Gold Mining Stocks Q3 2021 / Commodities / Gold and Silver Stocks 2021

The gold miners’ latestquarterly earnings season will soon get underway, with their full Q3’21 resultsdue out by mid-November.  These fundamentalreports are invaluable to traders, revealing how companies are actually faringoperationally and financially.  Despite Fed-tighteningfears hammering gold and gold stocks last quarter, the miners are likely to collectivelyreport outstanding results further lowering their valuations.

After a rough stretch technicallythis past summer, gold-stock sentiment remains down in the dumps.  This battered sector has few bulls left, withthe vast majority of speculators and investors either ignoring the gold miners ordespising them.  This overwhelmingly-bearishpsychology resulted from a sharp gold-stock selloff between early June to lateSeptember.  That trying time tested themettle of contrarian traders.

The gold miners weren’tmarket pariahs earlier this year.  Theirleading sector benchmark, the GDX VanEck Gold Miners ETF, powered 28.4% higherin just 2.5 months between early March to mid-May.  That solid young upleg was starting to winsome converts, with herd sentiment shifting back towards bullish.  Unfortunately that promising start was torpedoedby extreme gold-futures selling on Fed-tightening fears.

That bullishness-slayingcalamity unfolded over several separate episodes, which I’ve analyzed in depth from a gold perspective.  First in mid-June, a third of individual Fed officialsforecast maybe two rate hikes way out into year-end 2023.  That hawkish FOMC dot-plot unleashed hugegold-futures selling, crushing this metal and its miners’ stocks.  But gold stocks soon started recovering fromthat vicious sucker punch.

Then another body blowfollowed in early August, after an upside surprise in monthly US jobs.  That data reignited gold-futures speculators’perennial Fed-tightening fears.  Theyshort-sold aggressively, including unleashing a rare gold-futures shorting attack that Sunday evening.  So the major goldstocks per GDX again plunged to new selloff lows.  While sector sentiment damage was severe, hardenedcontrarians remained.

Thus gold stocks recoveredagain into mid-September, when a nasty uppercut spawned a capitulation knockout.  Heavy sustained gold-futures selling eruptedagain after a big beat in US retail sales, implying the Fed would have to startslowing its colossal quantitative-easing money printing sooner rather thanlater.  Gold and especially gold stocks wiltedas the Fed’s QE4-taper pre-announcement soon came to pass.

Those gold-futures cannonblasts felt like they blew gold stocks to smithereens.  GDX ultimately plunged 27.1% in 4.4 months bylate September, hitting levels last seen emerging from March 2020’s brutalstock panic.  Gold-stock bulls were allbut extinct.  Of course when thingsfeel the worst are the best times to buy low before later selling high,which is necessary to multiply wealth in the markets.  That was a major bottoming.

As this GDX chartshows, gold stocks have screamed higher since in a powerful surge unlikeanything seen since mid-June.  Over thelast several weeks, GDX hasbounced hard soaring 13.7% higher at best! That blistering run included two major breakouts, above downtrendresistance and more importantly this leading gold-stock benchmark’s 50-daymoving average.  This massive reversal iscapturing attention.

Those Fed-tightening-fearcatalysts driving heavy-to-extreme gold-futures selling in recent months areshown in red.  While those hyper-leveragedspeculators were right in the sense that the Fed is going to soon start slowingits epic money printing, they largely exhausted their selling firepower in anticipation.  Gold stocks were justbludgeoned in a preemptiveQE-taper tantrum, which finally passed in late September.

That removed the witheringdownside pressure drowning gold miners, so like beach balls no longer heldunderwater they shot higher.  Thispowerful mean reversion is just getting started, with vast room to run far higher.  GDX still has yet to regain its 200-day movingaverage, and is a long way from recovering to pre-June-FOMC-meeting levels challenging$40.  It will take big gold-stock gainsto restore herd bullishness.

The gold stocks werejust pummeled to deeply-undervaluedlevels relative to gold, making for a strong fundamental case formuch-higher prices.  The gold miners’ imminentQ3’21 earnings season really ought to bolster that.  They are likely to report really-strongoperational and financial results, leaving this sector even cheaper in price-to-earnings-ratioterms.  That will underscore whatincredible bargains gold stocks are.

And when really-bullishfundamentals align with really-bullish technicals and sentiment, massive gainsare almost certain.  Gold stocks arefamous for those.  This current secular bull’sfirst four uplegs averaged awesome 99.2% GDX gains each over 7.6 months!  If this past spring’s Fed-interrupted upleg stubis considered the fifth, they still averaged excellent 85.0% gains each.  Those are par for the course for gold stocks.

Their previous secularbull straddling the first decade of this century saw literally one-dozengold-stock uplegs averaging similar 87.5% gains each over 7.8 months!   While usuallyoverlooked or ridiculed, the gold miners are a phenomenal sector to multiplywealth.  The legions of weak handswho always flee in terror near capitulation bottomings lack this essentialperspective.  So they fail, selling lowfor big losses.

Some are really goingto kick themselves after gold miners’ coming earnings season.  Gold mining is a simple business fundamentally.  These companies wrest gold from the bowels ofthe earth, which they generally sell at market prices.  So the difference between prevailing goldprices and gold-mining costs are this sector’s profits.  And those all-in sustaining costs areinversely correlated with miners’ output levels.

So these three variablesof quarterly average gold prices along with gold miners’ likely average costsand production levels are sufficient to predict how their latest results shouldlook.  While the latter couple take someunderstanding and estimation, the first one is set in stone.  In the just-completed third quarter of 2021,gold averaged $1,789 on close.  That’ssomewhat surprising considering how miserable gold felt.

While that heavy-to-extremegold-futures selling on Fed-tightening fears pounded gold 9.6% lower from earlyJune to late September, most of that happened in June.  That month alone as speculators cowered in fearat maybe seeing two little quarter-point rate hikes over a couple years intothe future, over 3/4ths of gold’s total recent-months selloff accrued.  Gold plunged 7.0% in June alone, the lion’sshare of its drop!

Of course June was thefinal month of Q2’21, where gold still averaged $1,814.  While it’s hard to believe with herdsentiment overriding all rationality, gold actually fared really well in Q3’21.  Last quarter gold just edged a trivial 0.8%lower!  That’s blasphemy, right?  Surely gold is doomed if the Fed is going totaper QE.  The super-bearish gold and gold-stockpsychology from that foolish belief really tainted perceptions.

Last quarter’s $1,789average gold price was actually excellent, the fifth-highest on record behind somerecent quarters.  Q3’20 averaged $1,912, Q4’20$1,876, Q2’21 $1,814, and Q1’21 $1,793. Q3’21 came in close to the latter couple, not far from being the third-bestever witnessed.  Sequentially quarter-on-quarterin Q3’21, the average gold price merely slumped 1.4%.  And goofy traders still cried the sky isfalling.

For the major gold minersof GDX, $1,789 is a heck-of-a-profitable price to sell their production!  That is evident relative to all-in sustainingcosts, the best measure of the total expenses necessary for extracting eachounce of gold.  AISCs not only includeall cash costs of mining, but add on everything else that is needed to maintainand replenish gold-mining operations at current output tempos.  I’ve studied them for years.

After every quarterlyearnings season, I dig through the latest results from the top 25 GDX and GDXJgold miners.  Their key numbers are fedinto a mammoth spreadsheet for data crunching and analysis, then I write essayssummarizing the results.  I’ve been doingthis hard work for 21 quarters in a row now, and can’t wait to get to Q3’21numbers.  I analyzed the GDX top 25’s Q2’21fundamentals in a mid-August essay.

Then these elite majorgold miners’ all-in sustaining costs averaged $1,037 per ounce, the best proxyfor gold-mining costs as an industry. That was right in line with the last four reported quarters before that,which had an average of $1,029.  So oddsare the upcoming Q3’21 results from the GDX gold miners will reveal similarAISCs.  That would make for avery-profitable quarter despite the wailing and gnashing of teeth.

Quarterly-average goldprices of $1,789 less flat $1,037 average major-gold-miner AISCs would yield fatunit earnings of $752 per ounce!  Thosewould prove the fourth-highest ever seen after Q3’20’s $884, Q4’20’s $838, andQ2’21’s $778.  Such colossal earnings wouldfuel profit margins of 42%, lofty levels most industries would die for.  Recent months’ heavy gold-stock selling certainlywasn’t fundamentally-righteous.

And amazingly the goldminers’ earnings will likely prove even bigger once their Q3’21 results are inand collated.  I’ve been activelyspeculating and investing in gold stocks for over two decades now, earning fortunes.  This high-flying sector with massiveupleg-correction cycles to ride has been very good to me and our newslettersubscribers.  As I find gold miningreally interesting, I actually like reading quarterlies.

One common theme stuckout a couple months ago when I was wading through Q2’21 reports.  A sizable fraction of the GDX-top-25 goldminers were forecasting considerably-higher production in Q3 and sometimesQ4.  Many of these companies hadfull-year output guidance weighted to the back-half of 2021.  Some reasons included chewing throughlower-grade ores earlier on the way to higher-grade ones later.

There were also expansionscoming online that would boost production at individual gold mines.  So it is likely the major gold miners’ output will grow sequentially from Q2 to Q3. That should proportionally lower unit mining costs, spreading the bigfixed expenses of producing gold across more ounces.  Interestingly rising output in the middle ofcalendar years has proven a long-established phenomenon globally in this industry.

The World Gold Council publishesthe best-available worldwide gold fundamental data in its outstanding quarterlyGold Demand Trends reports.  I can’t waitfor Q3’s installment which should be released late next week.  It will reveal how gold investment demand faredlast quarter in the face of that heavy gold-futures selling.  For our purposes today, these GDTs include totalglobal gold-mining production each quarter.

Going back a full decade,the sequential output growth from Q2s to Q3s has averaged an amazing 6.7%!  That is massive, and the best quarter-on-quartergrowth by far.  Q4s to Q1s averaged 8.2%declines, Q1s to Q2s 4.4% growth, Q2s to Q3s that awesome 6.7% surge, and Q3sto Q4s stabilized there up 0.4%.  Thirdquarters of calendar years have long proven the ones with the best gold-productiongrowth.  Why is that?

A variety of factorscome into play.  Mine managers get newbudgets to maintain and upgrade gold-mine infrastructure as new yearsdawn.  That contributes to downtime inQ1s as that work is done.  Q1s also containpeak winter months in the northern hemisphere where most of the world’s goldmines are found.  Cold temperatures slow the chemical processes used in heap leaching to recover gold from crushedores.

Conversely Q3s have thewarmest months on the top half of the planet, speeding up gold recoveries.  By that time of the year the maintenance and light-expansionwork is usually done, allowing production to run uninterrupted.  And mine managers often choose to sequence higher-grade ores during Q3s, boosting their outputs.  That’s because Q3 results are the last-reportedones before year-end bonuses are calculated.

Higher gold-stock pricesheading into year-ends often increase compensation for mine managers, so theygame ore grades accordingly.  If theyhave to dig through lower-grade ores, they try to schedule them for first halvesof years so better grades are available in second halves.  Whatever the reasons, gold miners’ productionoften swells considerably in Q3s.  That6.7% Q2-to-Q3 average growth since 2010 is incredible.

That should materializeagain as Q3’21 is reported over this next month or so.  Exactly where GDX-top-25 gold-output growthwill shake out to is a crapshoot.  But tobe conservative, assume sequential growth last quarter comes in just over halfthe global decade-long average at 3.5%.  From reading the quarterlies and press releasesI suspect the actual Q2-to-Q3 growth will prove higher, but 3.5% is easy todefend for a preview.

As industry all-insustaining costs are generally inversely proportional to gold production,that implies the major gold miners’ average AISCs will also contract on theorder of 3.5% quarter-on-quarter.  That wouldleave last quarter’s estimate near $1,001 per ounce, which is still on the highside.  During the last 21 quarters, theGDX-top-25 gold miners reported average AISCs over $1,000 in just 5.  Those aren’t low costs.

Q3’21’s $1,789 averagegold prices less $1,001 AISCs yields unit profits of $788 per ounce.  That would rank as the third-highest onrecord after Q3’20’s $884 and Q4’20’s $838! And these massive earnings are coming with gold stocks often already tradingat very-low or even dirt-cheap conventional valuations.  I look at their trailing-twelve-monthprice-to-earnings ratios right after earning seasons in my quarterly analyses.

GDX exited Q2’21 at $33.98,well above last quarter’s average close of $32.58 as that heavy gold-futuresselling ravaged gold-stock prices.  Thisdominant gold-stock ETF left Q3’21 pounded way down to $29.47, an ugly 13.3%quarterly loss.  That was ridiculously-overdone compared to gold’s own mere 0.8% Q3’21 slump, revealing how foolishly-emotionalgold-stock traders as a herd have acted during recent months.

Yet at the end of Q2the GDX-top-25 gold miners’ TTM P/Es were already the lowest I’d ever seen, withplenty trading in the teens and a fifth deep down in the single-digits!  With gold-stock prices falling far in Q3, andquarterly earnings almost certain to prove very strong, sector valuations hadto have fallen even lower.  The goldminers’ incredibly-bullish fundamentals will amplify their gains as traders inevitablyreturn.

There’s a good chance excellent-to-amazingquarterly reports will prove catalysts sparking big buying in individualgold-mining stocks before this latest earnings season runs its course.  More important for gold-stock buying will bethe fortunes of gold.  It too is recoveringout of gold-futures speculators’ taper-tantrum selling in recent months.  So far gold’s mean reversion higher has beenlagging the gold stocks’ powerful bounce.

Capital inflows intogold should really accelerate as it powers higher, since traders love chasingupside momentum.  The raging inflationsavaging Americans should greatly increase awareness of the critical importanceof the ultimate-inflation-hedge gold for prudently diversifying stock-heavy portfolios.  Even if the Fed’sQE4 taper goes according to plan, vastly more Fed money printing is still bakedinto the pipeline.

In coming years, gold will follow the moneysupply way higher.  Over the last 19.6months since March 2020’s pandemic-lockdown stock panic, this profligate Fedhas ballooned its balance sheet by a terrifying 103.9% or $4,322b!  That doubling of the monetary base hasproportionally mushroomed the worldwide US dollar supply.  And if the Fed gradually slows QE4 until themiddle of next year, another $660b is still coming.

Aboveground goldsupplies barely grow, rising on the order of just 1% annually throughmining.  Thus far more fiat dollars areavailable to bid up the prices on relatively-far-less ounces of gold.  The more inflation worries fester withinvestors, the more capital they will deploy in gold.  And higher gold prices will greatly increasetraders’ interest in buying gold stocks, which are ultimately leveraged plays onthe metal they mine.

So if you don’t have sufficientgold-stock portfolio exposure yet, there’s still time to deploy before this newupleg grows way bigger and matures.  Our newslettertrading books are full of great fundamentally-superior mid-tier and junior goldminers.  Their upleg gains trouncethe GDX majors since they can ramp output faster off lower bases.  Buying low requires adding great gold stocks beforeeveryone else rushes in later.

At Zeal we walk the contrarianwalk, buying low when few others are willing before later selling high when fewothers can.  We overcome popular greed andfear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental,and fundamental research.  That has alreadyled to realized gains in this Fed-interrupted upleg as high as +51.5% on our recentnewsletter stock trades!

To multiply your wealthtrading high-potential gold stocks, you need to stay informed about what’s goingon in this sector.  Staying subscribed toour popular and affordable weekly and monthly newslettersis a great way.  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.  Subscribetoday while this gold-stock upleg remains small!  Our recently-reformatted newsletters have expandedindividual-stock analysis.

The bottom line is goldminers’ imminent Q3’21 results should prove really strong.  Prevailing gold prices stayed high lastquarter despite those extreme gold-futures-selling bouts.  That portends some of the best earnings thissector has ever seen even if production costs are stable.  But gold-mining output tends to grow considerablyin Q3s, which should proportionally lower unit costs.  That would drive even-fatter profits.

These powerfully-bullishfundamentals are happening with gold-stock prices already beaten down todeeply-undervalued levels.  So great Q3reports could act as catalysts spurring big buying, accelerating gold stocks’ blisteringmean-reversion rally higher.  Gold-stockprices remain far too low relative to current gold prices and the huge profitabilitythey drive.  And gold itself is headingway higher on crazy money printing.

Adam Hamilton, CPA

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