The
gold miners’ stocks have slumped in January, tilting sentiment back
to bearish. This sector’s strong December upward momentum was
checked by gold’s own upleg stalling out. Gold investment demand
growth slowed on the blistering stock-market rally. But uplegs
always flow and ebb, and this young gold-stock upleg merely paused.
The gold miners’ gains will likely resume soon, rekindling bullish
psychology.
Most
investors and analysts track the gold-mining sector with its leading
ETF, the GDX VanEck Vectors Gold Miners ETF. GDX was this sector’s
pioneering ETF birthed in May 2006, creating a huge first-mover
advantage that is insurmountable. This week GDX’s net assets of
$9.9b were an incredible 56.7x larger than the next-biggest
1x-long major-gold-miners ETF! GDX dominates this space with little
competition.
Back
in early September, the gold stocks plunged to a major 2.6-year
secular low per GDX. This sector suffered a brutal
forced
capitulation on cascading stop-loss selling, devastating
sentiment. The triggering catalyst was gold getting pounded to its
own major lows in mid-August on
record futures
short selling. At worst GDX fell to $17.57 on close, which was
down an ugly 24.4% year-to-date. Most traders fled in disgust.
But
major new uplegs are born in peak despair, and that was it.
The gold stocks started recovering out of those fundamentally-absurd
levels, gradually carving a solid upleg. By early January GDX had
rallied 22.3% higher in 3.7 months, fueling more-optimistic sector
sentiment. Plenty of speculators and investors including me were
comparing 2019’s setup for gold stocks to the first half of 2016, a
wildly-lucrative stretch.
That
was just after today’s gold bull ignited, and its maiden upleg
surged 29.9% higher in just 6.7 months. Such gold strength ignited
a flood of capital into the gold miners, catapulting GDX an enormous
151.2% higher in essentially that same span! This year when GDX’s
latest closing upleg high of $21.48 was achieved on January 3rd,
traders were salivating at the prospects of another mighty
H1’16-like gold-stock upleg.
But
instead of powering higher, the gold stocks stalled and started
drifting lower. By last Friday the 18th, GDX had slumped 5.4% over
a couple of weeks or so to $20.31. That really discouraged the
gold-stock traders, torpedoing the nascent bullishness driven by
GDX’s powerful 10.5% December rally. I’ve been getting lots of
e-mails from discouraged traders moping, and often convinced this
gold-stock upleg fizzled.
Sentiment has really deteriorated in recent weeks as gold-stock
prices retreated. One manifestation of this resurgent bearishness
is apparent in how individual gold miners’ stocks are reacting to
company-specific news. Early in new quarters, many gold miners
report their prior quarter’s production. And early in new years,
plenty also give guidance for new full-year production. Traders are
selling hard on this news.
Even
though these production reports and outlooks have generally been
flat to good, they are being used as excuses to sell. When
traders wax bearish, all news is considered bad. So when pessimism
reigns early in new quarters, it’s not unusual to see traders flee.
Conversely when gold stocks are rallying nicely early in new
quarters, this news is typically bought. Gold stocks’ reaction to
news is a sentiment indicator.
Interestingly selling on full-year production guidance is usually a
poor decision. Gold-miner managers try to maximize their
compensation which is heavily driven by their stock’s price. So
they tend to lowball their production estimates early in new
years, leaving room to beat them later in those years. Then when
they exceed their own expectations, their stocks catch strong bids
into year-ends maximizing their personal earnings.
Plenty of traders have written me worrying that January 2019 is
nothing like January 2016, arguing that a major new gold-stock upleg
isn’t underway. They are dead wrong, everyone forgets the gold
stocks also fell in much of that pivotal month. In the first couple
weeks of January 2016, GDX actually dropped 9.1% despite a
parallel 2.5% gold surge! Then like now, emotional gold-stock
traders were irrationally scared.
That
monster H1’16 gold-stock upleg didn’t start until January 20th that
year, which was that month’s 12th trading day. That was after most
of the post-quarter and new-year news releases. This year’s slump
is actually better, not worse. GDX was only down 3.7% month-to-date
on this month’s 13th trading day, on gold’s slight 0.1% drift lower
over that span. Early-year weakness doesn’t preclude major uplegs
brewing!
While most traders want to assume otherwise, gold stocks’ young
upleg remains very much alive and well. This chart is
updated from my essay several weeks ago heralding GDX’s major
upside triple
breakout, a super-bullish technical event. While GDX did slump
in recent weeks after achieving that, its upleg is still
rock-solid. All uplegs meander higher in fits and starts, taking
two steps forward before one step back.
I’m
not going to rehash this chart after analyzing it in depth just a
few weeks ago. But scared gold-stock traders can take solace in
some brief observations. First note the early-January-2019 pullback
in GDX is far less severe than the early-January-2016 one. While
that month birthed a monster upleg, it wasn’t all rainbows and
unicorns until the very end. Weak-handed excitable traders had to
be shaken out before the surge.
Second look at GDX’s solid upleg since early September 2018, which
again rallied 22.3% at best over 3.7 months as of January 3rd.
Uplegs are simply series of higher lows and higher highs often
unfolding in a defined uptrend channel. All that still perfectly
applies to GDX, its technicals remain very bullish. Both its upleg
lows and highs are gradually marching higher, revealing zero
technical strain on this young upleg.
Once
again this upleg was born at GDX’s deep 2.6-year low of $17.57 on
September 11th. Over the next few weeks into early October, GDX
surged 8.4% to $19.05. Then it quickly pulled back to $18.39, which
was still 4.7% above upleg-start levels. From there GDX powered up
another 9.3% over the next couple weeks to $20.10 in late October.
Then it suffered a bigger retreat to $18.42 by mid-November, still a
higher low.
GDX
rebounded strongly from there, surging another 16.6% to $21.48 by
early January. And after such a strong run it slumped again to
$20.31 last Friday. While it remains to be seen if that proves the
latest upleg low, the higher lows so far have run $18.39, $18.42,
and $20.31. And the higher highs clocked in at $19.05, $20.10, and
$21.48. This is a textbook-perfect gold-stock upleg so far,
offering nothing to worry about.
These higher lows and higher highs have formed an excellent uptrend
channel for this upleg. Connecting these lows and highs creates
parallel lower-support and upper-resistance lines. I didn’t draw
them in this chart because they’d be difficult to see at this scale,
but they are really well-defined. As of this week the support line
extends near $19.50. So even if GDX slumped that low, its uptrend
channel would remain intact.
Resistance now projects near $21.75, which would be another new
upleg high. Odds are GDX will head back up there to challenge it in
the coming few weeks or so. GDX may have started bouncing from last
Friday’s level a bit under its 200-day moving average, which is now
running $20.65. It could head a little lower first to its 50dma
which is down near $20.14. And maybe it will even drop to $19.50
lower support.
It’s
important to realize that as long as GDX remains above that
uptrend-channel support line, its upleg is just fine. Any action
over that is merely upleg noise that isn’t worth worrying about
technically. It is normal for pullbacks within uplegs to bleed away
bullishness and rekindle bearishness. That’s actually essential for
uplegs’ health and longevity, keeping sentiment balanced so uplegs
don’t prematurely burn out.
All
the upside
triple-breakout analysis and bullishness I discussed in early
January remains valid and in force today. This gold-stock upleg
has just paused, which is par for the course. All uplegs flow
and ebb, gradually meandering higher on balance. None shoot up in
straight lines, not even that monster one in H1’16. That was
riddled with multiple strong selloffs, with one even hitting support
below GDX’s 50dma.
The
reason this young gold-stock upleg paused in recent weeks was gold’s
own upleg stalled out. Gold miners’ stocks are ultimately just
leveraged plays on gold. Their profits really amplify changes in
gold’s price, which lets major gold miners’ stocks leverage gold’s
underlying moves by 2x to 3x. Gold’s own young upleg that is
driving gold stocks’ one hit its latest high near $1294 in early
January the same day as GDX.
At
that point gold had rallied 10.2% upleg-to-date, which GDX’s 22.3%
upleg leveraged by a normal 2.2x in a similar span. Gold had
bottomed a few weeks before the gold stocks, in mid-August instead
of early September. Gold stocks’ performance relative to gold in
this upleg has been normal. That leverage is often on the
low side of its range early in young uplegs, then climbs to the high
side later as momentum mounts.
At
worst since its own January 3rd high, gold had slumped 1.0% to $1280
on last Friday. It is certainly no coincidence that is the exact
span of gold stocks’ latest pullback. GDX’s young upleg will resume
as soon as gold catches a bid again. That is dependent on
gold investment demand resuming. It was strong in Q4, but faded
significantly in January. This next chart looks at the leading
proxy for gold investment demand.
That
is the physical bullion holdings the dominant GLD SPDR Gold Shares
gold ETF holds in trust for its shareholders. They are reported
daily, a far-higher-resolution read than the quarterly
supply-and-demand data from the World Gold Council. In last week’s
essay I explained
this chart in depth, analyzing why the capital flows into and
out of GLD alone by American stock investors overwhelmingly drive
the global gold price.
It
superimposes GLD’s bullion holdings in blue over the gold price in
red. Rising GLD holdings show that American stock-market capital is
moving into gold via the conduit of this leading gold ETF. In Q4
and especially December gold surged higher on heavy differential
buying of GLD shares. But in January that GLD buying has
moderated. That’s why gold’s advance stalled out, which in turn
drove gold stocks’ pause.
Again I discussed this chart just last week, so there’s no need for
more comprehensive analysis. For our purposes today, note how GLD’s
holdings climbed modestly in October and November after they had
fallen to a deep 2.6-year secular low of their own in early
October. GLD had suffered 5 consecutive monthly draws of 24.2
metric tons, 28.0t, 18.8t, 45.0t, and 12.9t between May and
September, an ugly streak.
But
that trend of American stock-market investors selling gold via GLD
shares ended in early October. GLD enjoyed its first big build
the very day the US stock markets suffered their first sharp
plunge! That snowballed into an 11.8t build in October and 7.7t in
November. That investment buying fueled modest gold rallies of 2.1%
and 0.5% those months. Then in December that GLD-share buying
really accelerated.
Last
month enjoyed a sizable 25.9t build in GLD’s holdings, the biggest
since September 2017. Those capital inflows fueled a much-larger
4.9% gold rally in December. When investment capital is flowing
into gold, its price naturally climbs. And that in turn drives the
gold miners’ stocks higher. Gold’s 2.1%, 0.5%, and 4.9% gains in
the last several months drove parallel 2.2%, 0.8%, and 10.5% monthly
rallies in GDX.
On
the surface January has looked good too, with GLD’s holdings surging
another 22.1t month-to-date as of the middle of this week. But
nearly 9/10ths of that build came on only 2 trading days, January
2nd and 18th. Out of 15 trading days so far, January has seen 4
GLD-holdings build days, 3 draw days, and fully 8 unchanged.
American stock investors’ differential GLD-share buying hasn’t
been consistent this month.
That’s enabled gold-futures speculators to push gold modestly
lower. Unfortunately we can’t know how much selling they’ve done,
or whether it was exiting longs or adding new shorts, because of the
federal-government partial shutdown. The weekly Commitments of
Traders reports usually published by the CFTC haven’t been released
since mid-December, so there is no data on gold-futures
speculators’ trading.
But
gold drifting lower this month despite a solid GLD build on
balance proves they have to be selling. A sharp bounce in the US
Dollar Index is a major factor driving those gold-futures sales.
But the main one is the surging US stock markets. They are really
retarding gold investment demand, making investors forget the wisdom
of prudently diversifying their stock-heavy portfolios with gold.
That has paused gold stocks.
The
flagship US S&P 500 broad-market stock index (SPX) plunged 19.8%
over 3.1 months between late September and late December, a
severe correction nearly
entering
bear-market territory. It was that SPX drop that reignited gold
investment demand and fueled gold’s latest young upleg.
Last week’s essay
dug into this critical relationship between the SPX and gold. The
SPX’s sharp rebound since weighed on gold demand.
Between the SPX’s Christmas Eve near-bear low and last Friday, this
leading index rocketed up 13.6% in just several weeks! That violent
bounce that looked and felt exactly like a bear-market rally
nearly erased 4/7ths of the preceding correction. That has
reignited widespread greed and complacency in the stock markets, the
exact mission of bear rallies which are the biggest and fastest seen
in all of stock-market history.
Gold
stalled out in January because the SPX is surging so fiercely,
retarding the impetus to diversify with gold. And the gold-stock
upleg paused because gold stopped advancing. So this probable bear
rally in the stock markets is to blame for gold stocks’ early-year
weakness. But once these overbought US stock markets roll over
decisively again, gold psychology will flip back to favorable and
big investment buying will resume.
When
gold starts powering higher again, gold stocks will be off to the
races. That portends big gains still coming in GDX, and even larger
ones in its little brother GDXJ. It is effectively a
mid-tier gold
miners ETF these days, and its upleg gains during recent years’
bull market have outpaced GDX’s by about 1.4x on average. GDXJ
simply has a better mix of gold miners than GDX, with fewer problems
expanding production.
Yet
the best gains by far won’t be won in the ETFs, but in the smaller
mid-tier and junior gold miners with superior fundamentals. GDXJ
still has deadweight in its top holdings, miners struggling with
declining production and rising costs. The better gold miners are
growing their output through new mine builds and expansions,
generating greater gains. Finding and owning these better
gold-mining stocks is essential.
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!
The
gold-stock gains should be similarly huge in this next major gold
upleg. The gold miners are
the last
undervalued sector in these still-very-expensive stock markets,
and rally with gold during stock-market bears unlike anything else.
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!
The
bottom line is this young gold-stock upleg is just paused. The
current technicals certainly don’t justify increasingly-bearish
sentiment. This sector’s leading benchmark GDX is carving higher
lows and higher highs, climbing on balance in a well-defined uptrend
channel. Uplegs don’t shoot higher in straight lines, pullbacks
within them are normal and expected. They serve to rebalance
sentiment keeping uplegs healthy.
Gold
stocks’ pullback this month was driven by gold’s own young upleg
stalling. Strong gold investment demand fueled by recent months’
serious stock-market selloff moderated after stocks screamed higher
in a violent bear-market-rally-like bounce. The resulting rekindled
bullish psychology overshadowed gold again. But once stock-market
selling resumes, so will the young uplegs in gold and its miners’
stocks. |