While the gold miners’ stocks remain out of favor, they are still
coiling. This small contrarian sector has been winding up like a
spring during this past half-year of technical basing. With great
fundamentals getting even better, ignored gold stocks are due for an
explosive move higher as traders rediscover their massive upside
potential. Higher gold prices will catalyze that, which are coming
in this super-bullish environment.
In
the financial markets, perceptions of time are heavily-distorted.
Traders weight the more-recent past much more highly when forming
their outlooks on sectors. And for the great majority of the past
nine months, gold stocks have been sucking wind. That’s so long in
market-time that the gold miners have largely been forgotten. This
recent mostly-weak price action is glaringly evident in this
sector’s leading benchmark.
That
remains the GDX VanEck Gold Miners ETF. From early March to mid-May
last year, GDX powered 28.4% higher in a solid young upleg. But in
mid-June that was derailed by speculators fixating on Fed-tightening
fears. They started periodically puking out heavy-to-extreme bouts
of gold-futures selling on Fed-hawkish news including Fed officials’
jawboning, better-than-expected economic data, and FOMC decisions.
That
hammered gold sharply lower from time to time, which the major gold
stocks of GDX amplified like usual by 2x to 3x. So over 4.4 months
into late September 2021, GDX collapsed 27.1% to a 17.7-month low.
That reversed the gold-stock-sentiment pendulum hard, from mounting
bullishness last spring to serious bearishness last autumn. Like
usual traders extrapolated that downside indefinitely, so they fled.
But
in sell-the-rumor-buy-the-news mode, gold and thus gold stocks
rebounded sharply in October and early November. Those surges came
soon after the FOMC first warned it was going to start slowing its
epic quantitative-easing money printing and then later pulled that
trigger. By mid-November GDX had surged 20.7% out of its
QE4-taper-scare lows, a budding upleg. Then more extreme
gold-futures selling erupted.
With
bearish sector sentiment still festering, GDX dropped 14.9% into
mid-December’s uber-hawkish FOMC meeting. That was the one where
the Fed doubled the pace of its QE4 taper to a turbo-taper, paving
the way for rate hikes sooner. And Fed officials’ rate-hike
outlook tripled from two hikes in 2022 and 2023 to fully six!
Yet GDX bottomed that very Fed Day before rebounding a solid 7.8% by
year-end.
But
the legs were cut out from under that rally in early January, on the
minutes from that same FOMC meeting. There Fed officials were
thinking about soon starting quantitative tightening to begin
unwinding their mind-boggling money printing. Between March 2020’s
pandemic-lockdown stock panic and mid-December, the Fed’s balance
sheet had skyrocketed by 110.6%! That more than doubled the
monetary base.
The
result of all these Fed-tightening-fears-spawned
gold-futures
selloffs since last summer is this uninspiring gold-stock
chart. GDX has been grinding along near lower support, which
is rising but only modestly. Over this past half-year, the gold
stocks have mostly been drifting sideways in a classic low
consolidation. While this basing does nothing for improving sector
sentiment, gold stocks are bullishly coiling.
Nothing attracts traders like upside momentum, which has been
sorely lacking in gold stocks since mid-November. When sectors are
rallying, capital inflows become self-feeding as buying begets more
buying. This positive feedback loop which helps fuel major gold
uplegs hasn’t ignited yet in this current bottoming. But it is
coming as gold’s own young upleg, which is technically-superior to
GDX’s, keeps powering higher.
Considering what has to be the Fed’s fastest hawkish lurching
ever, gold’s upside progress fighting these fierce psychological
headwinds has been impressive. The yellow metal also bottomed at
$1,725 in late September, a week after the FOMC first warned QE4
tapering was imminent. Back then I pointed out that gold’s “taper
tantrum” futures selling had already been
mostly expended
in anticipation of that key tightening.
While doubted at the time, that hardcore contrarian argument soon
proved correct. Gold bounced nicely in October before surging way
up to $1,867 in mid-November! Those latter sharp gains came right
after the FOMC formally launched that long-feared QE4 taper.
Unfortunately that frenzied momentum buying left gold-futures
speculators way overextended on the long side, so a sharp
rebalancing selloff erupted.
But
gold kept climbing on balance anyway, carving higher lows in a
much-steeper uptrend than GDX has seen. That uber-hawkish
mid-December FOMC meeting accelerating the QE4 turbo-taper and
tripling Fed officials’ rate-hike outlook didn’t even faze gold. It
clawed back up to $1,829 by year-end. While gold got hit briefly by
that FOMC meeting’s minutes discussing QT bond runoffs, its uptrend
rallying soon resumed.
By
late January gold had regained $1,848, closing in on new young-upleg
highs. Although gold-futures selling flared again on late January’s
next FOMC meeting, it was short-lived. That was after the Fed chair
said “I think there’s quite a bit of room to raise interest rates
without threatening the labor market.” Yet by the middle of this
week, gold was back up over $1,832. Gold is weathering this
crazy-hawkish Fed shift well!
As
it should, because gold’s outlook is wildly-bullish as I’ve
analyzed from multiple fronts in recent essays. Technically gold is
nearing a huge
upside breakout from a gigantic pennant chart formation. That
will work wonders to attract back legions of gold-futures
speculators, whose hyper-leveraged buying will drive gold sharply
higher. Gold is also really
lagging the
raging inflation unleashed by the Fed’s insane money printing.
Just
this week the intentionally-lowballed US Consumer Price Index still
soared 7.5% year-over-year in its latest January print! That’s the
hottest read since February 1982! The last time similar massive
inflation spikes erupted in the 1970s, gold tripled in one and
more than quadrupled in a second before they were brought under
control! Gold ought to at least double in this current spike, even
with its far-larger market now.
That
soaring inflation unleashed by the Fed more than doubling its
monetary base won’t be easily tamped down. To slay this monster it
spawned, the FOMC has to hike its federal-funds rate well over
headline inflation rates. It also has to unwind a big fraction
of its colossal $4,715b of money printing since March 2020’s stock
panic. But either sufficient rate hikes or QT would crash these
QE-levitated stock markets!
That
would force the US economy into a severe recession if not a
full-blown depression. So the FOMC will drag its feet on
tightening, allowing its inflation to fester. This central bank
actually has a long sorry track record on tightenings,
capitulating and
killing them prematurely once stock markets fall far enough to
risk a major economic slowdown on the negative wealth effect. The
Fed doesn’t have the will to fight inflation!
That’s bad news for Americans trying to make ends meet, but great
news for gold. The longer these high and rising price levels
persist, the longer the FOMC holds real rates deeply-negative
by refusing to hugely hike the FFR, the more investors will return
to gold. Its
investment demand is starting to improve, and gold portfolio
exposure today effectively remains near zero. Forgotten prudent
portfolio diversification will return.
Gold
has always been the ultimate diversifier, tending to rally when
stock markets materially weaken. Just to return to historical
minimum gold portfolio allocations of 5% to 10%, American stock
investors would have to do unbelievably-enormous gold buying. And
it’s not just runaway inflation that will drive big gold investment
demand, but these lofty
bubble-valued US
stock markets rolling over into a long-overdue bear.
Because gold’s outlook is so darned bullish, the gold stocks’ is
even more so. The GDX gold miners are effectively leveraged plays
on gold, again tending to amplify its uplegs and corrections by 2x
to 3x. Gold-stock uplegs tend to grow really large. Even including
that Fed-stunted dwarf GDX upleg last spring, this leading
gold-stock ETF’s five uplegs during this secular gold bull have
averaged massive 85.0% gains!
At
best so far in mid-November, GDX’s current young upleg was merely up
20.7%. Since gold stocks have been grinding sideways basing, in the
middle of this week GDX was only up 9.3% upleg-to-date. So the vast
majority of gold stocks’ gains are still yet to come. This
sector’s super-strong fundamentals and deep undervaluations support
far-higher gold-stock prices. But apathetic traders haven’t figured
this out yet.
The
gold miners will soon start reporting their latest Q4’21 results,
which include their all-in sustaining costs necessary to produce
each ounce of gold. Averaging these AISCs across the gold miners
yields a great sector proxy for profitability. Over the past four
reported quarters
ending in Q3’21, the top 25 GDX gold miners averaged $1,057
AISCs. The upcoming Q4 ones should shake out somewhere around there
too.
Because gold hasn’t soared yet on this profligate Fed’s raging
inflation, traders generally remain bearish assuming the yellow
metal is weak. But that’s really not the case. Gold averaged
$1,789 per ounce in Q3, which was actually the fifth-highest on
record after the preceding four quarters. The peak of $1,912 a year
earlier in Q3’20 wasn’t that much higher. Surprisingly to many,
gold actually fared even better in Q4’21.
With
gold-futures speculators periodically puking out heavy selling on a
steady hawkish drumbeat of Fed-tightening fears, gold still averaged
$1,796 last quarter! That’s slightly better quarter-on-quarter,
actually the fourth-highest ever witnessed. Assuming the GDX major
gold miners’ AISCs hover around that recent $1,050 trend, these
companies will average earnings around $746 per ounce! Those are
really-hefty profits.
That
would also prove the fourth-highest levels on record for this
great sector-earnings proxy. And gold stocks are so out of favor
that many are already dirt-cheap, trading with trailing-twelve-month
price-to-earnings ratios in the teens and even single-digits! So
gold-stock upside potential is explosive fundamentally as well as
technically. Once gold starts decisively running again, these
coiled gold stocks will soar higher.
Their potential upside targets are stellar as gold-stock rallying
momentum gradually restores popularity to this forgotten sector.
For a quick example, GDX’s record high of $66.63 came in early
September 2011. That’s a whopping 110.9% above today’s depressed
levels! Yet gold averaged just $1,706 in Q3’11 and four-quarter
gold-stock earnings were far smaller. Headline CPI inflation
also averaged a way-lower 3.8% YoY.
And
gold is doing even better this quarter almost halfway through Q1’22,
averaging $1,815. So gold-miner profitability continues to
improve as gold’s young upleg mounts. Fatter earnings will
force already-low valuations even deeper into serious bargain
territory if these companies can hold the line on costs.
Undervalued fundamentals, basing technicals, and apathetic sentiment
are explosively-bullish for this sector.
With
the US money supply more than doubled, much-higher gold prices are
inevitable. Fundamentally-superior mid-tier and junior gold stocks
will be the biggest beneficiaries. Smaller than the GDX majors,
these sweet-spot-for-stock-price-appreciation miners achieve
far-better production growth off of smaller bases. Their lower
market capitalizations also make them easier to bid higher, to big
gains trouncing the majors’.
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The
bottom line is gold stocks are basing technically, coiling like a
spring before their next explosive surge higher. Despite mostly
consolidating low over this past half-year, GDX is slowly grinding
higher in a young upleg. That will accelerate dramatically as gold
starts decisively running higher again. Traders will flock back to
this deeply-undervalued sector as upside momentum builds,
catapulting the gold stocks way higher.
Gold’s own setup here is super-bullish, on the verge of a major
upside breakout from a gigantic chart formation. Gold just
weathered the Fed’s most-extreme hawkish lurching ever, still
enjoying a solid uptrend. Gold investment demand is set to soar as
this raging inflation unleashed by the Fed’s epic money printing
persists. The higher gold marches as investors return, the more
traders will flock back to gold stocks. |