The
gold miners’ stocks weathered the recent stock-market plunge really
well. As evident in their leading GDX ETF, they were already beaten
down before stock markets started falling. The resulting explosion
of fear bled into GDX, forcing it even lower. Nevertheless, no
major technical damage was done. GDX remained well within its
consolidation trend channel and is still within striking distance of
a major $25 breakout.
Gold
stocks’ behavior during stock-market selloffs can seem capricious.
This small contrarian sector generally amplifies the price action in
gold, which drives its collective profitability. Gold tends to
surge in the wake of major stock-market selloffs, which erode
investors’ confidence in stocks’ near-term outlook. That greatly
boosts gold
investment demand as investors soon rush to wisely diversify
their stock-heavy portfolios.
This
drives gold prices higher after material stock-market weakness. So
naturally the gold stocks mirror and amplify gold’s gains which
really improve their fundamentals. But this broader strengthening
trend is interrupted by a lot of chaotic noise. The collective
greed and fear generated by the stock markets’ daily action heavily
influences gold-stock traders, especially when the stock markets are
exceptionally volatile.
The
gold miners’ stocks are just that, stocks. So it’s not
uncommon for them to get sucked into serious down days in the
general stock markets, which fuel widespread fear. When the
flagship S&P 500 stock index (SPX) falls sharply, nearly everything
else is dumped in sympathy including the gold stocks. The SPX truly
is the dominant center of the global financial-market-sentiment
universe, greatly affecting everything.
Unfortunately sharp SPX down days’ ability to heavily
influence GDX wreaks havoc on sentiment in the gold-stock sector.
Traders read
historical studies proving the precious-metals realm is the best
place to deploy capital in and after weakening stock markets. So
they rightfully expect gold-stock prices to rally on balance. But
when GDX plunges on a big SPX down day, their fear soars and they
abandon gold stocks.
Human psychology always tends to overweight the importance of recent
and traumatic events, with our minds wanting to extrapolate
short-term turmoil out into infinity. Thus when gold stocks get
sucked into a sharp general-stock selloff, traders assume they can’t
thrive in weak stock markets. They lose the trend forest for the
daily trees! This fearful herd sentiment scares them into panicking
and selling gold stocks low.
Weakening stock markets are like springtime for gold and its miners’
stocks due to higher investment demand. Just as daily temperatures
gradually warm over time during spring, gold stocks rally on balance
after material stock-market weakness. But spring weather also
includes periodic cold snaps that can feel winter-like. They are
just temporary countertrend aberrations though, like gold-stock
drops on big SPX down days.
This
first chart looks at gold stocks’ recent price action through the
lens of GDX, the VanEck Vectors Gold Miners ETF. Since its birth in
May 2006, GDX has grown into the leading and dominant gold-stock
ETF. As of this week GDX’s $7.6b in assets under management ran a
whopping 22.0x larger than its next-biggest 1x-long
major-gold-stock-ETF competitor! GDX actually weathered the stock
plunge really well.
The
sharp stock-market selloff in the past couple weeks has been
extraordinary, largely unprecedented on multiple key fronts.
The S&P 500 was wildly overvalued and overbought in late January,
deep in its longest span ever witnessed without a mere 5% pullback.
Volatility was trading near record lows, which catapulted
complacency off the charts. Last week I explored all this in an
essay analyzing
stock selling unleashed.
The
first real day of serious SPX selling was Friday February 2nd. The
gold stocks certainly weren’t high leading into that, as GDX had
closed the day before at $23.70. That was merely on the high-middle
side of gold stocks’ consolidation trading range. Really since late
2016, GDX has largely meandered between $21 support and $25
resistance. It had neared a major $25 breakout in late January, but
couldn’t punch through.
On
Friday the 2nd the SPX plunged 2.1% after rising wages on the US
monthly jobs report stoked fears of inflation. 10-year Treasury
yields continued their sharp surge since the
latest Fed rate
hike in mid-December. That SPX down day was the worst since
September 2016, before Trump won the election and the resulting
extreme taxphoria rally. It generated some real fear which
spilled over into the gold stocks.
But
that stock-fear bleed-in sure wasn’t the only reason GDX fell 3.3%
that day to revisit its technically-important 200-day moving
average. With inflation fears mounting, futures traders figured the
Fed might have to increase the tempo of this rate-hike cycle. So
the US Dollar Index surged a sharp 0.7% higher, which led
gold-futures speculators to hammer gold 1.4% lower. GDX’s initial
stock-selloff loss was reasonable.
The
major gold stocks tend to amplify gold’s underlying price action
by 2x to 3x. And GDX’s downside leverage to gold that day ran
2.4x, right in line. Most of the time gold stocks still follow
gold, even when stock markets are weaker. But on exceptional SPX
down days when fear really flares, that overshadows gold as traders
are infected by prevailing herd sentiment. That really started to
happen on Monday the 5th.
The
SPX selloff greatly intensified as it plunged 4.1%, its worst
daily drop since way back in mid-August 2011! That was extreme, as
stock markets usually don’t plummet so rapidly from record highs.
Because it had been so long since the SPX plunged, fear skyrocketed
as evidenced by the VIX implied-volatility index. Foolish traders
who had aggressively shorted volatility near record lows scrambled
to unwind their bets.
Gold
caught a modest bid that day, rallying 0.6% despite the US Dollar
Index climbing another 0.4% on safe-haven buying. On days when the
SPX plunges yet gold climbs, traders are torn about what to follow
so the gold stocks generally split the difference. Indeed
that day GDX slid another 0.9%, far milder than the sharp SPX plunge
but still worse than gold. That left GDX at $22.71, sliding farther
under its key 200dma.
After plunging even deeper early on Tuesday the 6th, the SPX
reversed sharply to a 1.7% gain on close as the extreme VIX-futures
long buying abated. Gold suffered a 1.1% loss on the stronger stock
markets as well as a major 1.4% draw in its leading
GLD gold ETF’s
holdings. Investors likely dumped GLD shares for a source of
capital. Since gold is much stronger than general stocks in SPX
selloffs, GLD is easy to sell.
With
gold falling sharply GDX dropped another 2.6% on that third day of
the SPX selloff. Once again that made for 2.4x downside leverage to
gold, which is perfectly normal. Although that decisively broke GDX
below its 200dma, at $22.11 it remained well within its
long-established consolidation trend channel. With trend support at
$21, gold stocks still had a ways to go before they threatened a
major technical breakdown.
The
SPX selling resumed on Wednesday the 7th with a relatively-minor
0.5% loss. Gold fell by the same amount, as once again the US
Dollar Index surged 0.7% on flight-capital safe-haven buying. GDX
lost another 1.4% to hit $21.80 on close. That amplified gold by
2.8x, still within that normal 2x to 3x range for the major gold
stocks. The gold stocks were weathering that sharp SPX selloff
really well by that point.
On
Thursday the 8th the stock markets started sliding again on no news,
and the SPX fell relentlessly all day long. By the time the dust
settled, it had collapsed another 3.8%! Two huge 4%ish down days
out of just four trading days was very serious, generating the most
fear traders have experienced for at least a couple years. Gold
eked out a 0.1% gain with the US dollar flat, and the gold stocks
split the difference as usual.
GDX
only retreated 0.6% that day the SPX formally plunged into
correction territory for the first time since early 2016. That was
truly an impressive show of strength given the stock markets rapidly
spiraling lower. At $21.68, GDX remained well above its $21 support
line that has held rock solid since late 2016. It looked like the
gold stocks were nearing selling exhaustion since they fell
so little on such a huge SPX down day.
In
just five trading days the SPX had plummeted 8.5%! That was a big
drop by any standard, let alone off record highs out of
near-record-low volatility. Interestingly GDX exactly mirrored that
drop, falling an identical 8.5% in that same span. Relative to gold
that was excessive, 3.5x the 2.4% gold lost during that same
timeframe. But with GDX remaining well within its consolidation
trend channel, technical damage was minor.
Last
Friday the 9th once again saw the SPX slide rapidly after open
before reversing sharply to a large 1.5% daily gain. Gold stocks
got sucked into that early fear-spawning selling, which was
exacerbated by gold itself slumping lower before a -0.2% close. GDX
tested that $21 support intraday, but bounced back to a dead-flat
close. This small contrarian sector had successfully weathered
an exceptional SPX selloff!
This
week the SPX and gold both rebounded, each rallying Monday, Tuesday,
and Wednesday. Thus it wasn’t surprising GDX followed suit,
rallying 1.3%, 0.1%, and a monster 4.6% by the data cutoff for this
essay. Thus over the entire 9-trading-day span of the recent
volatility storm, GDX merely slipped 2.9%. That was again between
the SPX’s 4.4% loss and gold’s slight gain. The gold miners’ stocks
are faring fine!
This
Wednesday GDX was back up to $23.01, exactly in the middle of its
consolidation trading range of the past year between $21 support and
$25 resistance. GDX was back over its 200dma again, and still
within striking range of that
critical $25
breakout I discussed a month ago. If you had totally tuned out
for 9 trading days and ignored the SPX-selloff action, it would’ve
looked like gold stocks were still merely basing.
One
of the greatest benefits to continuing to study the markets and
staying immersed in them is you will gradually become immune to
herd sentiment. After you’ve seen enough selloffs, they
increasingly lose their ability to scare you. And you remember that
sharp selloffs are short-lived, whether in the general stock markets
or gold stocks. So you come to accept them as inevitable
periodically, and they don’t rile you up.
A
great analogy is a beekeeper. Most people are scared of bees,
freaking out if bees buzz too closely or land on them. I know I’m
no fan of bees invading my personal space. But beekeepers have no
fear of bees because they work with them all the time. They
certainly respect bees and understand the risks of being around
them. But all their experience with bees leads to enough knowledge
to negate emotional responses.
Gold
stocks have always been a volatile sector. That’s actually a
core reason they are so alluring, as this volatility translates into
big and fast gains when they are rallying. In roughly the first
half of 2016, GDX rocketed 151.2% higher on a parallel 29.9% gold
upleg! Volatility is a double-edged sword, sectors that can rally
fast will also fall fast. So gold-stock investors must accept
periodic sharp selloffs as par for this course.
The
major gold stocks as represented by GDX are doing fine. Despite
some choppiness as the SPX was flailing about in recent weeks, they
are continuing to base in their well-established consolidation
trend. They are still on track for a major GDX $25 breakout,
which will work wonders to shift sector psychology back to bullish
again and spur big capital inflows. The gold miners’ stocks are low
technically and cheap fundamentally.
This
last chart zooms out to the bigger picture, looking at GDX since
2007 which is largely its entire life. Gold stocks move in great
bull-bear cycles like everything else, and they remain incredibly
low today. The small highlighted square in the lower right
encompasses the entire first chart. These prevailing gold-stock
levels are almost as low as during 2008’s epic stock panic, which is
absurd based on fundamentals.
This
powerful new gold-stock bull ignited in early 2016 remains young
and small. Its bull-to-date peak in early August 2016 was
merely a 3.3-year GDX high, still very low in secular context.
After this sector was sucked into 2008’s stock panic, the major gold
stocks more than quadrupled out of those extreme lows. A quadruple
from January 2016’s all-time low birthing this bull would catapult
GDX back up near $50.
That
means the major gold stocks easily have the potential to more
than double again from here, seeing another 117% GDX gain in the
next couple years! Is there any other sector in all these
wildly-overvalued stock markets that can make such a claim? No
way. Like gold, the gold stocks are now deeply out of favor thanks
to the extreme stock-market bull that may have just peaked in late
January. Sentiment is poor.
But
as gold inevitably powers higher in the wake of this newest SPX
correction on strengthening demand from investors, the gold stocks
will follow and amplify its gains. Fundamentally the major gold
stocks are still
dirt-cheap. That’s readily evident in their quarterly
operational and financial reports, which I closely follow and
analyze for the major GDX gold miners. I can’t wait for their Q4’17
results over the coming weeks.
The
primary measure of industry-wide gold-mining profitability is
all-in sustaining costs, what its costs to mine and replenish an
ounce of gold. In Q3’17 that
averaged $868
for the GDX gold miners. And these costs are pretty stable,
averaging $867, $878, $875, and $855 in the four quarters before
that. So odds are the major gold miners’ collective all-in
sustaining costs will hold near these levels in Q4’17 and Q1’18 too.
Gold
averaged $1279 in Q3, leading to fat per-ounce profits of $411.
Gold was essentially flat in Q4 with a $1276 average price. That
means the GDX-component gold miners are likely to soon report
profits of $408 per ounce. I’ll dig deeply into those new Q4
quarterlies as they are released, and publish an essay on the
results in mid-March. Since Q4 reporting includes full-year
results, regulatory deadlines are twice as long.
The
SEC requires normal quarterly reports to be filed within 40 to 45
days after quarter-ends, depending on companies’ sizes. But since
they have to prepare annual reports with the quarter that ends
fiscal years, usually Q4, that deadline is extended to 60 to 90
days. So by mid-March most of the major gold miners’ Q4’17 results
will be out. I expect average all-in sustaining costs to come in
flat like usual in these reports.
And
that’s super-bullish given what gold is doing. The yellow metal
that drives its miners’ profits is faring much better in Q1 than it
did in Q4. It’s averaging $1331 quarter-to-date, up 4.3%
sequentially from Q4. So if AISCs are stable like usual, profits
will surge which investors will anticipate in advance. The
same $868 AISC implies Q1 GDX-major-gold-miner profitability of $463
per ounce, soaring 13.3% quarter-on-quarter!
So
my month-old forecast of a
GDX $25 breakout
on Q4 earnings remains highly likely. When investors see how the
gold miners are faring in their latest reported quarter, they are
going to extrapolate mining costs into Q1. That will portend
exploding profitability. GDX only needs to rally another 8.6% from
its mid-week levels to hit $25. And once gold stocks break out
decisively to the upside, they are off to the races.
In
all the markets buying begets buying. The more a sector or asset is
rallying, the more investors want to participate. And the more
capital they pour in, the more those prices keep rallying. That
creates and fuels a powerful virtuous circle of buying. Gold stocks
have drifted sideways for so long now that they need to achieve a
major upside breakout from their consolidation to catch
investors’ interest. That’s not far away.
Despite the roller-coaster ride in gold stocks as the wild SPX
volatility bullied them around in the past couple weeks, GDX is
still within striking distance of that key $25 breakout. Once that
happens, the gold stocks’ popularity will surge again. There’s
still time to buy low before lots more investors start returning
which will catapult this small contrarian sector sharply higher.
The gold stocks look really bullish today!
While investors
and speculators alike can certainly play gold stocks’ powerful
coming upleg with major ETFs like GDX, the best gains by far will be
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The
bottom line is the gold stocks weathered the recent sharp
stock-market selloff really well. The SPX plunged for the first
time in a couple years, generating a big and sharp fear spike. As
usual that spooked the gold-stock traders, who sold and fled. Yet
despite the carnage GDX’s major consolidation support at $21 held
solid. The gold miners’ stocks soon rebounded sharply back up to
the middle of their basing channel.
With
GDX trading near $23 this week, that critical $25 breakout to entice
investors back remains within easy range. Once the collective
gold-mining costs reported in the upcoming Q4 results are compared
with higher Q1 prevailing gold prices, strong gold-stock buying
should resume. Gold stocks have always been a volatile sector, so
there’s no reason for traders to fear periodic selloffs like they
suffered in recent weeks. | 
