Gold Price Green Light For Mining Stocks / Commodities / Gold and Silver Stocks 2020

The gold miners’ stocksare finally perking up again, after spending months slogging through a grindingcorrection.  Contrarian traders aretaking notice, starting to redeploy capital in this high-potential sector.  Gold miners’ earnings and thus stock pricesare overwhelmingly driven by gold’s fortunes. And the yellow metal’s recent technicals are signaling a maturecorrection, green-lighting gold stocks’ next major upleg.

Bull markets are analternating series of uplegs followed by corrections, for every few stepsforward there is always one step back. These periodic selloffs are essential for bulls’ health and longevity,rebalancing sentiment and technicals before they get too overheated.  Popular greed growing too extreme early in bullswill prematurely slay them.  Allavailable near-term buying is sucked in, exhausting capital inflows and upside.

The most-importanttimes to trade during bull markets are correction bottomings and uplegtoppings.  The mission is to buy in relatively-lowat the former, then sell relatively-high at the latter.  That’s the lowest-risk and fastest way tomultiply wealth in ongoing secular bulls. But executing on this strategy is challenging in real-time, becausethese tradable major lows and highs aren’t definitive until well after they’vepassed.

When bull uplegs aretopping, greed and euphoria are rampant and traders assume big gains will keepon coming.  Selling high requiresfighting the herd’s rush to buy near peak excitement.  Then later when the subsequent correctionsare bottoming, popular fear and despair scare traders into worrying the biglosses will persist indefinitely.  Buyinglow necessitates deploying capital when most fret a sector will spiral muchlower.

While traders’collective sentiment driving major toppings and bottomings is ethereal andimpossible to measure, it can be inferred through technical price action.  Indicators reveal when price levels aregetting too overbought or too oversold, flagging likely upleg crests and correctiontroughs.  Gold’s price behavior in recentweeks was very consistent with the latter, a major correction bottoming preceding its next upleg.

Gold’s necessary andhealthy correction after its last upleg shot parabolic looked to finally reach maturityas November ended, both in size and duration. All that selling hammered gold’s price back to oversold levels.  This doesn’t guarantee gold’s correction isover, but reveals high odds for that eventually proving to be the case.  This first chart shows gold’s newly-bullishtidings within the context of this entire bull.

Gold’s technicals aresuperimposed over my favorite indicator of overboughtness and oversoldness, atool called Relativity Trading.  It looks at gold price levels relative to their own trailing 200-day moving average, using a multiple simply calculatedby dividing gold’s daily close by its 200dma. When charted over time, this metric tends to form horizontal tradingranges.  This Relative Gold or rGold isback into buy territory.

This secular gold bullwas stealthily born back in mid-December 2015, when gold sunk to a deep6.1-year low.  The journey higher sincehas seen four uplegs and four corrections. Gold’s latest upleg that peaked in early August at an all-time-recordhigh proved a monster.  This metal soared40.0% higher in only 4.6 months out of March’s pandemic-lockdown-spawned stockpanic!  That was an exceedingly-big and -fastrun.

As gold shot parabolicin the terminal weeks of that upleg, it soared to extraordinarily-overbought levels of 1.260x its 200dma!  That rGoldindicator hadn’t seen such crazy extremes since September 2011, only a coupleweeks after gold’s last secular bull peaked. I warned about gold’s mountingoverboughtness in late July.  Such stretchedtechnicals and overheated bullish sentiment meant an imminent correction loomed.

That indeed soon cameto pass, as the exceptional popular greed fueled by those big gains sucked inand exhausted all-available near-term buying. So sellers soon gained the upper hand and forced gold lower, rapidly atfirst.  Gold plunged 7.5% in just threetrading days out of its early-August peak of $2062, rapidly collapsing back to$1906!  But corrections aren’t fast andlinear, they surge and retreat much like bull uplegs.

The mission ofcorrections is to rebalance sentiment, to eradicate widespread greed bystoking popular fear to smother it.  Afew days of selling isn’t enough to break traders’ wills to force them tocapitulate.  It takes sustained, sizable downtrendsto shift prevailing psychology from bullish back to bearish.  Since corrections usually take their sweettime to accomplish this, they trap traders lulling them into complacency.

After gold’s initial plungein this bull’s fourth correction, it generally ground sideways consolidatinghigh until mid-September.  With thismetal meandering around $1948 which is still very high, the great majority oftraders and analysts assumed its correction was over.  I wrote some contrarian essays arguing theopposite, that much more selling was still coming since gold remained so overbought.  Traders scoffed at that.

But sure enough gold sufferedanother sharp plunge in late September, blasting it 4.7% lower in just threetrading days to $1859.  That finallyestablished gold’s correction downtrend, another major lower low to accompanythe lower highs.  That big leg lower naturallyrekindled correction fears, but traders have short memories.  So once gold started grinding sideways on balanceagain into late October, they fell back asleep.

Gold retested itscorrection low late that month, which held. Then gold started surging into the elections, on pollsters’ universalblue-wave-sweep predictions implying another huge pandemic-stimulus-spendingbill.  Then when Democrats didn’t win theSenate and saw their House lead seriously dwindle, gold blasted higher again onhopes that would force the Fed to step in with more quantitative-easing moneyprinting.

The day that fanciful rationalizationtook root a couple days after the voting, gold surged 2.5% to $1949.  That looked like a breakout above boththe upper resistance of gold’s correction downtrend and its 50-day movingaverage!  That proved the hardest daypsychologically of this entire selloff, as a technical case could be made thatit had ended.  But gold had yet to revisitoversold conditions, so I suggested staying wary.

In financial markets,absolute price levels usually don’t matter very much.  The important thing is how fast they gotto wherever they are.  If theyrecently moved too far too fast, they are likely going to soon mean revert toreverse some of those excessive moves. When gold hit $1859 in late September and $1869 in late October, thatrGold indicator was running 1.085x and 1.060x. Gold never got close to falling under its 200dma.

These 200-day movingaverages are the strongest support zones in ongoing bull markets, thebottoming levels for major corrections. When all three of this secular gold bull’s previous correctionsbottomed, they were all under gold’s 200dma. The rGold reads at those best buying opportunities of this bull came whengold was pummeled way down to 0.885x, 0.908x, and 0.984x its 200dma.  1.060x remained way too high.

Indeed gold’s breakoutsurge on Fed-QE hopes soon collapsed, with this metal plummeting 4.4% back to$1866 in a single trading day shortly after that election spike!  It had proven to be false, another sharpheadfake rally which aren’t uncommon during corrections.  Gold’s necessary corrective work to rebalancesentiment and technicals hadn’t been finished yet.  But once again many traders refused tobelieve that.

Gold started grinding sidewaysagain, averaging $1875 for the next two weeks into mid-November.  But with this bull’s fourth correction still smallcompared to bull precedent, and gold having yet to even revisit its 200dma support,I continued to fear the selling wasn’t over. We still hadn’t added any long gold-stock trades in our newsletters sinceearly July before gold shot parabolic, as gold corrections pummel goldstocks.

The necessary andhealthy gold selling resumed at the end of November during Thanksgiving week.  That Monday and Tuesday gold plunged 1.9% and1.5%, finally retreating all the way back to $1808 and challenging its 200dma.  That selling pressure continued cascading onBlack Friday, when gold plunged another 1.1% to $1787.  That finally dragged it back under that keysupport zone for the first time in this correction!

On the following Mondaywrapping up November, gold slumped another 0.6% to $1775.  That extended its total selloff to 13.9% over3.8 months, and pushed rGold down to 0.989x. Technically that was enough to imply this gold bull’s fourth majorcorrection had finally reached maturity. Gold’s selloff had fallen deep enough and lasted long enough to eradicatethe extreme greed and overboughtness of the early-August peak.

That total selloff was rightin line with precedent set by this bull’s first three corrections.  They averaged 14.3% losses over 4.1 months,just slightly worse than the latest 13.9% over 3.8 months.  And that earlier average was skewed lowerthan it should’ve been, as two of those previous corrections were seriously exacerbatedby anomalous and unrepeatable circumstances. Mid-March’s extreme stock panic was one of them.

Another greatly intensifiedthis bull’s first correction towards the end of 2016.  Gold was bludgeoned with merciless sellingafter Trump’s surprise election win unleashed a euphoric deluge into stockmarkets on hopes for big tax cuts soon.  Without that, gold would’ve bottomed higherafter a shallower selloff.  So the casecan be made that gold’s latest correction actually proved a bit larger than anytypical one would have.

If gold’s correction isindeed over, then this secular bull’s next upleg has already begun marchinghigher.  Again major correctionbottomings are the best times to redeploy in fundamentally-superior goldstocks.  The major gold miners of theleading GDX VanEck Vectors Gold Miners ETF tend to have stock prices amplifygold’s moves by 2x to 3x.  And the bettermid-tier gold stocks even outpace those gains during uplegs.

This secular gold bull’sfour uplegs averaged strong 33.3% gains. If its fifth one merely conforms to that precedent, the major goldstocks should rocket between 67% to 100% higher during it!  The prospects of doubling our capital inless than a year are super-alluring. When gold resumes marching higher on balance, massive gold-stock gainsaccrue.  So this sector should beaggressively bought early in gold uplegs.

But don’t forget thatimportant caveat that major bottomings are impossible to guarantee in real-time.  The probabilities certainly argue that gold’scorrection has matured, carving such excellent buyable lows.  But bottomings don’t always take the form ofsharp V-bounces.  Sometimes gold pricescan grind along near lows for a spell before the next upleg starts gatheringmomentum.  Gold could even sink back tofresh lows.

Several major riskfactors remain which could unleash more gold selling.  The primary one is a rally in the really-low US DollarIndex, which would motivate leveraged gold-futures speculators to sell enmasse.  That would likely snowball giventheir current positioning which remains heavily long gold.  Another big risk is ongoing differential sellingpressure in the shares of the leading and dominant gold ETFs, GLD and IAU.

But even if gold soonrevisits its $1775 correction low from late November, or plumbs new depths andextends this total selloff, odds are the lion’s share of the selling isbehind us.  With gold’s latest correctionmature, the gold-stock redeployment for gold’s next upleg can commence anyway.  New trades are gradually layered in overtime, minimizing overall portfolio risk while attempting to straddle the ultimatebottom.

This last chart showsgold stocks’ performance through the GDX lens during gold’s secular bull.  They have corrected with gold in recentmonths, and have also been dragged back down under GDX’s own200dma.  So like gold, sentiment andtechnicals in the miners’ stocks have also been rebalanced in this vital selloff.  That paves theway for gold stocks to surge higher amplifying the gains in gold’s next upleg.

The latest gold-stockupleg paralleling gold’s rocketed 134.1% higher in 4.8 months into early Augustin GDX terms!  And that wasn’t even thebiggest of this bull, with its initial one hitting +151.2% in roughly the firsthalf of 2016.  When gold powers higher onbalance, gold-stock prices soar due to the miners’ big profits leverage to gold.  GDX just corrected with gold like usual,falling 24.9% in 3.6 months into late November.

Interestingly GDX’s latestmajor interim low was carved a week before gold’s, on that Tuesday leading intoThanksgiving.  Shrewd contrariangold-stock traders try to anticipate major trend changes in the yellow metal,and at that point it was becoming apparent gold’s correction was maturing.  That was the very day we started layeringinto new fundamentally-superior gold-stock trades in our subscriptionnewsletters.

The bullish case forgold stocks in coming months is strong. While gold’s next bull-market upleg is the essential linchpin, the goldminers’ fundamentals continue to rapidly improve really bolstering their upsidepotential.  When bearish sentiment and oversoldtechnicals combine with strong fundamentals, the moves higher can bemassive!  Consider a quick proxy for theGDX gold miners’ earnings I analyzed in mid-November.

They had just finishedreporting their Q3’20 operationaland financial results then, including averaging all-in sustaining costs of$1028 per ounce.  That was far below lastquarter’s record $1912 average gold price, fueling huge sector profitability of$884 per ounce!  That had soared anawesome 49.7% year-over-year from Q3’19 levels. And that stunning earnings growth for the gold miners is going to persistinto Q4.

While gold has beencorrecting this quarter, its Q4’20-to-date average price as of the middle ofthis week is still running way up at $1879. No matter what gold does in the next few weeks, that is going to provethe second-highest ever witnessed well above Q2’20’s $1714.  Even if gold’s average price this quarter isdragged down to $1850, gold-mining profits are going to skyrocket based on theGDX majors’ likely AISCs.

They averaged $969 perounce over the last four reported quarters. If that holds into Q4, the gold miners could again earn $881 per ounce nearlyequaling that Q3 record!  That wouldmake for another enormous 59.7% YoY gain. So it is not just bearish sentiment and oversold technicals in both goldand the gold stocks arguing for big upside, but the wildly-bullish fundamentalsboth major and mid-tier gold miners are enjoying.

Even if gold’s correctionisn’t quite over yet, its maturing has green-lighted aggressively redeployingin fundamentally-superior gold stocks. That process occurs over a couple months or so, gradually adding newpositions attempting to straddle gold’s ultimate correction bottoming.  That layering in of new trades over timelowers portfolio risks while upping the odds of buying in relatively-low toride gold’s next major upleg.

So that’s exactly whatwe’ve been doing in our subscription newsletters over the last couple weeks orso, slowly redeploying in great new trades. Buying low and selling high can only be accomplished if there is still plentyof uncertainty when those trades are being executed.  By the time major correction bottomings andupleg toppings are readily apparent to all well after the fact, the best gains havealready been won.

At Zeal we walk thecontrarian walk, buying low when few others are willing before later selling highwhen few others can.  We overcome populargreed and fear by diligently studying market cycles.  We trade on time-tested indicators derivedfrom technical, sentimental, and fundamental research.  That’s why all 1178 stock trades recommendedin our newsletters since 2001 averaged superb +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 vastexperience, knowledge, wisdom, and ongoing research to explain what’s going onin the markets, why, and how to trade them with specific stocks.  Subscribetoday and take advantage of our 20%-off sale!  There’s no better time than around acorrection-bottoming buying opportunity.

The bottom line is thisgold bull’s latest correction looks to be mature sentimentally and technically.  This selloff’s total size and duration atgold’s late-November lows was right in line with averages from this bull’sprior three corrections.  Gold also fellback under its 200-day moving average, the strongest support zone for bull-marketcorrections.  All this argues that the lion’sshare of gold’s correction is behind us, if not finished.

That green-lightsredeploying aggressively into fundamentally-superior gold stocks to ride gold’snext bull-market upleg.  That should bedone gradually over time, attempting to straddle gold’s ultimate correctionbottoming.  In addition to bearishsentiment and oversold technicals, the gold miners continue to enjoy super-strongfundamentals.  Their earnings are continuingto soar with these still-high prevailing gold prices.

Adam Hamilton, CPA

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