The
gold miners’ stocks surged strongly this week, blasting to new upleg
highs. The mounting gains are naturally driving more interest in
this small contrarian sector, shifting sentiment towards bullish.
Despite their accelerating rally, gold stocks still remain fairly
low technically and deeply undervalued relative to gold. So their
strengthening upleg likely has plenty of room to run considerably
higher in coming months.
The
gold miners’ stocks are ultimately leveraged plays on gold, which
overwhelmingly drives their profits. The much-maligned yellow metal
has enjoyed a strong upleg since mid-August, when record
gold-futures short selling pounded it to a deep 19.3-month low of
$1174. Gold has been gradually powering higher on balance ever
since, surging near $1341. That makes for 14.2% gains over 6.1
months, an excellent run.
Gold
miners’ earnings are amplifying these higher gold prices, driving
this parallel gold-stock upleg. This is readily evident in the
most-popular gold-stock benchmark, the GDX VanEck Vectors Gold
Miners ETF. Launched back in May 2006, GDX has an insurmountable
first-mover lead. This week its net assets of $11.1b were a
whopping 50.6x larger than the next-biggest 1x-long
major-gold-miners-ETF competitor!
The
gold stocks as measured by GDX have certainly capitalized on gold’s
advance. Between its own brutal 2.6-year low in early September and
this week, GDX has surged 33.0% higher in 5.3 months. That works
out to gold stocks leveraging gold’s gains by 2.3x in recent
months. That is right in line with the 2x to 3x usually seen
historically in the major gold miners. Many smaller gold miners are
doing even better.
As
this upleg was being born and growing, I wrote multiple essays
explaining what was happening and why it was important to get
heavily long gold stocks. We filled the trading books in our
newsletters with great smaller gold and silver miners with superior
fundamentals to the majors. Our unrealized gains this week were
already running 60%+ on multiple trades! This young gold-stock
upleg is even now quite lucrative.
While it is always better to buy in earlier than later, GDX’s 33.0%
upleg to date remains relatively small. In essentially the
first half of 2016, GDX soared 151.2% higher in just 6.4 months in
its last major upleg! Really-big uplegs are par for the course in
the volatile gold-stock sector. Gold stocks’ last secular bull ran
from November 2000 to September 2011. Half of that was in the
pre-gold-stock-ETF era before GDX’s launch.
During that long 10.8-year span, the classic HUI NYSE Arca Gold BUGS
Index skyrocketed an incredible 1664.4% higher! That life-changing
secular bull consisted of 12 separate uplegs. One was an anomaly,
the mean reversion out of 2008’s first stock panic in a century.
Excluding that behemoth, the 11 normal ones
averaged hefty
gains of 80.7% over 7.9 months. So GDX’s recent run is
nothing by this sector’s standards.
At
this stage all gold stocks have really done is regain their sharp
late-summer losses. This GDX chart over the past few years or so
illuminates the gold-stock technicals. The major gold miners’
stocks have merely climbed back up into their multi-year
consolidation basing trading range. The lion’s share of this
upleg’s gains are most probable as GDX breaks out above longstanding
resistance, likely in coming months.
For
fully 21.5 months leading into August 2018, GDX consolidated in a
well-defined trading range from $21 lower support to $25 upper
resistance. That sideways grind bled away bullish psychology,
leading many traders to abandon this drifting sector. By late last
summer not many were left, and most of them were soon driven out
too. August’s extreme record
gold-futures
short selling spawned a washout in gold stocks.
Because this sector is so volatile, running loose trailing stops is
essential for managing risk. The lower gold was hammered, the more
selling pressure mounted in its miners. That forced them to stop
losses, unleashing more mechanical selling and fueling a vicious
circle. Gold stocks cascaded lower in a brutal forced
capitulation into mid-August, and a secondary echo capitulation
bashed them lower still in early September.
GDX’s $21 support was shattered as this benchmark ETF plunged to
$17.57 by mid-September. Several days later I published an essay
Gold-Stock Forced
Capitulation explaining all this right in those depths of
bearish despair. I concluded “...the aftermath of capitulations is
exceedingly bullish. ... The technicals and sentiment spawned by
capitulations are so extreme they usually birth massive uplegs and
entire bull markets.”
With
GDX just plunging to an extreme and unsustainable 2.6-year low, we
were aggressively buying great gold stocks and recommending them to
our newsletter subscribers. Being bullish when everyone else was
bearish was the right call of course. The gold stocks started
powering higher in their upleg persisting to today. I did my best
to let speculators and investors know about the great upside
opportunities in this sector.
Since that forced-capitulation essay, I’ve published 23 more
weekly essays on
subsequent Fridays. Fully 14 of those were about gold stocks,
exploring their deep undervaluation relative to gold, their
excellent technicals, and strong fundamentals. If you want to
multiply your wealth in the stock markets, you have to pay attention
all the time. Most traders make the costly mistake of
ignoring sectors until they get exciting.
I’ve
been trading stocks for over three decades now, and doing it
full-time professionally to earn a living for 2/3rds of that long
span. One of the most-important lessons I’ve learned is it’s
critical to always keep plugged in. If you are not following the
markets, you are missing great opportunities. The only way to buy
low before later selling high is staying abreast of beaten-down
sectors, especially when they are despised.
The
gold stocks kept marching higher on balance after that anomalous
forced capitulation, carving higher lows and higher highs.
In mid-October with GDX under $19 I explained why gold stocks were
Stocks’ Last
Cheap Sector. I concluded, “These gold miners’ stock prices are
wildly undervalued relative to the metal which drives their
profits. So they are overdue for a massive mean reversion and
eventually overshoot.”
This
new gold-stock upleg mostly drifted sideways in November,
discouraging even early contrarians. I did my usual quarterly
analyses of the newest Q3’18 results of the
major gold miners
of GDX and
mid-tier gold miners of the GDXJ Van Eck Vectors Junior Gold
Miners ETF. This critical fundamental homework proved “...the major
gold miners’ fundamentals remain far stronger than implied by their
left-for-dead stock prices.”
While few traders cared about gold stocks in this upleg’s initial
few months, December’s action started to change that. Gold surged
4.9% higher to $1282 that month as the US stock markets rolled over
into a severe near-bear correction. Down 19.8% at worst
since its late-September peak, the flagship S&P 500 broad-market
stock index plunged 9.2% in its worst December since 1931 in the
midst of the Great Depression!
The
gold miners’ stocks ignored the burning stock markets to follow
gold higher and leverage its gains like usual. GDX blasted up
10.5% that month, amplifying gold’s strong advance by a solid 2.1x!
Finally this young gold-stock upleg was getting big enough to
attract traders’ attention. I continued to do my best to spread
awareness, writing about an imminent
Gold-Stock Triple
Breakout in mid-December with GDX near $20.
This
leading gold-stock benchmark was on the verge of breaking out above
three major upper-resistance zones simultaneously. These included
the old $21 support of its consolidation basing trend, a
downward-sloping resistance line from a bearish descending-triangle
technical pattern, and most importantly GDX’s key 200-day moving
average. Gold stocks’ improving technicals were on the verge of
getting far more bullish.
I
concluded, “Three major GDX resistance zones have converged just
above current levels. Once the gold stocks surge decisively over,
the technically-oriented traders will take notice. They will likely
start chasing the momentum accelerating the gains, with buying
begetting buying.” That indeed came to pass. By early January that
super-bullish upside triple breakout in GDX had already become a
fait accompli.
I
wrote another essay
Gold-Stock Upleg
Breaking Out to explain the huge upside potential the gold
stocks had after clearing those essential technical hurdles. I
concluded this gold-stock upleg “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.” There were many opportunities to buy gold
stocks low.
January was a roller-coaster month for gold stocks, with GDX
rallying then swooning then surging to big new upleg highs at
month-end. But on balance this leading gold-stock benchmark
continued carving both higher lows and higher highs. In late
January I explained why
Gold-Stock Upleg
Pauses were nothing to worry about. All major uplegs flow and
ebb, surging two steps forward before slumping one step back.
Speculators and investors needed to remember that “Uplegs don’t
shoot higher in straight lines, pullbacks within them are normal and
expected. They serve to rebalance sentiment keeping uplegs
healthy.” Then in early February GDX flashed one of the
most-powerful buy signals of all, the fabled Golden Cross.
That is when its 50dma crosses back above its 200dma soon after a
major secular low in GDX, a wildly-bullish omen.
But
gold stocks again retreated in early February after surging in late
January, again worrying traders who lacked perspective. So a couple
weeks ago with GDX just over $22, I published another essay showing
Gold Stocks
Gather Steam. It explained that rare Golden Cross buy signal
and concluded, “All this has really started to shift sentiment back
to bullish, which will attract in lots more capital to chase the
momentum.”
That
indeed proved correct again. The more you study markets, the deeper
you understand them and the more sense their seemingly-capricious
rhythms make. The more your market experience and knowledge grow,
the higher the odds you can figure out what’s most likely next. If
you aren’t in a position to watch markets full-time for decades,
it’s essential to spend a little time and money to learn from
someone who is and has.
I
started investing in stocks when I was 12 years old, using money
earned from summer jobs. I had very little market knowledge in
those early years. So I subscribed to a few financial
newsletters written by market experts with vastly more
experience and wisdom than me. Their hard-earned insights from long
decades of study kept me on the right track to gradually grow my
meager capital at the time. I loved those guys!
Universally in life, the more time anyone spends doing anything the
better they get at it. Success is often directly proportional to
time on task. So if you can’t or don’t want to devote your life
to trading, you need to diligently and consistently learn from those
who have. Being right on this gold-stock upleg is no big deal, as
it’s been garden-variety and in line with precedent so far. It has
been both predictable and gameable.
After drifting lower in the first half of February, GDX started
surging again late last week. Heading into last weekend the major
gold stocks enjoyed solid 1.0% and 1.3% daily rallies per this ETF.
Those were directly driven by gold climbing 0.5% and 0.7% after
slumping to its own mid-month lows. While US stock markets were
closed Monday, that gold-stocks-rallying-and-amplifying-gold trend
really accelerated on Tuesday.
After edging up to a new upleg high last Friday, gold continued
climbing modestly in foreign trading over the long weekend in the
US. By Tuesday morning gold-futures speculators were seeing gold at
its best levels in 10.1 months. So they apparently rushed to buy,
catapulting gold 1.5% higher to $1341! GDX surged 3.2% that day,
leveraging gold’s advance by 2.1x. That momentum drove another 1.0%
rally Wednesday.
But
despite the major gold stocks climbing 33.0% in 5.3 months as of the
middle of this week, they remain fairly low technically. At
$23.36, GDX was merely back up to the middle of its old multi-year
consolidation basing trend between $21 to $25. Traders aren’t going
to get really excited until GDX powers decisively above $25 for the
first time since mid-2016. While improving, gold-stock psychology
is still relatively bearish.
I
suspect GDX will challenge $25 in the next few months. Though this
sector often experiences a seasonal lull into mid-March, gold
stocks then enjoy
a strong spring rally. As long as gold continues slowly
climbing on balance, the gold stocks have excellent upside
potential. Remember GDX’s last major upleg soared 151.2% in
essentially the first half of 2016, and the prior secular gold-stock
bull’s uplegs averaged +80.7%!
While the major gold miners’ technicals and sentiment both support
bigger gains to come, perhaps the most-bullish argument of all comes
from the fundamental side. The gold stocks remain relatively low
compared to prevailing gold prices, the metal which directly drives
their profits. They need to mean revert much higher to
regain normal levels compared to gold. A simple ratio of gold
stocks to gold illustrates this.
The
GLD SPDR Gold Shares is the world’s dominant gold ETF. Dividing
GDX’s daily close by GLD’s daily close yields the GDX/GLD Ratio, a
great fundamental proxy for gold-stock valuations. Hammered to the
low side by gold stocks’ late-summer forced capitulation, the GGR is
just now regaining average levels for recent years’ gold bull. But
mean reversions rarely stop at the averages, instead overshooting
proportionally.
I
explained this chart in depth a couple weeks ago in
another essay,
so just a brief update today. This Wednesday the GGR clawed back up
to 0.185x, which is exactly at the 3.2-year average since today’s
gold bull was born in mid-December 2015. At worst in mid-September,
the GGR plunged to a deep 2.6-year secular low of 0.155x. That was
0.030x under this bull’s mean, portending a proportional
overshoot higher.
Before this gold-stock upleg gives up its ghost, the odds really
favor the GGR surging back to 0.215x. At this week’s
gold-upleg-to-date high of $126.70 in GLD, that implies GDX near
$27.25. That would be a powerful breakout above that old $25
consolidation-trend resistance line, and would catalyze a lot more
trader interest in this small sector! It would extend this current
gold-stock upleg’s gains to a more-normal 55.1%.
But
if gold keeps
rallying like it ought to as these overvalued and overbought
US stock markets
roll over again, the potential gold-stock upside is far greater.
$1400 gold is just 4.4% above this week’s levels, not a stretch at
all. That would be a new bull-market high exceeding July
2016’s $1365, generating serious excitement to attract in new
traders. At a proportional-overshoot 0.215x GGR, that leaves GDX
near $28.50.
That’s still not particularly high, as GDX traded over $31.25 in
early August 2016 in its own gold-bull-to-date peak. With
speculators and investors actually excited about gold stocks then,
the GGR hit 0.244x. Apply that to $1400 gold, and the GDX target
climbs above $32.25. That would grow this upleg to +84%, right in
line with the prior secular bull’s average. Make no mistake, the
gold-stock upside from here is still big!
And
that’s just this upleg, not the entire gold-stock bull. In the 2
years before 2008’s stock panic radically changed the markets, the
GGR averaged 0.591x. In the 2 years after of 2009 and 2010, the GGR
was still far higher than recent levels averaging 0.422x. Plug in
the much-higher
historical GGRs seen when gold stocks were far more popular, and
higher gold prices, and GDX’s potential upside in this bull gets
huge.
The
best gains in today’s mounting gold-stock upleg are likely still yet
to come. While you can play it in GDX, the major gold miners
dominating this ETF are
really struggling
to grow their production. And that problem is even worse in the
newly-merged
super-majors, further retarding GDX’s performance. So the best
gains will be won in smaller gold miners with superior fundamentals
that are still expanding their outputs.
The
earlier you get deployed, the greater your gains will be. That’s
why the trading books in our popular
weekly and
monthly
newsletters are currently full of better gold and silver miners
mostly added in recent months. The gains we won in 2016 were
amazing the last time American stock investors returned to gold.
Our newsletter stock trades that year averaged +111.0% and +89.7%
annualized realized gains respectively!
Coming gold-stock gains should be similarly huge as today’s
strengthening gold and gold-stock uplegs grow. To multiply your
wealth in the stock markets you have to do your homework and stay
abreast, which our newsletters really help. They explain what’s
going on in the markets, why, and how to trade them with specific
stocks. You can
subscribe today for just $12 per issue! That’s a trivial
pittance for decades of hard-won market experience, knowledge,
wisdom, and ongoing research.
The
bottom line is gold stocks just surged higher again, their upleg
getting stronger on balance. GDX continues to carve higher lows and
higher highs, fueling improving sentiment. More traders are getting
interested in this sector and bringing in more capital, driving gold
stocks higher to strengthen a virtuous circle of buying. Gold-stock
technicals, sentiment, and fundamentals all argue for bigger gains
to come.
This
current upleg remains relatively small by sector precedent. And
gold stocks are just regaining their bull-average levels relative to
gold, with lots of room to rally on a proportional mean overshoot.
While a seasonal lull nears, mid-upleg pullbacks or consolidating
drifts are normal and healthy. This gold-stock upleg is likely to
grow a heck of a lot bigger in coming months’ major spring rally.
Get deployed if you aren’t yet! |