Gold Price Nearing Bull Market Breakout, Stocks to Follow / Commodities / Gold and Silver Stocks 2018

Gold remains largelyforgotten, off the radars of most investors. But that’s likely to change soon as this leading alternative investmentis nearing a major bull breakout.  Oncegold climbs to decisive new bull-market highs, sentiment will turn andinvestors’ interest will surge.  Theirresulting buying will rapidly drive gold higher, attracting in more capitalinflows.  Gold is only a couple modest updays away from that key breakout.

Universally in allmarkets, traders’ psychology is completely dependent on price action andlevels.  When prices are high and rising,speculators and investors alike eagerly buy in. They love chasing winners, so buying begets buying.  This creates powerful self-reinforcingvirtuous circles, with rising prices helping to entice in ever-moretraders.  In recent years this dynamiccatapulted the market-darling FANG stocks higher.

With capital inflowsfollowing performance, investments that aren’t high and rallying naturally seewaning popularity.  That’s the story ofgold over the past couple years or so. Gold’s last new bull-market high came way back in early July 2016, whenit hit $1365.  That was 21.3 months ago, which may as well be aneternity in terms of sentiment.  In mosttraders’ minds, gold has effectively been dead and buried ever since.

While contrarianinvestors always follow gold, most mainstream investors don’t.  They only get interested when gold ispowering up to major new highs.  Thispsychology holds true everywhere in the markets, it’s certainly not unique togold.  A handful of mega-cap tech stockshave soared since Trump’s election win in November 2016, but other mega-captech stocks have lagged far behind. Traders always pursue performance.

This first chart looksat gold’s technical price action over the past couple years or so.  A mighty new bull market erupted out of deepdespair, blasting higher with steep gains. But the gold-investment-driving force behind it soon reversed, so thisyoung bull stalled out.  Gold hasn’t beenable to best those initial bull highs ever since.  So with no new highs to spark excitement,gold has slipped off investors’ radars.

Gold prices are heavilyinfluenced by gold-futures speculators. The extreme leverage inherent in futures trading enables these traders to punch way above theirweight in bullying the gold price around. There is nothing these guys fear more than Fed rate hikes, even thoughhistory proves that’s absolutelyirrational.  So heading into theFed’s first hike of this cycle in December 2015, gold slumped to ugly 6.1-yearsecular lows.

But such extremebearishness made no sense, as goldhas thrived in past Fed-rate-hike cycles. So once that initial rate hike came and gold didn’t plunge, speculatorsrushed to buy back in to gold futures after that $1051 low.  They were soon joined by investors with theirhuge pools of capital.  They were spookedby the first stock-market corrections in 3.6 years, which boost gold demand todiversify stock-heavy portfolios.

Thus gold soared 29.9%higher in just 6.7 months in essentially the first half of 2016, easilycrossing that classic +20% new-bull-market threshold.  Gold’s $1365 bull peak in early July 2016 wasclosely tied to stock-market fortunes, coming the very day before the flagshipUS S&P 500 stock index achieved its first new record close in 13.7months.  With stock markets off to theraces again, gold investment demand waned.

Gold had been veryoverbought after such a blistering rally, and speculators had record long positions ingold futures which is a contrarian indicator. But gold still consolidated high in the summer of 2016 until it was hitby two anomalous events.  Firstgold-futures stops were run as gold fell below $1300, driving a sharp drop to its 200-day movingaverage.  Gold recovered quickly fromthat until Trump’s surprise win.

Very few tradersexpected Trump to stage a colossal underdog upset and win the presidentialelection in early November 2016.  It wasan extreme contrarian position, seen as madness.  Interestingly as I wrote the very weekendbefore that voting, a powerfulstock-market indicator predicted Trump would indeed win!  That soon came to pass, shocking speculatorsand investors into greatly reevaluating their outlooks.

With Republicans soonto control the presidency and both chambers of Congress, traders’ euphoriaflared to eye-searing brilliance.  Theywere captivated by hopes for big tax cutssoon, and rushed to buy stocks with reckless abandon.  As the stock markets surged first onTrumphoria and later taxphoria, gold fell deeply out of favor.  Investors abandoned it since they felt noneed to prudently diversify their soaring portfolios.

Thus a normal healthygold correction after a strong upleg cascaded into a 17.3% plunge over 5.3months ending in December 2016.  Suchsharp losses naturally devastated gold psychology among traders.  The bull market was still alive and welltechnically, as gold didn’t cross that -20% new-bear trigger.  But gold was still left for dead as thelevitating stock markets sucked in most capital.  Traders had largely moved on.

But gold still lookedreally bullish in mid-December 2016, as I explained within days of thatcorrection low.  Investors were radically underinvested ingold after fleeing in the election’s wake. And the truly incredible psychology unleashed by the Republican sweepwasn’t sustainable or repeatable.  It’spretty rare where nearly everyone gets presidential and congressional electionsso wrong!  So gold was overdue for somebuying.

Ever since thatpost-election anomaly it has indeed poweredhigher on balance in the solid uptrend you can see in this chartabove.  Gold has been relentlesslycarving a series of higher lows and higher highs, which made for a 20.4% uplegover the next 13.3 months.  That’sactually big enough to qualify as a new bull market, but again gold neverentered a bear.  Such strong price actionshould’ve improved sentiment.

But it reallydidn’t.  The extreme taxphoria last yearmade 2017 one of the most-extraordinary years on record for the US stockmarkets.  The S&P 500 ceaselesslylevitated to a massive 19.4% gain in the first year of the TrumpAdministration, accompanied by record-lowvolatility.  With big US stocks powering higher so dramatically and painlessly, who needed gold?  It tends to rally when stock markets areselling off.

While contrarians wererightfully impressed with gold’s strong bull-market uptrend since thoseanomalous post-election lows, mainstream investors didn’t know or care.  Everything was rainbows and unicorns forthem, despite dangerousbubble valuations in the stock markets. While gold’s 13.2% rally in 2017 would command attention normally, the35% to 57% gains in the FANG stocks overshadowed it and stole the limelight.

There’s no doubt over ayear of gold seeing higher lows and higher highs is very-bullish priceaction.  All students of the marketswould recognize this viewing gold charts. But climbing support and resistance lines are lost on the financialmedia and mainstream investors. Investments only start garnering talk and mindshare when major new highs are hit.  Popular psychology is totally dependent onthat one technical aspect.

Futures speculatorsview the horizontal $1350 line as key technical resistance.  Gold has tried and failed to break out aboveit from several to nearly a dozen times since the summer of 2016 depending onhow you slice such attempts.  These guysneed to see a decisive $1350 breakout to really motivate them to buyagain.  I define decisive as 1%+ beyond an old technical extreme, or about $1364 ingold’s case today.

That’s just a stone’sthrow away, very close.  Last week goldclosed near $1352, and this week it was still up at $1349.  All gold needs to see is a couple modest up days of 0.6% to push it back over $1365 for thefirst time in 21.3 months!  That wouldwork wonders for sentiment, rapidly turning it to bullish which would fuel muchgold-futures buying.  And the speculatorscurrently have lots of room to buy gold futures.

As of the latestCommitments of Traders report before this essay was published, total specgold-futures longs are only running 25% up into their past year’s tradingrange.  That means 3/4ths of these traders’ likely capital firepower remains availableto buy back in.  Believe me, if theythink gold is going to break out above $1350 resistance they will flood in witha vengeance.  These elite traders followcharts by necessity.

Every gold-futurescontract controls 100 troy ounces of gold, worth $134,900 this week.  Yet these only require traders to keep $3,100of cash per contract in their accounts. That works out to absurdly-extreme 43.5xmaximum leverage!  The legal limit inthe stock markets has been 2x for decades. Traders running at that crazy limit would lose 100% of their capitalrisked if gold merely moves 2.3% against their futures bets.

At 20x leverage thatrisk is still suffocating, with a 5% adverse move necessary to wipe out capitalrisked.  So when gold looks to bebreaking out above $1350, these traders will rush to buy to cover shorts andadd new longs.  They are well aware goldhas formed a giant ascending-trianglechart pattern over the past couple years or so.  That’s defined as rising lower supportcompressing a price into horizontal upper resistance.

When ascendingtriangles resolve, it’s usually with a sharp-to-explosive upside breakout.  Once thatlong-vexing overhead resistance fails, traders rush back in catapulting theprice higher.  When gold breaks out ofsuch a massive ascending triangle, technically-oriented traders are going toget the heck out of the way if they are short and rush to ride the breakout onthe long side.  Futures speculators liveand breathe technicals.

Their coming buyingwill fuel a far-more-important breakout. To the financial media and investors, new bull highs are the only thing that will draw theirinterest.  Before July 2016’s $1365bull-to-date peak, the last time gold closed over $1365 was way back in March2014.  So a $1365+ close right now wouldbe a major new 4.1-year high.  You betterbelieve that will catch investors’ attention, getting gold back on radars!

A 1% decisive breakoutabove $1365 requires $1379 on close. That sounds lofty since it’s been so long since gold challenged $1400,but it is merely 2.2% above thisweek’s levels!  When investors startgetting excited about gold again, it takes months or even years to reestablishmeaningful portfolio positions.  Thevastly-larger pools of capital they control overpower and dwarf whatever thefutures speculators are doing.

As I explored a couplemonths ago, investors are radicallyunderinvested in gold today.  Theywill have to shift capital into gold for a long time to come to reverse thismajor anomaly.  New gold bull-markethighs all alone will prove a powerful motivator for them.  But that will likely be amplified greatly bythe ongoing stock-market correction.  Stock selloffs ignite big investment demand forcounter-moving gold to diversify portfolios.

If either speculatorsbuy gold futures or investors buy gold and its major ETFs led by GLD SPDR GoldShares in any significant quantities, gold will absolutely see these majorbreakouts.  And there’s actually a goodprobability of that coming to pass in thenext month or so.  Gold tends toenjoy a major seasonal rally from late March to late May.  That oughtto be plenty big to drive gold decisively over $1350 and $1365.

This should reallyexcite contrarian speculators and investors. While the gains in gold will be nice, they will be trounced by theaccompanying surge in the gold miners’ stocks. This sector’s leadingbenchmark is the GDX VanEck Vectors Gold Miners ETF.  Its technical price action over this samegold-bull span is shown in this second chart. While gold is nearing new bull highs, the gold stocks are lagging far behind.

With little interest ingold since Trump’s election victory, the gold miners’ stocks have beenabandoned and left for dead.  They’vebeen drifting sideways in a vexing consolidation between $21 to $25 in GDXterms since late 2016.  That’s despite theirvery-strong fundamentals.  In theirlatest-reported quarter of Q4’17, these leading gold miners reported collective all-in sustaining costs averaging just $858 per ounce!

That’s far belowprevailing gold prices, showing this industry is earning fat operatingprofits.  In Q4’17 gold averaged about$1276 per ounce.  In the latest Q1’18which the gold miners will soon report on, that surged 4.1% quarter-on-quarterto a $1329 average.  That implies profitsof $471 per ounce, which is up 12.7%QoQ from Q4’17’s results!  The gold minersare thriving which stock prices haven’t recognized yet.

In Q1’18 GDX’s averageprice of $22.57 was actually 0.8% lower than Q4’17’s $22.76!  This highlights how deeply out of favor thegold miners are.  But that psychologywill reverse dramatically on that coming major gold breakout.  Once gold starts hitting new highs again,traders will flock back to gold stocks since their mining profits leverage andamplify gold’s gains.  That will drive a parallel big breakout in major goldstocks.

This week GDX waslanguishing near $23, dead-center in its 15.6-month-old consolidation between$21 support and $25 resistance.  It wouldhave to surge to $25.25 for a decisive breakout that would attract in a delugeof new capital.  That’s 9.9% higher fromthis week’s levels, which actually isn’t much at all for this small volatilesector.  Once gold stocks start rallying,they tend to move fast making for huge gains.

Since gold’s bullmarket began in mid-December 2015, GDX has actually seen 55 trading days with 3%+gains!  That’s nearly 1 out of every 10trading days over that entire 2.3-year span. The gold stocks are truly less than a week of decent rallying away froma decisive breakout of their own.  Andonce they start moving, traders will rush to buy back in to ride theirexplosive upside.  When gold is in favor,this sector soars.

In roughly the samespan of this gold bull’s first upleg in the first half of 2016, GDX skyrocketed151.2% higher in 6.4 months on the parallel 29.9% gold upleg.  That made for awesome wealth-multiplying 5.1x upside leverage to gold!  While gold stocks are abandoned and forgottenwhen gold isn’t on traders’ radars, once they get interested again the goldstocks stage massive catch-up rallies. The next one is nearing.

The major gold miners’early-2016 upleg wasn’t extreme at all considering the fundamentally-absurd prices gold stocks were trading at back then. GDX actually slumped to anall-time low, while the major gold stocks as measured by their HUI indexwere at a 13.5-year low.  They were tradingat levels last seen in July 2002 when gold was near $305.  So they needed to soar to mean revert out ofthat crazy anomaly.

Another massive meanreversion higher is certainly needed today. Gold first hit this week’s $1350 levels in mid-October 2010.  Since this metal was carving new all-timehighs, investors were eager to buy in for the ride.  Back then GDX was trading over $57, or 150% higher than today’s levels withthese same prevailing gold prices!  GDX’sbull-to-date peak in early August 2016 was $31.32, or just 36% higher fromhere.

So there’s a highchance the gold-stock upleg driven by the coming gold breakout will easilycatapult the gold stocks to new bullhighs too.  During the last secularbull in gold stocks between November 2000 to September 2011, the HUIskyrocketed 1664% higher.  There were 11 major uplegs during thatspan that averaged 81% gains over 7.9 months each!  So seeing gold stocks rally 40% or 50% fromhere is nothing.

The gold stocks aretruly a coiled spring today, ready to explode higher soon and trounce everything else.  They are deeply out of favor, incrediblyundervalued, and one of the only sectors that can rally sharply when generalstock markets sell off.  If you want tomultiply your wealth this year by fighting the crowd to buy low then sell high,this small and forgotten contrarian sector is the place to be.  Nothing else rivals it.

While investors and speculators alike cancertainly play gold stocks’ coming powerful upleg with the major ETFs like GDX,the best gains by far will be won in individual gold stocks with superiorfundamentals.  Their upside will far exceedthe ETFs, which are burdened by over-diversification and underperforming goldstocks.  A carefully-handpicked portfolioof elite gold and silver miners will generate much-greater wealth creation.

At Zeal we’ve literally spent tens of thousands of hours researchingindividual gold stocks and markets, so we can better decide what to trade andwhen.  As of the end of Q4, this hasresulted in 983 stock trades recommended in real-time to our newslettersubscribers since 2001.  Fighting thecrowd to buy low and sell high is very profitable, as all these trades averagedstellar annualized realized gains of +20.2%!

The key to this success is staying informed and beingcontrarian.  That means buying low beforeothers figure it out, before undervalued gold stocks soar much higher.  An easy way to keep abreast is through ouracclaimed weekly and monthly newsletters.  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. For only $12 per issue, you can learn to think, trade, and thrive likecontrarians.  Subscribe today, and get deployedin the great gold and silver stocks in our full trading books!

The bottom line is goldis nearing a major bull breakout above $1365. That will turn psychology bullish and bring traders back in droves.  Gold is rallying ever closer to new bull-markethighs as evidenced by its massive multi-year ascending-triangle chart pattern nownearing a bullish climax.  Today gold is onlya couple percent below that decisive breakout, which will finally blast it backonto the radars of investors.

That’s likely comingsoon, with gold in the midst of its major spring seasonal rally.  Speculators have lots of room to addgold-futures longs, while investors remain radically underinvested.  And once gold comes back into favor, theabandoned gold miners’ stocks are going to soar.  Their prices are far below where they oughtto be based on their fundamentals and prevailing gold levels.  Their upside from here is enormous.

Adam Hamilton, CPA

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