Gold Stocks Bouncing Hard / Commodities / Gold and Silver 2021

The battered goldstocks are bouncing hard, blasting higher over the past couple weeks!  That’s despite the Fed still looking to soonstart slowing the pace of its epic money printing.  Fed-tightening fears had weighted heavily onthe precious-metals realm since June. Gold stocks’ sharp rally confirms they have started mean reverting muchhigher after withering capitulation selling, portending massive gains coming.

As a professionalspeculator and newsletter guy for over two decades now, herd sentiment neverceases to amaze me.  The vast majority oftraders have no perspective, just a what-have-you-done-for-me-lately mentalityon the markets.  That foolish self-imposedmyopia greatly limits their gains, all but guaranteeing they will fail to buylow then sell high.  Succumbing to populargreed and fear usually leads to the opposite.

The leading gold-stockbenchmark and trading vehicle remains the GDX VanEck Gold Miners ETF.  Its price trends reflect prevailinggold-stock psychology.  Between mid-Mayto late September, the major gold stocks per GDX dropped 27.1% in 4.4months.  Nearly all those demoralizinglosses accrued across just several brief episodes.  And they were all triggered by heavygold-futures selling on Fed-tightening fears.

That was essentially a slow-motion taper tantrum in anticipation of the Fed starting to slow its colossal fourth quantitative-easingmoney-printing campaign!  Gold-futuresspeculators started worrying about that in mid-June, and their extreme leveragegrants them outsized influence over gold prices.  At the mid-June FOMC meeting, just a third oftop Fed officials saw maybe two quarter-point rate hikes way out intoyear-end 2023.

Despite that being an unofficialprojection the Fed chair himself warned against, and being an eternity away inmarket time, gold-futures speculators irrationally freaked out.  They dumped a colossal amount of longcontracts, crushing gold 5.2% lower in just three trading days!  GDX, which tends to amplify material goldmoves by 2x to 3x, collapsed 9.2% in sympathy. That short-lived episode really damaged sentiment.

That gold-futurespuking actually interrupted a nice young upleg in gold stocks, which had increasinglybred bullish sentiment.  Between earlyMarch to mid-May, GDX powered 28.4% higher in just 2.5 months.  The gold-stock fundamentals were awesomely-bullish,with gold miners earningfat profits with the high prevailing gold prices.  Their valuations were so darned low it madeno sense to flee them on gold-futures selling.

Indeed this sector quicklystarted recovering into early August, when extreme gold-futures selling againflared on Fed-tightening fears.  A better-than-expectedmonthly US jobs report upped the odds the Fed would start its QE taper soon.  Speculators aggressively short sold goldfutures on that, culminating in a rare gold-futures shorting attack onthe following Sunday evening!  Goldplunged 4.1% in two trading days.

While GDX dropped 5.4% inthat brief span, bearishness flared so intensely that heavy gold-stockselling persisted even as gold recovered sharply.  Over a couple weeks or so into mid-August,GDX cratered an ugly 11.8%.  Gold stocks werebecoming despised again, pariahs of the stock markets.  But there were still enough contrarians leftto fuel another recovery, until yet more big gold-futures selling short-circuitedit.

In mid-September better-than-expectedUS retail-sales data spawned another round of gold-futures long and shortselling.  That report was seen as Fed-hawkish, igniting a US Dollar Indexrally just like the mid-June dot plot and early-August jobs print had.  Gold-futures speculators watch the dollar’sfortunes as their primary trading cue. So gold plunged another 2.2% that day, which GDX amplified to a nasty4.2% loss.

That gold-futures andgold-stock selling lingered into and slightly past the Fed’s long-fearedQE-taper pre-announcement at the late-September FOMC meeting.  By then this gold-futures-driven gold-stockrout had cascaded into a full-blown capitulation!  Traders weren’t only exceedingly-bearish onthis sector, but hostile to any contrarian analysis arguing that selling was wildlyoverdone.  Gold stocks were ignored orhated.

Just three episodesof heavy selling since mid-June had all but eradicated any remaining vestigesof bullishness.  The foolish myopia of super-bearishherd sentiment was astounding.  Only 13.8months earlier in August 2020, gold stocks were a red-hot universally-adoredsector.  Traders were rushing to buy inhigh after GDX skyrocketed 134.1% over 4.8 months in a massive upleg!  Those aren’t unusual in this sector.

That happened to be thefourth upleg of this secular gold-stock bull, and all of them averaged awesome 99.2%GDX gains over 7.6 months!  Who wouldn’t wantto double their capital in such a short span? And if traders really liked gold stocks with GDX over $44 in earlyAugust 2020, they should have loved them at deep discounts with GDXunder $29 in late September 2021!  Buyinglow is necessary before selling high later.

But the sad hard truthis most speculators and investors are too lazy to study market cycles, which leavesthem not mentally-tough enough to fight herd sentiment.  So they miss the fantastic opportunities tobuy in low when fear soars, like in recent months.  Instead they foolishly wait until gold stocksgrow hot again, then buy in high right near major upleg toppings.  Then they suffer big losses as gold stocks naturallycorrect.

But after anycorrection-grade selloff as herd fear peaks, gold stocks carve major bottomings preceding their massive uplegs. The exact timing is never knowable in real-time, but in general theworse sentiment feels the higher the odds a major reversal higher is imminent.  Smart contrarian traders know that the besttimes to buy gold stocks are when it feels the worst.  That’s when despair reigns as everyone else flees.

The telltale sign ofdurable capitulation bottomings is what comes shortly after, the screaming V-bouncesout of those deep lows.  Those sharpreversals into powerful mean reversions higher imply selling was exhausted,that the weak hands were forced out near recent major lows.  And the past couple weeks or so have certainlyseen a face-ripping rally in gold stocks. They are even seeing big gains relative to gold.

That’s anexceptionally-bullish sign, and is evident in this chart.  The ratio of gold-stock prices to gold’sown is rendered here in blue in GDX/GLD Ratio terms.  The GLD SPDR Gold Shares of course is thedominant global gold exchange-traded fund. The underlying GDX closes are shown in red.  This recent blistering gold-stock rally is unlikeanything witnessed since spring in both absolute and relative terms!

Since carving that deep$28.91 closing low on September 29th, GDX has rocketed 11.2% higher as of themiddle of this week to $32.15!  That dwarfsgold stocks’ previous recoveries in late July and late August during recentmonths’ sharp selloff.  More importantly,recent weeks’ big gold-stock surge has amplified the parallel 3.9% gold gain by2.9x.  That’s on the high side of thatnormal-GDX-leverage range of 2x to 3x.

But while this entireten-trading-day V-bounce is really impressive, it is the middle seven days I’mreally marveling at.  Nearly all of gold’sgains were bookended on the first and last days of this rally, with 1.8% surgeson both September 30th and October 13th.  Sandwiched in between those, gold only ekedout a trivial 0.1% gain over seven trading days.  Yet over that same span, GDX blasted up aphenomenal 6.2%!

Such hugely-outsizedgold-stock gains contrary to gold are really unusual.  Gold stocks are essentially just leveraged playson the metal they mine, as prevailing gold prices directly drive their earningsand thus ultimately stock prices.  Seeinggold stocks bounce back so strongly while gold languished between $1,754 to $1,768was remarkable!  On that FOMC QE-taper-pre-announcementday, gold closed at $1,767.

So the myopic traderswho succumbed to bearish herd sentiment and sold gold stocks low during a majorbottoming are almost certainly gone. Good riddance to those weak hands! With their foolish selling likely exhausted, that leaves only hardenedcontrarian buyers.  And they are fuelingstrong upside that will soon start attracting in new momentum traders.  The battered gold stocks still have enormousroom to soar higher.

Remember GDX’s fourprevious uplegs in this secular bull before this year’s interrupted one averagedthose huge 99.2% gains.  Taken from theoriginal pre-June-FOMC-meeting correction bottoming in early March, thatimplies a $61.55 GDX target.  If insteadmeasured from late September’s silly capitulation low on Fed-QE-tapering fears,that retreats to $57.59.  But that’sstill another 79.1% above this week’s levels!

Gold stocks’ short-termupside potential is also massive on mean-reversion-relative-to-gold potential.  As this chart shows, the GGR has beengrinding higher on balance in a secular uptrend in recent years.  This is normal during secular gold bulls, asthe longer they persist the more traders migrate into gold stocks to ridethem.  The GDX/GLD Ratio plunged as lowas 0.178x as October dawned and traders rushed to sell low.

By the middle of thisweek it had rebounded strongly to 0.192x as gold-stock gains far outpaced gold’sown.  But that remains well under the supportline of the GGR’s secular uptrend.  Andafter gold stocks are hammered well under their normal levels relative to goldin capitulation selling, they usually not only mean revert but overshoot aboveGGR resistance.  That is currentlyrunning about 0.242x as this chart shows.

At this Wednesday’s$167.59 GLD close, that mean-reversion-overshoot GGR implied a GDX trading at$40.56.  That’s another 26.2% higher fromthis week’s levels, a nice chunk of gains. But that assumes gold itself doesn’t mean revert way higher after recentmonths’ episodes of extreme gold-futures selling, and that GGR uptrend resistancedoesn’t keep climbing.  Neither is likelyto prove true, arguing for bigger gains.

My essay last weekanalyzed why gold will followthe money supply much higher.  Sincethe March 2020 pandemic-lockdown stock panic, this profligate Fed has mushroomedits balance sheet by a truly-insane 103.5% or $4,305b over just 19.3 months!  And more than doubling the US dollarsupply in such a short span isn’t over with QE tapering.  If that unfolds as planned, another $660b of newmoney is coming by June!

This radically-unprecedenteddeluge of money printing is what is driving the raging price inflation in theUS.  That will ultimately greatlyboost gold investment demand, driving the yellow metal way higher.  Like the gold stocks, gold has seen fourprevious uplegs during this secular bull. They averaged hefty 33.3% gains.  Unlikegold stocks, gold’s early-March correction low held solid despite that recentgold-futures dumping.

Measured from that$1,681 major bottoming, a merely-average bull upleg would carry this metal upto $2,241.  That’s not even particularlyhigh, not far above the last upleg’s $2,062 peak in August 2020.  And since the US central bank has never beforedoubled the US money supply in just over a year-and-a-half, it’s hard toimagine the ultimate inflation hedge gold only enjoying an average uplegin this flood of fiat dollars.

Translated into GLD termsto plug into this GGR metric, another 33.3% gold upleg out of GLD’s early-Marchcorrection bottoming implies a target price around $209.93.  And the GGR uptrend should continue to riseas gold’s secular bull marches on, raising that upper resistance line.  Let’s assume 0.25x for that, the lowest agold-stock mean-reversion overshoot relative to gold should peak.  That yields a GDX target of $52.48.

That’s another 63.2%above this week’s levels, and would make for an 81.5% upleg gain off thoserecent capitulation lows!  While thesespecific targets aren’t important, the essential takeaway is gold stocks aredue to power way higher from here!  TheGDX major gold miners’ low valuations support that.  While their new Q3’21 quarterly results arecoming soon, the previous Q2’21ones remain the latest available to analyze.

In the second quarteras Fed-tightening fears started to mount, the top 25 GDX gold miners commanding7/8ths of that index’s total weighting were thriving.  While gold averaged $1,814 in Q2, these goldminers’ all-in sustaining costs were far lower averaging $1,037.  That implied massive sector profitability of$778 per ounce, the third-highest on record!  Many of GDX’s stocks were trading atreally-low valuations exiting Q2.

Even though GDX wasconsiderably higher then near $34, plenty of major gold miners were sportingtrailing-twelve-month price-to-earnings ratios way down in the teens andeven single-digits!  Naturally they wereeven lower after recent months’ excessive emotional selling.  And despite those several bouts of extremegold-futures purging since mid-June, prevailing gold prices remained high andvery profitable to mine.

Gold still averaged$1,789 in the just-finished Q3, only 1.4% under Q2’s levels that fueled huge gold-minerearnings.  And as plenty of gold minerswere forecasting higher production in Q3, their AISCs probably shrunk with moreounces to spread the big fixed costs of mining across.  So gold-stock fundamentals are going to continueto look awesome as these companies release their Q3 results over the nextmonth or so.

The gold stocks’powerful V-bounce out of their recent deep lows far outperforming gold stronglysuggests a major upleg is getting underway.  It’s the resumption of the Fed-tightening-fear-interruptedfifth one of this secular bull.  And the beaten-downgold stocks have a long ways higher to run before reflecting normal levels relativeto today’s gold prices, let alone where the yellow metal is heading.  This is an excellent opportunity.

Our newsletter tradingbooks are currently full of great fundamentally-superior mid-tier and junior goldminers.  Their gains during gold-stockuplegs tend to well exceed the majors’, amplifying gold even more.  While we’ve taken lumps in stoppings on thoseseveral episodes of extreme gold-futures selling, the gold-stock upsidepotential is so bullish we redeployed low. Our unrealized gains are already soaring in this sharp bounce.

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 goldstocks are bouncing hard, rallying sharply in recent weeks.  The size and speed of this surge dwarfs otherrallies during recent months’ selloff, and this sector’s blistering gains faroutpaced gold’s own.  All that implies amajor mean reversion higher is underway, the resumption of gold stocks’Fed-tightening-fears-interrupted upleg! And that means capitulation selling exhausted itself in late September.

This technical and sentimentalevidence for a young upleg gathering steam is greatly bolstered by gold stocks’deeply-undervalued fundamentals.  Theyare earning huge profits at these high prevailing gold prices, and gold itself islikely to power way higher on the Fed’s extreme monetary excess.  While mostly contrarians are deploying capitalnow, gold stocks’ upside momentum will soon attract back other traders.

Adam Hamilton, CPA

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