The
gold miners’ stocks have surged powerfully over the past few weeks,
challenging upleg highs. Traders started returning to this small
contrarian sector as gold blasted back above the
psychologically-crucial $1300 line. While such early-summer
strength is atypical, gold miners’ technicals, sentiment, and
fundamentals all support more gains to come. Gold stocks need to
mean revert to much-higher price levels.
Traders usually track gold-stock fortunes with this sector’s
most-popular exchange-traded fund, the GDX VanEck Vectors Gold
Miners ETF. Launched in May 2006, this was the maiden gold-stock
ETF. That big first-mover advantage has helped propel GDX to sector
dominance. This week its net assets of $9.7b ran 46.5x larger
than the next-biggest 1x-long major-gold-miners ETF! GDX is this
sector’s leading benchmark.
And
it sure didn’t look pretty in May, with traders wanting nothing to
do with gold stocks. GDX spent the great majority of last month
languishing near its 200-day moving average. Just a few weeks ago
on May 29th, GDX closed at $20.42. That was down 3.2% year-to-date,
much worse than gold’s own slight 0.2% YTD decline. The gold stocks
were really out of favor, just like the metal they mine which fuels
their profits.
This
sector started perking up on May 30th, when gold and GDX enjoyed
0.7% and 1.7% rallies. Major gold miners’ inherent profits
leverage to gold usually helps their stock prices amplify gold’s
gains by 2x to 3x. But there was still no excitement with gold and
GDX trading at $1288 and $20.77 heading into June. Early market
summers have gold’s
weakest seasonals
of the year, usually weighing on it and the miners.
But
leave it to Trump to unleash a bombshell shaking the status quo.
That evening he shocked, tweeting “On June 10th, the United States
will impose a 5% Tariff on all goods coming into our Country from
Mexico, until such time as illegal migrants coming through Mexico,
and into our Country, STOP. The Tariff will gradually increase until
the Illegal Immigration problem is remedied, at which time the
Tariffs will be removed.”
The
White House said those tariffs would be ratcheted up 5% each month
until they hit their terminal 25% level on October 1st! While Trump
later suspended his Mexico-tariff threat, it really surprised
traders. Not only was Trump opening up a new front in the trade
wars, but he was tying tariffs to non-trade issues as a
hardline negotiating tactic. That had serious implications, so
Asian traders flooded into gold after that tweet.
The
next day that new momentum spilled into the US, driving gold 1.3%
higher to $1305. Long-apathetic gold-stock traders rejoiced at
seeing gold claw back over $1300. That has proven a crucial level
for gold sentiment for years now, the dividing line between popular
bearishness and bullishness. GDX shot up 3.9% that day. Asian
traders bought gold aggressively heading into the next trading day,
driving a $1300 breakout.
That
upside action again carried into US markets on June 3rd, when gold
powered another 1.5% higher to $1325. The major gold stocks’ gains
mounted, with GDX surging another 4.2% to $22.49. In those two
trading days following Trump’s Mexico-tariff threat, this leading
gold-stock ETF blasted 8.3% higher on a 2.8% gold surge! GDX’s
gains were amplifying gold’s breakout rally by a strong 3.0x,
rekindling sector interest.
There’s nothing speculators and investors like more than chasing
winners, riding the momentum. So that newfound gold and gold-stock
buying persisted. By this Wednesday’s data cutoff for this essay,
gold had powered 4.1% higher since May 29th. True to form, the
major gold stocks as measured by GDX rocketed up 12.4% in that same
span for 3.0x leverage. The gold miners’ stocks are
starting to return to favor again!
Their strong gains in recent weeks didn’t erupt from major lows, but
from a lull in a solid existing upleg. This chart looks at GDX over
the past several years or so, across the life of gold’s current bull
market. It is important to consider big moves in broader technical
context, as that offers clues on what’s likely next. The gold
miners’ stocks have lots of room to rally much higher from here,
with major-upside-breakout potential.
While this week’s $23ish GDX levels feel high after May’s
disheartening 200dma grind, they are actually fairly low.
Since late 2016 GDX has mostly meandered in a major consolidation
trend running from $21 support to $25 resistance. $23 is right in
the middle of that long basing channel, which isn’t noteworthy at
all technically. The gold miners’ stocks won’t get exciting again
until GDX breaks out decisively above $25.
The
past few weeks’ big surge is simply part of an in-progress upleg
born in deep despair back in early September. That episode was
brutal.
All-time-record gold-futures short selling hammered the metal to
19.3-month lows. That unleashed cascading stop-loss selling
in gold stocks, an ugly
forced
capitulation that crushed GDX to deep 2.6-year secular lows.
All the gains since are just a normal mean reversion higher.
Gold
stocks’ recovery from those anomalous extreme lows has already
passed plenty of bullish technical milestones. GDX’s series of
higher lows and higher highs carved the nice uptrend rendered
above. This leading sector benchmark enjoyed a
major triple
breakout, climbing back over three key resistance zones
including GDX’s 200dma. A powerful Golden Cross buy signal flashed
as GDX’s 50dma surged over its 200dma.
By
late February this young gold-stock upleg had lifted GDX 33.0%
higher to $23.36. But there was no reason for gold stocks’ mean
reversion higher to fail there. Those gains remained relatively
small by sector standards. Back in essentially the first half of
2016, GDX skyrocketed 151.2% higher in a monster upleg on a parallel
29.9% gold one! And gold-stock uplegs during gold’s last bull
averaged bigger gains too.
Before GDX came along, the primary
gold-stock
benchmark was the classic HUI NYSE Arca Gold BUGS Index. Like
GDX it tracks most of the same major gold stocks, so HUI and GDX
price action are usually indistinguishable. The last gold-stock
bull straddling GDX’s birth saw the HUI soar 1664.4% higher over
10.8 years between November 2000 to September 2011! Those gains
accrued over 12
separate uplegs.
One
was an anomaly, the epic mean-reversion rebound after late 2008’s
first-in-a-century stock panic. Excluding it, the other 11 normal
gold-stock uplegs in that last bull averaged 80.7% gains over 7.9
months per the HUI! So GDX’s 33.0% upleg-to-date advance as of
late February was nothing, way too small to be mature. Odds are it
will yet grow much larger in line with past precedent before giving
up its ghost.
Mid-upleg selloffs after big surges are normal and healthy to
rebalance sentiment. If greed becomes too excessive early in
uplegs, it can prematurely exhaust them by pulling forward too much
future buying. In most cases mid-upleg pullbacks bounce at upleg
support. But that didn’t hold in late April, as GDX fell even
farther to its 200dma. That was the result of extreme stock-market
euphoria stunting
gold demand.
The
gold stocks were down but not out, simply awaiting signs of life in
gold before traders returned. That came in late May after the stock
markets had entered a pullback and Trump’s Mexico-tariff threat
rattled traders. GDX quickly leapt back up into its upleg’s uptrend
channel, proving it is alive and well. Overall this upleg’s
technicals remain very bullish, pushing this leading ETF’s
price ever closer to a major upside breakout.
For
the better part of several years now, GDX $25 has proven gold
stocks’ graveyard in the sky. They’ve challenged it several times,
but haven’t been able to decisively break though. They certainly
can go much higher. In this gold bull’s monster initial upleg in
H1’16, GDX rallied as high as $31.32. And near the end of gold’s
last secular bull, this ETF peaked at $66.63 in September 2011.
There’s nothing magical about $25.
And
it isn’t far away at all. As of the middle of this week, GDX merely
had to rally 8.9% more to regain $25! That’s nothing for a
sector as volatile as gold stocks. Remember just a few weeks ago
GDX surged 8.3% in only two trading days as gold powered back over
$1300 after Trump’s Mexico-tariff threat. So a major gold-stock
breakout that would radically improve sector psychology is very much
within reach today.
The
higher gold stocks climb, the more traders will want to buy them to
ride that momentum. The more capital they deploy, the more gold
stocks will rally. This normal virtuous circle of improving
psychology and buying will become even more exaggerated as GDX $25
is surpassed. Seeing the highest gold-stock levels in several years
will work wonders to improve sector sentiment, unleashing widespread
bullishness.
This
gold-stock upleg’s potential gains are massive spanning such a major
upside breakout. Remember speculators and investors love chasing
winners, so the higher gold stocks rally the more attractive they’ll
look. If GDX’s current upleg grows to the last secular bull’s
average upleg gain of 80.7%, it would catapult this ETF to $31.75.
The major factor almost certain to push GDX well over $25 is
gold’s own breakout.
Much
like GDX $25, gold’s own bull since December 2015 has been capped
near $1350 ever since. Last week I wrote a whole essay explaining
why gold is winding closer and closer to
blasting through
that to new bull-market highs. New-bull-high psychology
in gold would spark a frenzied rush to bring neglected gold stocks
back into portfolios. Weakening general stock markets should create
the necessary gold demand.
Gold-stock sentiment is merely decent today, average at best even
after recent weeks’ sharp surge. That leaves lots of room for
improvement. The more bullish traders get on gold miners’ stocks,
the more they will want to buy. Gold miners’ shift back into favor
could easily propel GDX back above $25 anytime in the coming
months. But we may have to wait until August, after the worst of
the gold summer doldrums pass.
Normally this time of year I’d be updating my
gold-summer-doldrums research. But that takes a backseat to the
recent gold and gold-stock surges. In a nutshell, Junes and Julies
are the weakest time of the year seasonally for gold with no
recurring outsized gold-demand spikes. Gold and gold stocks can
rally during early summers if unexpected demand materializes, but
they usually don’t. Will summer 2019 prove an exception?
I
sure hope so, but only time will tell. This next chart looks at the
HUI’s average summer performances in all modern gold-bull-market
years. Each summer is individually indexed to its final close in
May, keeping gold-stock price action perfectly comparable regardless
of prevailing gold levels. The yellow lines show 2001 to 2012 and
2016 to 2017. Last year’s summer gold-stock action is rendered in
light blue for comparison.
All
these lines averaged together form the red one, revealing the
center-mass drift trend of gold stocks in market summers. Gold
stocks’ current 2019 summer action is superimposed over all that in
dark blue. As you can see, this sector is off to one of its best
summer starts in all modern bull-market years! That could be
sustainable like summer 2016’s powerful run, or gold stocks may end
up consolidating until August.
Which way this summer plays out depends on gold. If gold
keeps climbing on balance, so will the stocks of its miners
regardless of seasonal tendencies. Weakening stock markets would
spur gold investment demand continuing to push its price higher. A
weaker US dollar would also help, motivating gold-futures
speculators to buy as well. Only time will tell whether the gold
and gold-stock breakouts come sooner or later.
Whatever the timing, the gold miners’ fundamentals remain strong and
bullish and support much-higher stock prices. After every
quarterly earnings season, I dig deep into the GDX gold miners’
fundamentals. They finished reporting their
latest Q1’19
results about a month ago, and I wrote a comprehensive essay
analyzing them. There’s no doubt fundamentally that gold stocks
should be trading way over GDX $25 levels.
Stock prices are ultimately determined by underlying corporate
earnings, and for the gold miners that is totally dependent on
prevailing gold prices. Gold-mining costs are best measured in
all-in-sustaining-cost terms. In Q1’19 the GDX gold miners’ AISCs
averaged $893 per ounce. That’s right in line with the prior four
quarters’ trend of $884, $856, $877, and $889. Gold-mining profits
are going to soar with higher gold.
Gold
averaged $1303 in Q1 when the major gold miners were producing it
for $893. That implies they were earning $410 per ounce mined.
$1400 and $1500 gold are only 7.4% and 15.1% higher from there. As
the GDX gold miners’ AISCs reveal, gold-mining costs are largely
fixed from quarter to quarter and don’t follow gold higher. So
assuming flat AISCs, gold-mining profits surge to $507 at $1400 and
$607 at $1500.
That’s 23.7% and 48.0% higher from Q1’19 levels on mere 7.4% and
15.1% gold gains from that quarter’s average price! And as of the
middle of this week, gold had already climbed 2.3% of that. The
major gold miners’ fundamentals are already bullish, but improve
greatly at higher prevailing gold prices. With earnings growth hard
to come by in general stock markets this year, the gold stocks will
be even more alluring.
All
the stars are aligning for big gold-stock gains in coming months,
with their technicals, sentiment, and fundamentals all looking very
bullish. This mounting gold-stock upleg has great potential to grow
much larger later this year, greatly rewarding contrarian traders
buying in early. More and more investors are becoming aware of this
sector’s huge potential, including elite billionaires running major
hedge funds.
This
week one of them, Paul Tudor Jones, gave an interview in New York.
He was asked what his best trade over the next year or two will be.
He said, “The best trade is going to be gold. If I have to pick my
favorite for the next 12 to 24 months it probably would be gold. I
think gold goes beyond $1400, it goes to $1700 rather quickly. It
has everything going for it in a world where rates are conceivably
going to zero...”
This
is not the summer to check out, but to do your homework and get
deployed in great gold stocks. All portfolios need a 10%
allocation in gold and its miners’ stocks! Many smaller
mid-tier and
junior miners have superior fundamentals and upside potential to
the majors of GDX. And by the time the gold stocks get really
exciting again in upside breakouts with gold, much of the easy gains
will have already been won.
One
of my core missions at Zeal is relentlessly studying the gold-stock
world to uncover the stocks with superior fundamentals and upside
potential. The trading books in both our popular
weekly and
monthly
newsletters are currently full of these better gold and silver
miners. Mostly added in recent months as gold stocks recovered from
selloffs, their prices remain relatively low with big upside
potential as gold rallies!
If
you want to multiply your capital in the markets, you have to
stay informed. 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. As of Q1 we’ve
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The
bottom line is this gold-stock upleg is mounting. Despite weak
early-summer seasonals, the gold miners’ stocks are rallying with
gold and nearing a major breakout above GDX $25. Seeing the best
gold-stock prices in several years will really motivate traders to
return, fueling a virtuous circle of capital inflows and gains.
Gold-stock technicals, sentiment, and fundamentals all support
much-higher prices ahead.
Gold’s own inexorably-nearing major bull-market breakout will really
light a fire under gold stocks. The higher gold climbs, the more
investors and speculators will want to own it and its miners. While
summer may force a consolidation, softening stock markets could
easily overcome gold’s weak seasonals. The potential gold-stock
gains as gold returns to favor are massive, so it’s important to get
deployed early. | 
