Gold
miners’ stocks rocketed out of mid-March’s stock panic, breaking out
to major new bull-market highs in mid-May. Such blisteringly-fast
gains, and gold stocks’ upleg stalling out since, have left many
traders nervous about this sector. Calls for a serious selloff are
mounting. But arguing in favor for more near-term gains to come,
gold stocks never grew overvalued in this post-panic upleg and are
still undervalued today.
The
recent gold-stock action is best understood through this sector’s
most-popular benchmark, the GDX VanEck Vectors Gold Miners ETF.
Holding the world’s biggest and best gold miners, it dominates
gold-stock-ETF capital flows. GDX’s world-leading $15.1b in net
assets this week are triple the size of its little-brother
GDXJ mid-tier
gold miners ETF! No other gold-stock ETFs come remotely close
to GDX’s scale.
And
the major gold stocks of GDX have been on a wild ride in recent
months. As gold itself got sucked into mid-March’s stock panic,
which was fueled by fears of the economic impact of COVID-19
lockdowns, the gold stocks plummeted. GDX collapsed 38.8% in 0.6
months into mid-March. And the final couple days of that were
technically a full-on crash, a 20%+ cratering in 2 days. GDX
crashed 24.5% in that span!
That
left gold stocks
radically oversold and absurdly undervalued, so they immediately
staged a violent
V-bounce. The mean reversion out of the panic’s
exceedingly-anomalous lows was wildly profitable for traders who
added gold-stock positions in that brutal carnage. That included
our newsletter subscribers, as we started aggressively buying and
recommending fundamentally-superior gold stocks right after those
lows.
From
there GDX skyrocketed 95.8% higher in just 2.2 months into
mid-May! That rare opportunity to ride a quick doubling was
awesome. Hardened contrarians tough enough mentally to buy in
crazy-low when everyone else was fleeing in terror multiplied our
wealth fast. But since then gold stocks have weakened on balance.
By last week GDX had slumped into correction territory, with a 12.8%
loss in the post-peak month.
This
gold-stock-bull-technicals chart illustrates this sector’s
neck-snapping crashing and savage V-bounce higher. GDX not only
soared, but broke
out to major new bull-market and secular highs in this massive
post-stock-panic rebound. With gold-stock price levels undeniably
high in the context of this bull, traders are worried a serious
selloff is brewing. Many have been exiting gold-stock positions
since mid-May’s peak.
There’s no doubt a near-doubling in a couple months or so really
stretched gold stocks technically. When GDX hit a 7.1-year secular
high of $37.21 in mid-May, it was far above its 200-day moving
average. The relationship between prices and their 200dma baselines
illuminates overboughtness and oversoldness. At gold stocks’ latest
interim high, GDX was trading way up at 1.311x its 200dma. That was
very overbought.
That’s one big reason the major gold stocks have consolidated high
since, drifting sideways on balance to bleed off the
excessively-greedy sentiment of mid-May. GDX didn’t plunge out of
those lofty levels, but gradually drifted lower until it hit its
50dma. That has acted as support since. This technical behavior is
much more typical of mid-upleg pauses than far-more-serious
selloffs after major uplegs give up their ghosts.
This
gold-stock bull’s only other comparable upleg to this current
post-panic one was its maiden soaring back in the first half of
2016. Then GDX skyrocketed 151.2% higher over 6.4 months,
far-more-extreme gains than the recent 95.8% in 2.2 months. That
left GDX wildly more overbought, as it soared as far as 1.646x its
200dma in July 2016! That dwarfed that
recent
peak-overboughtness which was again only 1.311x.
After a tight double-top peaking in early-August 2016, GDX plunged
16.7% in the first month or so after that greed-drenched topping.
That was considerably worse than the major gold stocks’ recent 12.8%
retreat into mid-June 2020. In August 2016 GDX’s 50dma decisively
failed just a couple weeks into that selloff. This time
around GDX’s same 50dma line has again held strong as mid-upleg
support for 5 weeks now.
The
gold-stock price action since GDX’s mid-May peak has been way more
consistent with a short mid-upleg pause than a long and deep
post-upleg correction. Stallings and subsequent high consolidations
are very healthy, rebalancing sentiment by bleeding off the
excessive greed always seen after fast gains to major highs. One
key reason this already-big gold-stock upleg is likely still alive
and well is valuations.
Valuations measure where stock prices are trading relative to
underlying corporate earnings, which are the ultimate driver of
long-term price levels. The more expensive stocks are relative to
their profits, the greater the odds a technical selloff will
snowball into a much-larger major correction or even bear market.
If the gold stocks had been really overvalued in mid-May or since,
it would really up near-term downside risks.
Conventional stock-market valuation metrics like
trailing-twelve-month price-to-earnings ratios certainly apply to
the gold miners. But that voluminous data is challenging and
tedious to amass. Because of the unique nature of the gold-mining
industry, there’s a simple valuation proxy that reveals whether
gold-stock price levels are relatively undervalued or overvalued.
That’s the relationship of gold-stock prices to gold.
Gold-mining earnings are directly driven by prevailing gold prices.
Since gold-mining costs are largely fixed quarter after quarter,
profits rise and fall amplifying changing gold prices. This is easy
to understand with a quick illustration. In Q1’20, the elite GDX
gold miners averaged all-in sustaining costs of $932 per ounce.
Let’s round that up to $950 to make the math easier. At $1750 gold,
that implies profits of $800 per ounce.
If
gold falls $200 or 11.4% to $1550 in a correction, gold-mining
profits also fall $200 but that’s a larger 25.0% contraction. If
gold rallies $200 or 11.4% to $1950, gold-mining earnings also surge
$200 making for 25.0% growth. As goes gold, so go the gold miners’
profits in leveraged fashion because of their fixed mining
costs. Gold prices are the most-important driver by far of
gold-mining profitability, utterly dominating it.
So
looking at gold-stock price levels compared to gold prices over time
offers a great proxy for valuations in this sector. If gold stocks
are high relative to gold, they may be overvalued. If they are low
relative to gold, they are likely undervalued. There are various
ways to express this ratio, but the easiest one for most people to
chart today is the GDX/GLD Ratio. GLD of course is the leading SPDR
Gold Shares gold ETF.
Dividing GDX’s daily closes by GLD’s daily closes and charting the
resulting GGR reveals trends in gold-stock valuations. And
considering recent gold-stock price action relative to gold
casts it in a different light. This chart superimposes this GDX/GLD
Ratio over the raw GDX index during this secular gold-stock bull.
And it reveals gold stocks have yet to get particularly overvalued
despite their massive mean reversion higher.
Way
back in mid-January 2016, this gold-stock bull was born out of a
super-low 0.120x GGR. My essay that week was literally called “Absurd
Gold-Stock Levels”, in which I explained that gold stocks were
so ridiculously cheap compared to gold that they were due for a
massive mean reversion higher. And that’s exactly what happened
over the next half-year or so, when GDX blasted 151.2% higher in
this bull’s first upleg.
That
peaked near a GGR of 0.244x, GDX’s share price was trading at 24.4%
of GLD’s share price. Fast-forward to mid-March 2020’s stock panic,
and the GGR cratered to 0.133x. That deep 4.1-year low sure wasn’t
very far above gold-stock-bull-birthing levels! It’s very rare for
the major gold stocks of GDX to fall that low relative to the
dominant gold ETF. And those anomalous lows soon yield to
massive V-bounces higher.
GDX
nearly doubling between mid-March to mid-May, this blistering 95.8%
upleg in just 2.2 months, was mostly the mean reversion out of
absurd stock-panic lows. Today’s secular gold bull began marching a
month before gold stocks’ bull in mid-December 2015. During the 4.5
years since, the GDX/GLD Ratio has averaged 0.187x. That’s
something of a fair-value proxy for this gold-stock bull, like a GGR
baseline.
During the brutal recent COVID-19-lockdown stock panic, the GGR
crashed 0.054x under its bull mean. After gold-stock prices are
hammered to extreme lows compared to gold, they don’t just mean
revert but overshoot proportionally in the opposite
direction. That would imply the GGR surging as high as 0.241x,
which is nearing its 0.244x bull peak of August 2016. But the
highest the GGR stretched in mid-May was just 0.227x.
The
lack of a proportional overshoot from the stock-panic lows so far
argues this big mean-reversion gold-stock upleg isn’t over yet.
Our human minds don’t parse decimals easily, so the difference
between mid-May’s 0.227x GGR and a full 0.241x overshoot might not
sound like much. Yet it is considerable. GDX’s 7.1-year secular
high of $37.21 in mid-May was 0.227x. 0.241x would’ve yielded
$39.59 at that point in time.
That
would’ve extended GDX’s upleg to 108.4% back then. And odds are
that proportional post-panic GGR overshoot is still yet to come
since it hasn’t been achieved yet. Gold has powered higher since
the gold stocks originally peaked in mid-May. A 0.241x GGR applied
to this week’s GLD-share price would make for GDX $40.12. The
higher gold climbs in its own upleg, the higher gold-stock prices
should run.
Despite blasting higher out of those extreme stock-panic lows, the
gold stocks have yet to look particularly overvalued relative to
prevailing gold prices. That both lessens the risks of a serious
selloff and argues this upleg has farther to run yet before kicking
the bucket. And there’s no reason gold stocks should just stop at
that 0.241x GGR mean-reversion overshoot. They have great potential
to soar to much-higher GGRs.
Since late 2018, gold stocks have been gradually regaining ground
relative to gold as is apparent in the GGR’s current uptrend. It
was only briefly interrupted by that wild stock panic, then the GGR
quickly surged back up into trend. GDX shifting back to
consistently outperforming gold again makes higher GGRs quite
likely. Historically the GGR has meandered at far-higher levels
than this young gold bull has yet witnessed.
I
wrote my last gold-stock valuation essay back in late December,
which included a
longer-term GGR chart starting in 2007. From 2009 to 2012 after
the previous stock panic, the GGR was meandering way higher
averaging 0.381x! And even that was lower than the 0.591x in
the 2 years before October 2008’s stock panic, and 0.422x in the 2
calendar years after. The GGR ground lower on balance for about 8
years!
That
long trying period of gold outperforming gold stocks finally ended
in early 2016 when today’s gold-stock bull was born. After an
initial sharp mean reversion in the first half of 2016, GDX’s
outperformance compared to gold has stalled. But odds are this key
fundamental ratio still needs to mean revert much higher in a
secular sense. As gold and gold stocks regain favor, more capital
shifting in will push prices higher.
A
couple weeks ago I wrote about what’s driving
gold’s strong
investment demand, and why that is likely to persist for
years. Stock panics motivate investors to diversify their
stock-heavy portfolios with gold long after those scary selloffs
pass. The Fed’s mind-boggling epic record monetary inflation since
to attempt to stave off a COVID-19-lockdown-spawned depression has
made gold an essential investment for everyone.
The
more popular gold grows and the higher its prices get, the more
interest will mount and capital flow into the gold miners’ stocks.
GDX generally leverages material gold-price moves by 2x to 3x,
making gold stocks attractive for multiplying wealth during secular
gold bulls. Just like gold, gold stocks will grow more popular with
investors the higher their prices go. So much-higher GDX/GLD Ratios
aren’t just possible, but likely.
While predicting exactly where the GGR will meander is impossible,
it seems reasonable for it to return to its 2009-to-2012 average
after the last stock panic of 0.381x. Applied to this week’s GLD
prices, that implies an awesome $63.43 GDX! That’s not even back to
its $66.63 peak in September 2011 near the end of the last secular
gold bull. Gold stocks look really undervalued relative to
gold today compared to history!
And
this sector’s undervaluation isn’t just apparent in that GGR proxy,
but in current implied earnings. In their recently-reported
Q1’20 results,
the elite GDX gold miners again averaged $932 AISCs. And gold
averaged $1582 last quarter. Those implied profits of $650 per
ounce had skyrocketed 58.5% YoY from Q1’19’s $410! With
higher gold prices driving such massive earnings growth, gold stocks
need to soar.
That
profits trend is persisting with gold consolidating high after its
own post-stock-panic mean-reversion upleg. In the almost-over
Q2’20, gold has averaged a much-better $1710. Over the last 4
quarters, the GDX major gold miners have averaged $920 AISCs.
Assuming this quarter’s are somewhere around there, the gold miners
could be earning $790 per ounce this quarter! That’s up
90.8% YoY from Q2’19’s $414!
Now
actual Q2’20 results won’t reach that potential because countries’
national COVID-19 lockdowns temporarily disrupted plenty of mining
operations. That means lower Q2 production, which proportionally
boosts AISCs. But as outputs have quickly scaled back up after
governments let miners resume work, higher prevailing gold prices
mean much-bigger earnings going forward. That’s
super-bullish for this sector.
Current gold-stock valuations remain relatively low, arguing
this post-stock-panic gold-stock upleg still has lots of room to run
higher. Add in recent high-consolidation technicals that much more
closely resemble
mid-upleg pauses rather than post-upleg serious selloffs, and
sentiment shifting more bearish since this gold-stock upleg stalled
in mid-May, and this powerful gold-stock run sure doesn’t look like
it is over yet.
Far
from being threats, mid-upleg selloffs are great gifts to traders.
They offer the best mid-upleg entry opportunities to add new
gold-stock trades at relatively-low prices! So if your gold-stock
allocations aren’t yet sufficiently large, mid-upleg selloffs are
when to buy more. While gold-stock gains are already huge since the
stock-panic lows, they will grow much bigger still as this
gold-stock upleg keeps powering higher.
At
Zeal we started aggressively buying and recommending
fundamentally-superior gold and silver miners in our
weekly and
monthly
subscription newsletters back in mid-March right after the
stock-panic lows. We’ve been layering into new positions ever
since, with unrealized gains already growing huge. Today our
trading books are full of these fundamentally-thriving gold and
silver miners that aren’t done running yet.
To
profitably trade high-potential gold stocks, you need to stay
informed about the broader market cycles that drive gold. Our
newsletters are a great way, easy to read and affordable. They draw
on my vast experience, knowledge, wisdom, and ongoing research to
explain what’s going on in the markets, why, and how to trade them
with specific stocks. Subscribe
today and take advantage of our 20%-off sale! Seize this
gold-stock weakness to mirror our many winning trades before this
powerful upleg resumes.
The
bottom line is major gold stocks still look undervalued relative to
gold today despite their massive post-stock-panic upleg. Ratios of
gold-stock prices to prevailing gold levels remain fairly low
compared to this gold bull’s own precedent. And they are really low
based on historical levels in the years after the last stock panic!
This latest post-panic gold-stock upleg has lots of room
fundamentally to keep powering higher.
Recent gold-stock technicals support this bullish outlook, with gold
stocks consolidating high since their mean-reversion surge stalled
out. That price action looks like a healthy mid-upleg pause that’s
necessary to rebalance sentiment. The gold miners’ earnings growth
is going to be strong in coming quarters after the COVID-19
disruptions to mining operations pass. That should continue to fuel
strong gold-stock buying. |