The
gold miners’ stocks are drifting listlessly in the summer doldrums,
largely forgotten by investors and speculators. They are missing a
fantastic opportunity to buy low in this barren sentiment wasteland
when no one else wants to. The gold stocks remain exceedingly cheap
relative to the metal which drives their profits, and they continue
to establish a strong technical base. They are ready to soar as
gold returns to favor.
Gold-stock investing feels pretty thankless these days, like an
exercise in self-flagellation. Thus there aren’t many traders left
in this realm. Week after week as gold stocks continue to drift on
balance, the ranks of remaining investors and speculators dwindle.
Interest in this sector is among the lowest I’ve ever seen in
decades of actively trading gold stocks. They’ve been left for dead
as contrarians vanish.
That’s rather unfortunate since multiplying wealth in the stock
markets requires buying low before later selling high! Stock
prices rarely get lower than when traders universally view their
sector with apathy or even antipathy. So the best times to buy low
are when it feels the worst, when everyone else thinks it is crazy
to deploy capital. If you want to buy stocks dirt-cheap, you have
to do it when it feels miserable to do.
Ironically gold stocks have always tended to perform poorly in the
first halves of summers. Yet traders so quickly forget, getting
depressed again each year when summer doldrums return like
clockwork. There’s no hope of overcoming herd psychology which
leads to buying high then selling low without some understanding of
market cycles. June and early July have always been the weakest
time of the year for gold stocks.
A
couple weeks ago I published my latest research on
gold’s summer
doldrums in modern bull-market years. They are nothing to fear,
offering the best seasonal buying opportunities of the year in gold,
silver, and their miners’ stocks. This chart shows how gold stocks
are tracking this summer compared to their past summers’ behavior,
using the benchmark HUI NYSE Arca Gold BUGS Index since it has such
a long history.
The
yellow lines show individual summers’ gold-stock price action from
2001 to 2012 and 2016 to 2017 in indexed terms. Each year’s
final May close of the HUI is set at 100, and then all subsequent
movement is recast off that common baseline. An indexed level of
105 means the HUI is up 5% from May’s close. All these modern
bull-market-year yellow lines are then averaged together in the red
line rendered here.
This
year’s summer indexed HUI action is shown in blue. Note that the
gold stocks’ drift in recent weeks is merely closely tracking their
usual summer-doldrums behavior. There’s nothing out of the
ordinary at all here. So far this summer, the HUI has meandered in
a trading range from 2.6% under to 1.2% above its May 31st close.
That’s well within the center-mass summer trend shown above, which
runs from +/-10%.
There’s no reason for traders to get depressed about gold miners’
stocks this time of year when they are only doing what they
routinely do in market summers. A sideways-to-lower grind should be
expected, as it’s no surprise at all. Investors and speculators
need to study market cycles so they understand what’s likely coming
and trade accordingly. Otherwise they are going to get battered
around by irrational herd sentiment.
Because of these summer doldrums, it’s usually wise to realize
profits leading into summers. If the gold and silver miners’
stocks are relatively low in May, I usually exit the oldest third of
my trades ahead of summer’s arrival. If this sector is relatively
high and bullishness abounds, I’ll double that pre-June selling to
2/3rds of my trading book. But if super-overboughtness and euphoria
reign, I take profits on the whole thing.
Freeing up capital by late Mays when gold’s strong season tends to
peak is the best way to play gold’s summer doldrums, keeping it safe
in cash while sentiment is eroded. That keeps powder dry to buy the
resulting bargains around mid-summers before gold’s major
autumn,
winter, and
spring
seasonal rallies get underway. Summer seasonal ebbs should be
eagerly anticipated to redeploy back in low, not fretted about.
We
run two trading portfolios at Zeal, one each for our popular weekly
and monthly newsletters. This year I sold 10 gold-stock and
silver-stock trades in May and early June in anticipation of this
summer-doldrums drift. Fully 8 had realized gains even in this flat
gold-stock market, which averaged +24.3% annualized. The biggest
win on these trades was an absolute gain of 62.7%, while the worst
loss was only 8.0%.
I’m
looking forward to redeploying that cashed-out capital in new
trades, probably starting mid-summer and likely at lower prices.
The gold stocks remain wound like a coiled spring ready for a
massive new upleg, both technically and fundamentally. This next
chart looks at the price action in the leading gold-stock trading
vehicle, the GDX VanEck Vectors Gold Miners ETF, over the past
two-and-a-half years or so.
While the summer doldrums are rarely happy psychologically, gold
stocks have been ignored and hated long before this month. Since
early 2017 they’ve been trapped in a vexing consolidation. Over the
past 18 months or so, GDX has largely drifted sideways on balance
between major lower support at $21 and major upper resistance at
$25. The intra-trend rallies have been quite tradable, but not big
enough to be exciting.
Gold
stocks entered this summer in the lower half of that trading range,
but still well off the bottom. The recent withering of sector
volatility to unnaturally-low levels in recent months
highlights ongoing attrition of weary investors and speculators. So
far in all of Q2’18, GDX has traded in a super-tight and narrow
range between $21.87 to $23.06. That’s just 5.4%, which is
abnormally small for this usually-volatile sector.
With
the gold miners so flat and dead, they simply can’t compete for
traders’ mindshare. By the middle of this week, GDX had actually
slumped 5.7% year-to-date. That was reasonable relative to gold,
which was down 2.6% over that same span. Gold-stock prices
generally leverage gold price moves by 2x to 3x due to the miners’
big inherent
profits leverage to gold. But that really underperformed the
red-hot stock markets.
The
flagship S&P 500 broad-market stock index surged to an all-time
high in late January, generating extreme euphoria. And it’s
still up 3.5% so far this year despite the
sharp-yet-shallow-and-short
volatility-shock
correction in early February. Some of the market-darling stocks
have skyrocketed to astounding gains, like Netflix which is up 117%
year-to-date! Never mind it is trading at a ludicrous 280.7x P/E
ratio.
Gold
itself has always been the leading contrarian investment, tending to
rally when stock markets are weakening. So gold has fared the worst
historically when stock markets are near major secular peaks.
That’s when traders start to believe classic new-era myths, that
stocks can rally indefinitely despite very-high valuations. Thus
they feel little need to prudently diversify into counter-moving
gold when stocks are euphoric.
But
invariably overbought, super-expensive stock markets roll over into
subsequent bears to rebalance away greedy sentiment and excessive
valuations. That’s when gold really starts to shine again. And as
goes gold, so go silver and their miners’ stocks. We got a dress
rehearsal of that back in the first half of 2016. After a
near-record 3.6 years without a single 10%+ correction, stock-market
downside finally returned.
The
S&P 500 suffered two back-to-back corrections in mid-2015 and early
2016, a 12.4% loss over 3.2 months followed by another 13.3% loss
over 3.3 months. Hyper-complacent investors were stunned, once
again realizing that stock markets rise and fall. So in the
first half of 2016 they remembered gold and started diversifying
their risky stock-heavy portfolios. Their big buying drove gold
29.9% higher in 6.7 months!
With
gold finally returning to favor after extreme stock-market highs
faded, GDX rocketed 151.2% higher in just 6.4 months in
roughly the first half of 2016! When gold starts powering higher
for long enough to convince traders its run is sustainable, they
flock back to beaten-down gold stocks. And that massive gold-stock
upleg kicking off a new bull was but a small foretaste of the great
feast coming in the next stock bear.
The
young gold and gold-stock bulls were oddly put on hold by the
powerful stock-market rally following Trump’s surprise election
victory in early-November 2016. That unleashed mania-grade buying
fueled by euphoric hopes for big tax cuts soon, catapulting the
stock markets to a seemingly-endless series of new record highs last
year. With stocks relentlessly surging driving great complacency
and greed, gold was forgotten.
That
left gold stocks trapped in their surreal suspended-animation
sideways drift over the past year and a half or so. Their bull
is on ice, awaiting the return of gold investment demand which
will ignite once these wild stock markets inevitably roll over
decisively again. That’s probably coming much sooner than most
think, with the major central banks
increasingly
strangling this epic stock bull their extreme easing fueled.
The
Fed’s unprecedented
quantitative-tightening campaign to start unwinding long years
and trillions of dollars of quantitative-easing money printing
started at a modest clip in Q4’17. But it is ramping up to a
serious $50b-per-month pace in Q4’18! Meanwhile the European
Central Bank is dramatically tapering its own colossal QE campaign
which will fully end this December. So the stock markets’
long levitation is over.
Together these
dominant central banks so critical to world stock-market fortunes
are effectively tightening massively in 2018 and 2019
compared to recent years. A QE-conjured stock bull can’t persist
when QE is slashed and reversed. 2018 alone will see the equivalent
of $900b more Fed QT and less ECB QE than 2017 when stock markets
surged. And in 2019 that number will swell to another $1450b less
than 2017!
Today’s
literal-bubble
stock-market valuations are wildly unsustainable with around a
staggering $2350b less liquidity from the Fed and ECB in 2018 and
2019 alone. Early February’s sharp correction was just a slight
hint of what’s to come. The inevitable reckoning is nearing to pay
the piper for this extreme central-bank-goosed stock bull. Stock
markets are forever cyclical, and proportional bears always follow
bulls.
As
that unavoidable next bear gets underway, rest assured gold
investment demand will return in a major way. As is typical after
long stock bulls, investors are
radically
underinvested in gold today. They will have to do big buying
for years to reestablish normal portfolio allocations. That will
propel gold much higher, which in turn will drive an enormous bull
market in the despised gold stocks. Gold-stock bulls are huge.
The
last time this dynamic of weaker stock markets
driving gold
demand played out on a large scale was in the 2000s. Over 10.8
years between November 2000 and September 2011, the gold stocks per
the HUI skyrocketed a life-changing 1664.4% higher! This sector was
the king of wealth multiplication during that long span where the
S&P 500 drifted 14.2% lower as part of a secular bear. Gold-stock
upside is vast.
This
sector’s sideways drift since early 2017 during the anomalous
taxphoria stock-market rallies since is a giant basing pattern.
Such technical bases form critical foundations for major bull
markets, with base size often leading to proportional uplegs. Gold
stocks have ground sideways on balance for a year and a half as
weak-handed investors and speculators exited, selling their
positions to strong-handed ones here to stay.
While gold is trapped in the low-investment-demand summer doldrums
for a few more weeks, its
major autumn
rally is coming. That’s driven initially by Asian post-harvest
buying and later by Indian-wedding-season buying. Western investors
generally don’t play a material role. As gold starts powering
higher again, gold stocks will catch a serious bid. A major
breakout above GDX’s $25 resistance is likely later this year.
The
fact gold stocks have held solid in their consolidation trading
range throughout nearly all of the entire extreme taxphoria
stock-market rally is a testament to their underlying strength.
Even with this sector’s pervasive hopelessly-bearish sentiment,
investment demand has remained strong enough to absorb all the
selling. The resulting long technical base has perfectly
positioned gold stocks for massive new upside.
This
bullish technical picture and an inevitable sentiment mean reversion
out of extreme bearishness are reason enough for gold stocks to
surge dramatically higher. But supercharging that is the gold
miners’ dirt-cheap fundamentals today. They remain radically
undervalued compared to prevailing gold prices, not reflecting
strong current profitability. That will greatly amplify capital
inflows once investors start returning.
The
classic fundamental proxy for gold-stock valuations is the HUI/Gold
Ratio. It divides daily closes in that leading HUI gold-stock index
by gold’s closes, charting the results over time. This reveals when
gold stocks are expensive or cheap relative to the metal which
drives their profits. All stocks must ultimately trade at
reasonable valuations relative to their earnings, and gold stocks
have rarely been more undervalued.
This
week the HGR was way down around 0.138x, which is incredibly low
historically. Even during the first stock panic in a century in
late 2008, the lowest the HGR plunged was 0.207x. And that lasted a
single day before gold stocks rebounded sharply higher relative to
gold. The gold stocks are trading at levels today implying gold and
their profits are radically lower, which is an unsustainable
fundamental disconnect.
This
week GDX and the HUI were way down at $21.92 and 175.4. The HUI
first hit this level way back in August 2003, years before GDX was
even born. Back then gold was only running $357, and had yet to
trade over $380 in its entire young secular bull. Let the insane
irrationality of this sink in. Today’s gold-stock prices were first
seen 14.9 years ago when gold was merely trading in the $350s, far
lower than today!
This
week even with its latest summer-doldrums selloff, gold is still
3.6x higher near $1269. These far-higher gold prices should
obviously be reflected in gold-stock levels. Yet this sector is
still languishing at stock prices not much above the HUI’s extreme
stock-panic lows back in October 2008. And back then gold was only
trading in the mid-$700s. Today’s gold-stock price levels are truly
fundamentally-absurd.
This
makes no sense at all, and is only explainable by unjustified
extreme bearish sentiment. If any other stock-market sector was
trading at levels from a decade or more earlier despite the selling
prices of its products doubling to quadrupling, investors
would rush to aggressively buy up the bargains. That would
rightfully be seen as a short-lived anomaly, a rare chance to buy
deeply-undervalued stocks at decade-old prices.
The
last quasi-normal years in the markets ran from 2009 to 2012. That
4-year span was sandwiched between 2008’s first-in-a-century stock
panic and the era of extreme central-bank QE levitating the stock
markets from 2013 on. The HUI/Gold Ratio averaged 0.346x then.
Even at the depressed gold prices today, a mean reversion back up to
those normal HGR levels would require a monster
150% gold-stock upleg!
But
that’s really conservative for two key reasons. First, gold itself
is likely to power dramatically higher as its on-ice bull market
resumes when these
bubble-valued
stock markets inevitably roll over. Second, after HGR extremes the
mean reversions don’t magically stop at the averages but tend to
overshoot proportionally to the opposite extremes. Higher gold
prices plugged into higher HGRs yield much-greater upside.
And
while you wouldn’t know it from their emaciated stock prices today,
the gold miners are faring fine fundamentally. The major gold
miners of GDX reported their
latest Q1’18
results in early May. They had average all-in sustaining costs
of just $884 per ounce. That is what it really costs to operate
gold mines as ongoing concerns, including replacing mined gold with
new reserves to maintain production indefinitely.
Even
at this week’s depressed summer-doldrums gold levels, that implies
current fat operating profits of $385 per ounce in this industry. A
10% gold rally from here would boost these profits 33% to $511 per
ounce, highlighting the miners’ great profits leverage to gold. And
that’s not a stretch at all. After the previous 6 Fed rate hikes of
this cycle before last week’s 7th,
gold averaged
10.2% gains in subsequent months.
The
gold stocks are truly
a coiled spring
today, ready to explode higher soon and trounce everything else.
They are deeply out of favor, incredibly undervalued, and one of the
only sectors that can rally sharply when general stock markets sell
off. If you want to multiply your wealth by fighting the crowd to
buy low then sell high, this small and forgotten contrarian sector
is the place to be. Nothing else rivals it.
While investors
and speculators alike can certainly play gold stocks’ coming
powerful uplegs with the major ETFs like GDX, the best gains by far
will be won in individual gold stocks with superior fundamentals.
Their upside will far exceed the ETFs, which are burdened by
over-diversification and underperforming stocks. A
carefully-handpicked portfolio of elite gold and silver miners will
generate much-greater wealth creation.
At Zeal we’ve
literally spent tens of thousands of hours researching
individual gold stocks and markets, so we can better decide what to
trade and when. As of the end of Q1, this has resulted in 998 stock
trades recommended in real-time to our newsletter subscribers since
2001. Fighting the crowd to buy low and sell high is very
profitable, as all these trades averaged stellar annualized realized
gains of +19.4%!
The key to this
success is staying informed and being contrarian. That means buying
low before others figure it out, before undervalued gold stocks soar
much higher. An easy way to keep abreast is through our acclaimed
weekly and
monthly
newsletters. 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 summer-doldrums sale before
we add new trades soon!
The bottom line is
gold stocks are basing technically and cheap fundamentally today.
While this small contrarian sector has largely been forgotten, its
past 18 months’ consolidation trading range continues to hold
solid. The longer the basing, the greater the potential upleg when
investors return. And despite trading at levels implying far-lower
gold prices, the major gold miners are actually earning fat profits
today.
Those earnings
will surge dramatically as gold continues powering higher in its own
bull market. It’s only a matter of time until investors see the
extreme market-leading value inherent in the gold miners’ stocks.
These lofty stock markets will soon get dragged lower by this year’s
unprecedented tightening by the Fed and ECB, rekindling gold
investment demand. And the dirt-cheap gold stocks will soar as gold
returns to favor. |