The
gold miners’ stocks are blasting higher, just achieving major new
secular highs! Traders are flocking back to gold stocks as the
metal they produce relentlessly advances on strong investment
demand. That is atypical during market summers, but the pandemic
has made for unprecedented times. This gold-stock upleg is big, but
doesn’t look excessive yet. It should keep marching with investment
capital flowing into gold.
With
these red-hot stock markets fueled by extreme Fed money printing,
the small contrarian gold-stock sector has largely remained
overlooked. But the gold miners’ gains since March’s stock panic
have been awesome. The leading and dominant gold-stock benchmark is
the GDX VanEck Vectors Gold Miners ETF. Its impressive $16.9b in
net assets this week doubled all the rest of the US
gold-stock ETFs combined!
The
major gold miners tracked by GDX have skyrocketed since being
briefly sucked into that COVID-19-lockdown stock panic. As of the
middle of this week, GDX has soared 105.1% higher in just 3.8
months! This fantastic performance has been exceptional, it is not
often speculators and investors can double their capital in such a
short span. Those enormous fast gains are creating an interesting
dichotomy of thinking.
They
are bringing legions of new traders to this sector, as they love
chasing winners. Nothing attracts in fresh capital like strong
upside momentum. This is a very-bullish dynamic, fueling a
powerful virtuous circle. The more gold-stock buying traders do,
the larger this sector’s uplegs grow. And the higher gold stocks
climb, the more traders want to buy them. Major new secular highs
greatly reinforce this rallying cycle.
But
many traditional gold-stock traders are wary, worried this sector
has run too far too fast to sustain these levels. That’s certainly
prudent to consider after anything more than doubles in a few short
months. But somewhat surprisingly, GDX still isn’t yet flashing
normal warning signs signaling major upleg toppings. That argues
this gold-stock upleg still has plenty of room to keep running
higher, which is encouraging.
This
first chart looks at this gold-stock bull’s technicals. This sector
is so wildly volatile that its bull and bear markets are reckoned
based on gold’s own. Gold’s ongoing secular bull was born in
mid-December 2015, and has yet to see a single bull-slaying 20%+
correction. This parallel gold-stock bull began its long march
higher about a month later in mid-January 2016. It has been a
choppy and often-trying run since.
While GDX’s recent massive 105.1% gains in just 3.8 months sure
sound excessive, it’s always essential to maintain longer-term
perspective. That violent surge didn’t erupt from euphoric highs,
but from the depths of despair in an ultra-rare stock panic. Late
in those, which are technically 20%+ plummetings in major stock
indexes in 2 weeks or less, gold gets sucked into the frantic
selling. That wreaks havoc on gold stocks.
In
just 0.6 months leading into mid-March’s epic fear maelstrom, GDX
collapsed 38.8%. It was radically oversold! Oversoldness
and overboughtness are technical measures of when prices move too
far too fast to be sustainable. One easy way to quantify that
mathematically is simply to divide a closing price by its trailing
200-day moving average. 200dmas are ideal technical baselines,
ever-so-gradually following prices.
On
March 13th, GDX collapsed to just 0.694x its 200dma. That was the
most oversold it had been by far in this entire secular gold bull.
As the gold baby was thrown out with the general-stock bathwater in
the scary heart of that panic, GDX literally crashed 24.5% in
just 2 trading days! A crash compresses that 20%+ decline into 2
trading days or less. GDX cratered to just $19.00 on close that
day, unbelievably low.
In
their darkest hour, the major gold stocks had collapsed 35.1%
year-to-date! And bull-market-to-date, GDX was only 52.4% higher
over a long 4.2-year secular span. Gold had climbed 40.0% during
that, and GDX usually amplifies its material moves by 2x to 3x.
GDX should’ve been up 80% to 120% bull-to-date at March’s
stock-panic nadir, trading between $22.45 to $27.43. Those panic
lows were an epic anomaly!
And
that’s why GDX immediately rocketed higher out of them. In late
February before getting sucked into that stock panic, GDX traded at
$31.05 which was up just a modest 6.0% year-to-date. That was
largely seen as a reasonable level for gold stocks. They remained
far from overbought then, with GDX trading at just 1.153x its
200dma. The danger zone for major upleg toppings over the past 5
years or so exceeds 1.50x.
While GDX soaring 105.1% in the 3.8 months since that brutal
stock-panic low sounds extreme, realize that over 60% of those
gains merely recouped what was lost in several weeks in that
panic! The gold stocks have been mostly mean reverting higher out
of extreme losses. From its late-February high to this week, GDX
has only rallied 25.5% in 4.4 months. And this week GDX was only
33.1% higher year-to-date.
Believe it or not, that is actually fairly-weak 2020 gold-stock
performance! Why? The major gold stocks almost always amplify
gold’s own gains and losses. This Wednesday gold itself had soared
19.2% so far this year. A normal gold-stock upleg over this span
would’ve seen GDX blast 38% to 58% higher, again leveraging gold’s
upside by the usual historic 2x to 3x. Gold stocks are still
really underperforming gold.
And
while they are definitely overbought technically after GDX blasted
20.1% higher over about several weeks since mid-June, danger signs
aren’t yet flashing. Again that Relative GDX or rGDX measure of
this leading gold-stock ETF as a multiple of its own 200dma has to
soar over 1.50x to reach upleg-killing extremes of overboughtness.
That certainly happened late in this gold-stock bull’s monster
maiden upleg.
In
essentially the first half of 2016, GDX skyrocketed 151.2% higher in
just 6.4 months! Those gains were so big so fast that GDX soared as
high as 1.646x its 200dma. On the actual day that upleg gave up its
ghost before rolling over into a severe correction, the rGDX ran
1.567x. The odds of today’s gold-stock upleg failing and rolling
over would definitely be high if the rGDX was back over 1.50x in
that rarefied territory.
But
GDX still hasn’t stretched anywhere near that radical overboughtness
in this upleg. About a month ago I ran
an rGDX chart
in another essay if you want to take a look at this indicator’s
history during this gold-stock bull. Back in mid-May when GDX’s
initial post-panic peak was carved, this leading gold-stock
benchmark was only trading at 1.311x its 200dma. That’s overbought,
yet still far from upleg-slaying levels.
Then
the rGDX didn’t exceed that high until this Wednesday, when GDX
surged 3.3% to a major new 7.4-year secular high. This rGDX
overboughtness indicator clocked in at 1.327x on that. So the major
gold stocks still haven’t rallied anywhere near fast enough or far
enough to reach the historical danger zone warning of imminent upleg
failures. And interestingly the stock panic skewed these latest
rGDX reads high.
Again that exceedingly-anomalous event pummeled the gold stocks to
radically-oversold depths far under GDX’s 200dma. While those
extreme lows were short-lived, they definitely dragged that 200dma
lower and retarded its subsequent upslope. 200 trading days from
this week extends all the way back to late September 2019. Again
imagine that crazy ultra-rare stock panic hadn’t happened, erase it
mentally.
We
can approximate that technically. Instead of GDX plummeting 38.8%
in 0.6 months, without a panic it probably wouldn’t have dropped
much more than 5% in a mild pullback. So in the 6 weeks or so that
surrounded that panic, we can infer a non-panic GDX no more than 5%
off February’s peak. A simple formula recasts GDX during that short
span as the higher of its actual daily close or late-February levels
less 5%.
GDX’s 200dma based on that hypothetical no-panic scenario is a bit
higher, which drags this week’s highest rGDX read down from 1.327x
to 1.297x. The major gold stocks would look even less overbought
without the stock panic’s skew lower. Either way, technically this
sector isn’t dangerously overbought yet by its own bull’s standards.
And that’s certainly not the only reason the gold stocks likely
have room to run.
Gold
stocks are ultimately just leveraged plays on gold, which
overwhelmingly drives their earnings. So as goes gold, so go gold
stocks. Gold-stock uplegs don’t peak until gold itself does.
Back in early July 2016 after these gold and gold-stock bulls’ huge
maiden uplegs, gold crested at $1365. After that it consolidated
high for several weeks, helping GDX grind up modestly to its later
upleg peak in early August.
Gold’s ascent then ran out of steam because gold investment demand
petered out. The best daily proxy for gold investment demand
is the changes in the physical-gold-bullion holdings held in trust
by the major gold ETFs. I explained all this in depth in an essay
on the strong
gold investment a month ago. Rising gold holdings in the
dominant GLD SPDR Gold Shares gold ETF reveal stock-market capital
flowing into gold.
As
GDX has blasted higher in recent weeks culminating in this week’s
major secular highs, investment capital inflows into gold have
remained really strong. During the last several weeks or so as
GDX shot up 20.1%, GLD enjoyed a powerful 5.8% holdings build! That
compares to a 2.9% holdings draw during the several weeks in July
2016 after gold peaked when the last major gold-stock upleg was in
the process of topping.
The
second-largest gold ETF in the world well after GLD is the IAU
iShares Gold Trust. It tends to be more favored by some
institutional investors due to its lower management fees. Again all
this was explained in my latest gold-investment essay. During these
same last several weeks as GDX blasted higher, IAU’s holdings also
saw a solid 2.3% build. Gold uplegs don’t peak while investment
capital is still pouring in.
The
major gold stocks of GDX can keep powering higher on balance as
long as gold does. And one of the main signals gold is running
out of steam is waning investment demand as evidenced in its pair of
major physically-backed ETFs. That hasn’t happened yet. Another
key signal flagging the ends of major gold uplegs is how
gold-futures speculators are positioned, as their buying exhausting
is a big warning sign.
A
few weeks ago I wrote my latest essay
on gold futures,
which explored all this. In a nutshell, the specs’ capital
available to deploy in gold futures is finite. They can only add so
many long contacts, and buy to cover so many short contracts, before
they run out of capital firepower to keep buying. That leaves them
little room to buy but vast room to sell, so gold soon rolls over
killing uplegs. We haven’t seen that yet this time.
Back
in early July 2016, speculators’ gold-futures longs and shorts were
running 100% and 7% up into their gold-bull trading ranges. That is
excessively bullish in terms of these hyper-leveraged and
highly-influential traders’ bets, and thus very bearish for gold.
100% longs and 0% shorts is the most-bearish-possible
near-term setup for the yellow metal! And indeed that helped end
gold’s massive maiden upleg.
At
the end of June 2020, the latest gold-futures reporting week when
this essay was published, total spec longs and shorts were running
71% and 20% up into their gold-bull trading ranges. And in 52-week
terms which may be even more relevant since this gold bull has seen
such record gold-futures extremes, that positioning was way more
moderate at 47% longs and 80% shorts! Those ran 100% and 6% in
early July 2016.
So
like investors, gold-futures speculators have yet to show any
indication they are done buying gold in this upleg. Gold stocks
live and die by gold prices, they will follow gold higher or lower
and amplify its material moves on balance. And fundamentally the
gold miners are likely doing amazing, as higher gold prices drive
much-higher earnings. I analyzed today’s
gold-stock
undervaluations a couple weeks ago.
From
a sector level, the major gold miners’ profits are the difference
between average prevailing gold prices and their all-in sustaining
costs. For the top-25 GDX gold miners, over the last four quarters
that have been reported ending in Q1’20 these implied earnings have
run $439, $591, $552, and $649 per ounce. But Q2’20 would prove
much bigger without the early-quarter COVID-19 disruptions affecting
miners.
Q2’s
average gold price of $1714 surged a major 8.4% quarter-on-quarter
from Q1’s $1582! And gold miners’ AISCs generally don’t change much
quarter to quarter, although reduced operations for part of Q2 due
to government COVID-19 lockdowns could briefly skew that. But that
impact remains unknown until the major gold miners report Q2 results
from late July to mid-August. Otherwise gold-stock earnings are
huge.
Q2’20’s $1714 average gold price less the GDX top 25’s $904 average
all-in-sustaining costs over the last four reported quarters yields
enormous $810-per-ounce implied earnings! If that had happened
ex-shutdowns, the major gold miners’ profits would’ve skyrocketed
84.4% year-over-year. Actual Q2 results will be worse with COVID-19
impacts, but this sector will still see sharply-rising earnings
in future quarters.
Major gold-stock uplegs are unlikely to peak and roll over into
serious corrections before miners’ earnings prospects fade
dramatically on lower gold prices. That certainly isn’t the case
today. Least importantly of all, there’s one more minor peripheral
gold-stock indicator that’s interesting. It considers how this
sector has performed in market summers, Junes, Julies, and
Augusts, during all gold’s modern bull-market years.
This
chart is updated from my essay last week on gold’s usual
summer doldrums.
It takes the older HUI gold-stock index, since the newer GDX’s
price history is insufficient, and individually indexes this
sector’s price action each summer. Then all those summer indexes
are averaged together, distilling out the seasonal tendencies. The
red line is the result, while the blue line shows how the HUI is
performing this summer.
The
major gold stocks have broken out above their usual
summer-doldrums center-mass drift this year, which runs +/-10% from
May’s final close! As the HUI and GDX both include most of the same
major gold stocks, they are functionally interchangeable. I’m
intrigued by this chart this week because of how gold stocks have
behaved in past counter-seasonal strong summer rallies. Note all
the action above the 110 line.
2020
is only gold stocks’ 5th summer out of all gold-bull-market years
since 2001 where this sector has managed to decisively power above
its summer-doldrums trading range. Previously after such breakouts
in 2003, 2016, and 2019, gold stocks continued rallying on balance
for the rests of those summers. That strong upside momentum
continued to attract in enough new buyers to keep driving gold and
gold stocks higher.
So
history suggests gold stocks’ current upleg driven by strong gold
investment demand is likely to persist even during summer.
Traders love chasing winners, and will happily ride upside momentum
and ignore everything else including seasonals. The exception to
this summer-breakout-momentum precedent was 2005, when gold stocks
broke out then soon returned to trend. But all that happened much
later in August.
Despite gold stocks blasting higher in recent weeks, there’s no
reason yet to expect an imminent upleg failure. While they could
roll over into a correction anytime, key indicators flagging the
ends of historical major uplegs aren’t flashing warnings so far.
That argues the gold stocks still have plenty of room to run
higher yet. Thus any GDX pullbacks can be used as opportunities
to add positions in excellent gold stocks.
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keeps marching higher.
The bottom line is
despite gold stocks blasting higher, their upleg likely still hasn’t
run its course yet. The majority of their massive post-panic gains
were merely a mean reversion out of extreme anomalous lows. The
gold stocks haven’t outperformed gold normally year-to-date, they
aren’t super-overbought, investors are still buying gold, and
speculators haven’t exhausted their gold-futures-buying firepower in
this upleg.
All this is
bullish for gold stocks in coming months. While their Q2 results
will be somewhat impaired due to COVID-19 disruptions, their
earnings-growth potential in future quarters is enormous with these
higher prevailing gold prices. And counter-seasonal gold-stock
summer breakouts usually keep rallying on momentum buying instead of
rolling over. This sector’s odds of keeping marching higher on
balance look good. |