Another Gold Stocks Upleg / Commodities / Gold and Silver Stocks 2021

The gold miners’ stockssuffered a rocky start to 2021, rolling over into an extended correction aftera young upleg prematurely failed.  Theresulting deeper lows left sentiment overwhelmingly bearish, with thiscontrarian sector deeply out of favor. But over the last five weeks or so, gold stocks have powered higheragain in another young upleg.  This onehas a far-stronger foundation given the underlying gold setup.

The leading anddominant gold-stock benchmark and trading vehicle remains the GDX VanEckVectors Gold Miners ETF.  It held $14.2bin net assets in the middle of this week, a massive 30.6x bigger than the next-largest1x-long major-gold-miners-ETF competitor! Several weeks ago I analyzed the top 25 GDX gold miners’ latest quarterly results,which revealed this sector now enjoys incredibly-strong fundamentals.

While gold averaged$1,876 per ounce in the recently-reported Q4’20, the big GDX gold minersreported average all-in sustaining costs of $1,038 per ounce.  That implied stellar $838-per-ounce profitmargins!  That fantastic profitabilityfueled record revenues, adjusted earnings, operating cash flows, and treasuriesat the GDX-top-25 gold miners.  That was their sixth quarter in a row of soaring mid-double-digit earnings growth!

But you sure wouldn’t knowthe gold miners are thriving mightily by looking at GDX’s technical action inrecent months.  Traders wanted nothing todo with gold stocks in January and February, leaving them for dead.  This dirt-cheap high-potential contrariansector was hated, choked by overpowering universal bearishness.  This GDX chart over the past couple years orso highlights this sector’s wild and violent ride.

Last March’s brutalstock panic on economic fears from government lockdowns to slow COVID-19 slammedgold stocks to radically-oversold levels. GDX’s mean-reversion rebound out of that extreme anomaly was neck-snappinglysharp, ultimately growing into a huge upleg. Over just 4.8 months into early August, GDX skyrocketed 134.1% higher!  That parabolic surge left gold stocksextremely overbought.

So a healthy correction wasnecessary to rebalance sentiment, and that’s exactly what happened.  Over the next 3.6 months into late November,GDX fell 24.9%.  That was a sizable retreat,and this key sector benchmark knifed well under its 200-day movingaverage.  Those usually prove strong supportzones in ongoing bull markets. Gold-stock technicals and sentiment looked to be bottoming ahead of anew upleg.

Gold’s own situationbuttressed that thesis, green-lightingmore gold-stock upside.  Since gold miners’earnings are highly leveraged to prevailing gold levels, their stock prices actlike leveraged plays on gold.  The majorgold miners of GDX tend to amplify material gold moves by 2x to 3x.  And by late November, gold itself hadcorrected 13.9% over 3.8 months.  Thatwas right in line with this bull’s prior corrections’ average.

Gold’s three earliercorrections in recent years averaged 14.3% losses over 4.1 months.  And gold was also oversold below its own200dma, dogged by widespread bearishness. That was a great setup for a new bull-market upleg, and indeed one soongot underway.  Over the next 1.3 monthsinto early January, GDX powered 15.2% higher in a textbook-perfect series ofhigher lows and higher highs defining a young upleg.

That even surged to decisive major upside breakouts above both GDX’s 50-day moving average and its correction-downtrend resistance!  That young gold-stock upleg lookedrock-solid, set up beautifully to keep rallying on balance.  But then the markets threw a spanner into theworks, ultimately causing gold stocks’ young upleg to fail.  While that was a strange low-probabilityevent, it devastated sector psychology.

Gold stocks were nicelyconsolidating high during 2021’s opening week, until Friday January 8th.  Gold plummeted 3.5% out of the blue that day when gold-futures sellingcascaded after the key technical level of $1,900 failed overnight.  GDX collapsed 4.8% that day, weathering gold’splunge relatively well at just 1.4x downside leverage.  But that day’s extreme selling startedinexorably eroding precious-metals sentiment.

The major gold stocksdrifted lower throughout January into mid-February, keeping their young uplegintact with a high consolidation.  Butwhen heavy gold selling flared again in mid-February as $1,800 gold failed,gold-stock traders fled hammering GDX to new correction lows.  That young gold-stock upleg that looked sopromising in December, that had been as technically-confirmed as uplegs everget, gave up its ghost.

That shattered anyremaining gold-stock bullishness, and GDX plunged sharply into early March in a fierce capitulation climax.  ByMarch 1st, GDX’s correction had extended to 30.5% over 6.4 months.  That was much closer to this gold-stock bull’sfirst three corrections’ average of 36.5% losses in 8.0 months.  The resulting deep new correction low leftGDX extremely oversold, falling to just 0.825x its 200dma.

For a variety of reasons,I remained very bullish on gold stocks during that extended-correctionswoon.  They are earning money hand overfist with these high prevailing gold prices, leaving their stocks super-cheap fundamentally.  With this sector despised and abandoned, andtechnicals so deeply oversold, odds really favored a major rebound rally thatcould grow into this bull’s next upleg. And gold also looked very bullish.

So as gold stocks slidand psychology worsened, I kept adding fundamentally-superior gold-stock andsilver-stock trades in our subscription newsletters.  I was trying to get their trading books fully-deployedwhile this sector languished so seriously out of favor.  We took some lumps with some of those trades gettingstopped out, but the pain of redeploying was well worth it given the vast upsideopportunities.

Correction bottomingsare never obvious in real-time, but only in hindsight.  So they can only be gamed by layering intrades gradually when bottomings are increasingly probable.  That approach straddles the ultimatecorrection lows, adding trades at relatively-low prices both before andafter.  And sure enough when all hopelooked lost for this forsaken sector in early March, GDX was actually carving amajor bottom!

While gold stocks were drowningin bearishness and extremely oversold, those certainly weren’t the only reasonsthey looked so bullish surrounding that apparent correction nadir.  Again the dominant primary driver of goldminers’ fortunes and thus stock prices is gold, and it too was extremelyoversold and riddled with fear.  And thedrivers of gold’s own extended correction that forced gold stocks’ looked tobe exhausting.

Gold’s own price actionmostly results from the interplay of speculators’ gold-futures trading combinedwith investment-capital flows.  The latteris ultimately much more important than the former, but because of the extremeleverage inherent in gold-futures trading it often proves the tail waggingthe gold-price dog.  This weekspeculators were only required to keep $10,000 cash in their accounts for eachcontract traded.

Yet controlling 100 troyounces of gold each, those were worth $173,720 at mid-week gold prices.  That implied gold-futures specs could runmaximum leverage up to 17.4x!  Wayup there, every $1 bet on gold has the same price impact as $17 of outright buyingor selling.  But such crazy leveragecomes with crazy risks.  At 17.4x, a mere5.7% gold move against traders’ positions would wipe out 100% of their capital deployed.

That naturallycompresses gold-futures speculators’ time horizons to be exceedinglyshort-term, just days to weeks on the outside. These influential traders are momentum players by necessity, as thatis the only way they can survive.  Sowhen gold starts materially sliding, gold-futures selling flares, then snowballs,then becomes self-feeding.  The more contractsspecs dump, the faster gold falls triggering even more selling.

Back in early Januarywhen GDX’s young upleg was strong and breaking out, speculators held 411.7kgold-futures long contracts.  That’s on thehigh side historically.  Starting withgold’s plummeting in early January on that technical breakdown under $1,900,these guys started unwinding these leveraged bets.  By mid-March they had dumped a gargantuan104.9k contracts, the equivalent of 326.2 metric tons of gold!

That is a staggering amountover just 10 weeks, explaining why gold fell 11.2% over that span.  As spec gold-futures positioning is onlyreported weekly current to Tuesday closes, that doesn’t exactly coincide withgold’s extended correction.  But overthat same gold-futures-mass-exodus timeframe, GDX only fell 13.0%.  That was just 1.2x downside leverage,incredibly resilient compared to the 2x-to-3x normal range.

While speculators pukedout gold-futures contracts like they were radioactive, the resulting weaknessin gold scared investors.  Gold investmentdata is only available quarterly from the World Gold Council, but a greatreal-time proxy representing it is reported daily.  That is the holdings of the world’s biggestgold exchange-traded funds, which dominate their space.  They are the American GLD and IAU gold ETFs.

With gold falling,American stock traders fled these two behemoths.  When gold-stock-ETF shares are sold faster thangold itself, that forces these ETFs to sell some of their physical gold bullion.  That finances buying back enough of theirshares to keep their prices tracking gold. So GLD and IAU draws reveal investment-capital outflows from gold.  They added up to another 157.1t of sellingduring that same span.

Most gold-ETFshareholders aren’t leveraged, and if they are the maximum possible in thestock markets is just 2x.  So theirselling is nowhere near as frantic as the gold-futures speculators’.  It also tends to lag gold’s corrections abit.  So between early January to thisweek, GLD+IAU holdings actually fell 181.7t at worst.  That makes the total identifiable gold liquidationin recent months a colossal 507.9 metric tons!

It’s no wonder goldwilted on that heavy momentumselloff, and gold stocks had no choice but to follow their metallower.  But the great thing about gold correctionsdriven by major selling is that is finite and soon exhausts itself.  Eventually all traders susceptible to beingscared into selling have already sold, leaving only buyers.  While this dynamic applies to both gold futuresand gold ETFs, it is clearest in the former.

After GDX then gold bottomedin early March at extremely-oversold levels, gold-futures selling lingered intomid-March.  Total spec longs fell as lowas 306.8k contracts, the lowest they had been since back in mid-June 2019.  While they can go lower, spec selling isexhausting around 300k.  And once allthose hyper-leveraged traders who were forced to sell are out, gold decisivelybottoms with that selling pressure gone.

In just 2.8 months afterthat last spec-longs-300k approach, gold rocketed 17.2% higher as these tradersflooded back into longs to reestablish normal positions.  That sharp mean-reversion gold rally catapultedGDX 37.0% higher in that same short span! Both spec gold-futures positioning and gold-ETF holdings are far morebullish for gold now than they were in late November at its original apparentcorrection bottoming.

Back then total speclongs and shorts were clocking in at 379.8k and 86.5k contracts, compared tothat 306.8k and 118.7k in recent weeks. Total spec longs and shorts are now running 5% and 100% up into their past-yeartrading ranges.  The most-bullish-possiblenear-term setup for gold is 0% longs and 100% shorts, indicating sellingexhaustion leaving room to only buy.  Inlate November that ran 40% and 59%.

GLD+IAU holdings were 1,722.7tthen compared to 1,532.1t in the middle of this week, leaving way lesspotential additional selling with most of the weak hands already shakenout.  That makes a new gold-bull upleg increasinglylikely.  And as that powers higher, the goldstocks will amplify its gains like usual. This is already apparent in GDX, with its technicals in the last fiveweeks arguing another upleg is underway.

Since bottoming at$30.90 on March 1st, GDX has carved another series of higher lows and higherhighs.  The former were that $30.90 and then$31.83 in late March, while the latter were $34.21 in mid-March and $34.28earlier this week.  GDX was tradinghigher still this Thursday when I penned this essay, rallying to a $34.73 close.  This is another textbook-perfect uptrendunfolding over a sufficiently-long time.

While countertrend ralliesare common in corrections, they are compressed into much-shorter and much-sharpersurges.  Slower more-deliberate reboundsunfolding over longer periods of time are new-upleg behaviors, not correctionones.  And given the bombed-out gold-stocktechnicals and psychology at GDX’s latest extended-correction low, this upleghas excellent potential to power up to massive size.

This gold-stock bull’sprior four uplegs averaged huge 99.2% GDX gains over 7.6 months!  At best so far, the current young upleg isonly up 12.4% on close.  That leaves vastroom to run higher yet, which is fully justified fundamentally by the goldminers’ incredibly-strong operating and financial results.  Another nice tailwind is this sector’s strong spring seasonals,which I analyzed in another essay back in late February.

This chart from thereindexes gold-stock performances in all modern gold-bull years, using the olderHUI gold-stock index which was around long before GDX.  For our purposes today, note the major goldstocks as a sector have averaged strong spring rallies of 13.2% between mid-Marchto early June.  April and May inparticular have proven the gold stocks’ fourth- and first-strongest months of theyear seasonally!

While seasonals are merelya secondary gold and gold-stock driver after sentiment, technicals, and fundamentals,having them align offers a nice boost to in-progress uplegs.  This is a heck of a bullish setup for thegold stocks, boosting the odds that a major new upleg is indeed underway.  And this time, unlike December’s young upleg,the potential gold selling available to sabotage it is way more limited.

So if you’re not sufficientlydeployed in high-potential fundamentally-superior gold stocks, the window tobuy in relatively-low is certainly closing. As gold itself powers higher on astoundingly-extreme levels of moneyprinting by major central banks, the gold stocks will amplify its gains likeusual.  Given this super-bullish setup, anotherdoubling in GDX out of early March’s lows over the coming months wouldn’tbe surprising.

While it wasn’t easy psychologically,we gradually filled up the trading books in our newsletters into and since GDX’sMarch 1st correction bottoming.  Now ourweekly and monthly have 20 and 10 open gold-stock and silver-stock trades respectively.  These hand-picked fundamentally-superiorcompanies offering excellent production-growth potential still have relatively-lowstock prices, but they are rallying fast as gold recovers.

At Zeal we walk the contrarianwalk, buying low when few others are willing before later selling high when fewothers can.  We overcome popular greedand fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental,and fundamental research.  That’s why all 1178 stock trades recommendedin our newsletters since 2001 averaged hefty +24.0% annualized realized gains!

To multiply your wealthtrading high-potential gold stocks, you need to stay informed about what’sgoing on in this sector.  Stayingsubscribed to our popular and affordable weekly and monthly newsletters is agreat way.  They draw on my vast experience,knowledge, wisdom, and ongoing research to explain what’s going on in themarkets, why, and how to trade them with specific stocks.  Subscribetoday and take advantage of our 20%-off sale!  Early in a young gold-stock upleg is a greattime to get deployed.

The bottom line isanother young gold-stock upleg is underway. GDX has carved a lovely series of higher lows and higher highs in the 5+weeks since bottoming in early March.  Thisnascent uptrend looks very different technically from the short-and-sharp countertrendrallies within corrections.  It is veryyoung-bull-upleg-like, arguing that the latest one is indeed marching.  This bull’s prior four soon doubled onaverage.

While another young gold-stockupleg in December subsequently prematurely failed, that anomaly was fueled by heavygold selling.  But that massivegold-futures selling is largely spent, looking increasingly exhausted.  And the resulting big differential gold-ETF-shareselling is really slowing with gold bouncing. So unlike the previous one, gold stocks’ latest young upleg is far lesslikely to be derailed by big gold selling.

Adam Hamilton, CPA

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