June FOMC meeting. A minority of Fed officials seeing rate
hikes in the distant future doesn’t matter.
Within an hour after that latest dot plot’s release last month,
the Fed chair himself warned to take the dots “with a big grain
of salt” because those unofficial projections are “no great
forecaster of future” rates. The examples of this are legion. When
the Fed’s last rate-hike cycle kicked off in mid-December 2015, dots
predicted four rate hikes in 2016. But only a single one happened,
a full year later in mid-December 2016!
The
ninth hike of that cycle came in mid-December 2018, when the dots
forecast three more hikes in 2019 and 2020. Zero of those came to
pass! The dot plot is a notoriously-inaccurate short-term
rates indicator, and looking years into the future it is utterly
worthless. Mid-June’s gold-futures purge and the resulting
gold-stock plunge sparked by more-hawkish-than-expected dots were
completely unrighteous.
The
gold-stock low grind since has dragged some trades back to their
stop losses, which were elevated in this young upleg’s fast progress
into mid-May. That bumpy ride certainly contributed to today’s
bearish sector psychology. But the gold miners’ stocks still look
really bullish technically and fundamentally, as does the metal they
mine. So this
summer swoon should be viewed as a nice contrarian buying
opportunity.
The
great tragedy of the markets is most traders do the exact
opposite of what they should, buying high in greedy excitement
then later selling low in fear. Millennials loved bitcoin as it
rocketed higher in March and April, aggressively buying as it
blasted over $60k. But as it plummeted under $35k since, their
interest collapsed. Gold stocks are the same, crowded into when
they’re strong then abandoned when they’re weak.
Buying in relatively-low when few others want to is how prudent
traders multiply their wealth in this volatile high-potential
sector. This gold-stock bull’s previous four uplegs have
averaged massive 99.2% gains in GDX terms over 7.6 months!
Smaller fundamentally-superior gold stocks have fared much better.
So anomalous gold-stock weakness like this Fed-spawned plunge should
be aggressively bought, not feared.
While we’ve taken our lumps in stoppings thanks to this silly
hawkish-Fed-dots scare, we’ve redeployed to keep our newsletter
trading books full. When gold and its miners’ stocks are
beaten-down while both their technicals and fundamentals remain very
bullish, big gains are coming soon. Such price disconnects
spawned by sentiment birth and rekindle major uplegs. Smart traders
are fighting the crowd to stay in or get in.
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 unrealized gains
in this current young upleg as high as +66.5% 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 coiling again in the wake of that
hawkish-Fed-dots scare. While that unjustified gold-futures purge
slammed the miners, their technicals and fundamentals remain
strong. The gold stocks’ post-FOMC plunge proved mild compared to
gold’s, and their upleg and longer secular uptrend remain intact.
The gold miners are also likely to report good-to-great Q2 results
in the coming weeks.
They
should see their usual big sequential production boost from Q1,
lowering unit costs proportionally. That along with higher
prevailing gold prices should fuel strong earnings. Gold ought to
resume powering higher on balance too, as speculators’ gold-futures
positioning is super-bullish and the Fed continues to print money
like crazy. This makes for excellent and building upside potential
for the gold miners’ stocks. |