Gold Stocks Bull Upleg Mounting / Commodities / Gold and Silver Stocks 2019

The gold miners’ stockshave surged powerfully over the past few weeks, challenging upleg highs.  Traders started returning to this smallcontrarian sector as gold blasted back above the psychologically-crucial $1300line.  While such early-summer strengthis atypical, gold miners’ technicals, sentiment, and fundamentals all support moregains to come.  Gold stocks need to meanrevert to much-higher price levels.

Traders usually trackgold-stock fortunes with this sector’s most-popular exchange-traded fund, theGDX VanEck Vectors Gold Miners ETF. Launched in May 2006, this was the maiden gold-stock ETF.  That big first-mover advantage has helped propelGDX to sector dominance.  This week itsnet assets of $9.7b ran 46.5x larger than the next-biggest 1x-longmajor-gold-miners ETF!  GDX is thissector’s leading benchmark.

And it sure didn’t lookpretty in May, with traders wanting nothing to do with gold stocks.  GDX spent the great majority of last monthlanguishing near its 200-day moving average. Just a few weeks ago on May 29th, GDX closed at $20.42.  That was down 3.2% year-to-date, much worsethan gold’s own slight 0.2% YTD decline. The gold stocks were really out of favor, just like the metal they mine whichfuels their profits.

This sector started perkingup on May 30th, when gold and GDX enjoyed 0.7% and 1.7% rallies.  Major gold miners’ inherent profitsleverage to gold usually helps their stock prices amplify gold’s gains by2x to 3x.  But there was still noexcitement with gold and GDX trading at $1288 and $20.77 heading into June.  Early market summers have gold’s weakest seasonals of theyear, usually weighing on it and the miners.

But leave it to Trump tounleash a bombshell shaking the status quo. That evening he shocked, tweeting “On June 10th, the United States willimpose a 5% Tariff on all goods coming into our Country from Mexico, until suchtime as illegal migrants coming through Mexico, and into our Country, STOP. TheTariff will gradually increase until the Illegal Immigration problem isremedied, at which time the Tariffs will be removed.”

The White House saidthose tariffs would be ratcheted up 5% each month until they hit their terminal25% level on October 1st!  While Trumplater suspended his Mexico-tariff threat, it really surprised traders.  Not only was Trump opening up a new front inthe trade wars, but he was tying tariffs to non-trade issues as ahardline negotiating tactic.  That had seriousimplications, so Asian traders flooded into gold after that tweet.

The next day that newmomentum spilled into the US, driving gold 1.3% higher to $1305.  Long-apathetic gold-stock traders rejoiced atseeing gold claw back over $1300.  That hasproven a crucial level for gold sentiment for years now, the dividing linebetween popular bearishness and bullishness. GDX shot up 3.9% that day.  Asiantraders bought gold aggressively heading into the next trading day, driving a$1300 breakout.

That upside action againcarried into US markets on June 3rd, when gold powered another 1.5% higher to$1325.  The major gold stocks’ gainsmounted, with GDX surging another 4.2% to $22.49.  In those two trading days following Trump’sMexico-tariff threat, this leading gold-stock ETF blasted 8.3% higher on a 2.8%gold surge!  GDX’s gains were amplifyinggold’s breakout rally by a strong 3.0x, rekindling sector interest.

There’s nothingspeculators and investors like more than chasing winners, riding the momentum.  So that newfound gold and gold-stock buyingpersisted.  By this Wednesday’s datacutoff for this essay, gold had powered 4.1% higher since May 29th.  True to form, the major gold stocks as measuredby GDX rocketed up 12.4% in that same span for 3.0x leverage.  The gold miners’ stocks are starting toreturn to favor again!

Their strong gains inrecent weeks didn’t erupt from major lows, but from a lull in a solid existingupleg.  This chart looks at GDX over thepast several years or so, across the life of gold’s current bull market.  It is important to consider big moves inbroader technical context, as that offers clues on what’s likely next.  The gold miners’ stocks have lots of room torally much higher from here, with major-upside-breakout potential.

While this week’s$23ish GDX levels feel high after May’s disheartening 200dma grind, they are actually fairly low.  Since late 2016 GDXhas mostly meandered in a major consolidation trend running from $21 support to$25 resistance.  $23 is right in the middleof that long basing channel, which isn’t noteworthy at all technically.  The gold miners’ stocks won’t get excitingagain until GDX breaks out decisively above $25.

The past few weeks’ bigsurge is simply part of an in-progress upleg born in deep despair back in earlySeptember.  That episode was brutal.  All-time-record gold-futuresshort selling hammered the metal to 19.3-month lows.  That unleashed cascading stop-loss selling in gold stocks, an ugly forcedcapitulation that crushed GDX to deep 2.6-year secular lows.  All the gains since are just a normal meanreversion higher.

Gold stocks’ recoveryfrom those anomalous extreme lows has already passed plenty of bullishtechnical milestones.  GDX’s series of higherlows and higher highs carved the nice uptrend rendered above.  This leading sector benchmark enjoyed a major triple breakout, climbingback over three key resistance zones including GDX’s 200dma.  A powerful Golden Cross buy signal flashed asGDX’s 50dma surged over its 200dma.

By late February this younggold-stock upleg had lifted GDX 33.0% higher to $23.36.  But there was no reason for gold stocks’ meanreversion higher to fail there.  Thosegains remained relatively small by sector standards.  Back in essentially the first half of 2016,GDX skyrocketed 151.2% higher in a monster upleg on a parallel 29.9% gold one!  And gold-stock uplegs during gold’s last bullaveraged bigger gains too.

Before GDX came along,the primary gold-stock benchmark was the classic HUI NYSE Arca Gold BUGS Index. Like GDX it tracks most of the same major gold stocks, so HUI and GDX priceaction are usually indistinguishable. The last gold-stock bull straddling GDX’s birth saw the HUI soar 1664.4%higher over 10.8 years between November 2000 to September 2011!  Those gains accrued over 12 separate uplegs.

One was an anomaly, theepic mean-reversion rebound after late 2008’s first-in-a-century stock panic.  Excluding it, the other 11 normal gold-stockuplegs in that last bull averaged 80.7% gains over 7.9 months per theHUI!  So GDX’s 33.0% upleg-to-dateadvance as of late February was nothing, way too small to be mature.  Odds are it will yet grow much larger in linewith past precedent before giving up its ghost.

Mid-upleg selloffs afterbig surges are normal and healthy to rebalance sentiment.  If greed becomes too excessive early inuplegs, it can prematurely exhaust them by pulling forward too much futurebuying.  In most cases mid-uplegpullbacks bounce at upleg support.  But thatdidn’t hold in late April, as GDX fell even farther to its 200dma.  That was the result of extreme stock-market euphoria stunting gold demand.

The gold stocks weredown but not out, simply awaiting signs of life in gold before tradersreturned.  That came in late May afterthe stock markets had entered a pullback and Trump’s Mexico-tariff threatrattled traders.  GDX quickly leapt back upinto its upleg’s uptrend channel, proving it is alive and well.  Overall this upleg’s technicals remainvery bullish, pushing this leading ETF’s price ever closer to a majorupside breakout.

For the better part ofseveral years now, GDX $25 has proven gold stocks’ graveyard in the sky.  They’ve challenged it several times, buthaven’t been able to decisively break though. They certainly can go much higher. In this gold bull’s monster initial upleg in H1’16, GDX rallied as highas $31.32.  And near the end of gold’slast secular bull, this ETF peaked at $66.63 in September 2011.  There’s nothing magical about $25.

And it isn’t far awayat all.  As of the middle of this week,GDX merely had to rally 8.9% more to regain $25!  That’s nothing for a sector as volatile asgold stocks.  Remember just a few weeks agoGDX surged 8.3% in only two trading days as gold powered back over $1300 afterTrump’s Mexico-tariff threat.  So a majorgold-stock breakout that would radically improve sector psychology is very muchwithin reach today.

The higher gold stocksclimb, the more traders will want to buy them to ride that momentum.  The more capital they deploy, the more goldstocks will rally.  This normal virtuouscircle of improving psychology and buying will become even more exaggerated asGDX $25 is surpassed.  Seeing the highestgold-stock levels in several years will work wonders to improve sector sentiment,unleashing widespread bullishness.

This gold-stock upleg’spotential gains are massive spanning such a major upside breakout.  Remember speculators and investors love chasingwinners, so the higher gold stocks rally the more attractive they’ll look.  If GDX’s current upleg grows to the last secularbull’s average upleg gain of 80.7%, it would catapult this ETF to $31.75.  The major factor almost certain to push GDXwell over $25 is gold’s own breakout.

Much like GDX $25, gold’sown bull since December 2015 has been capped near $1350 ever since.  Last week I wrote a whole essay explainingwhy gold is winding closer and closer to blasting through that tonew bull-market highs.  New-bull-high psychology in gold would spark a frenzied rush to bring neglected gold stocks back intoportfolios.  Weakening general stockmarkets should create the necessary gold demand.

Gold-stock sentiment ismerely decent today, average at best even after recent weeks’ sharp surge.  That leaves lots of room for improvement.  The more bullish traders get on gold miners’stocks, the more they will want to buy. Gold miners’ shift back into favor could easily propel GDX back above$25 anytime in the coming months.  But wemay have to wait until August, after the worst of the gold summer doldrums pass.

Normally this time ofyear I’d be updating my gold-summer-doldrums research.  But that takes a backseat tothe recent gold and gold-stock surges. In a nutshell, Junes and Julies are the weakest time of the yearseasonally for gold with no recurring outsized gold-demand spikes.  Gold and gold stocks can rally during earlysummers if unexpected demand materializes, but they usually don’t.  Will summer 2019 prove an exception?

I sure hope so, but onlytime will tell.  This next chart looks atthe HUI’s average summer performances in all modern gold-bull-market years.  Each summer is individually indexed to itsfinal close in May, keeping gold-stock price action perfectly comparableregardless of prevailing gold levels. The yellow lines show 2001 to 2012 and 2016 to 2017.  Last year’s summer gold-stock action isrendered in light blue for comparison.

All these linesaveraged together form the red one, revealing the center-mass drift trend of goldstocks in market summers.  Gold stocks’current 2019 summer action is superimposed over all that in dark blue.  As you can see, this sector is off to oneof its best summer starts in all modern bull-market years!  That could be sustainable like summer 2016’spowerful run, or gold stocks may end up consolidating until August.

Which way this summerplays out depends on gold.  Ifgold keeps climbing on balance, so will the stocks of its miners regardless ofseasonal tendencies.  Weakening stockmarkets would spur gold investment demand continuing to push its pricehigher.  A weaker US dollar would alsohelp, motivating gold-futures speculators to buy as well.  Only time will tell whether the gold and gold-stockbreakouts come sooner or later.

Whatever the timing, thegold miners’ fundamentals remain strong and bullish and support much-higherstock prices.  After every quarterlyearnings season, I dig deep into the GDX gold miners’ fundamentals.  They finished reporting their latest Q1’19 results abouta month ago, and I wrote a comprehensive essay analyzing them.  There’s no doubt fundamentally that gold stocksshould be trading way over GDX $25 levels.

Stock prices areultimately determined by underlying corporate earnings, and for the gold minersthat is totally dependent on prevailing gold prices.  Gold-mining costs are best measured in all-in-sustaining-costterms.  In Q1’19 the GDX gold miners’AISCs averaged $893 per ounce.  That’sright in line with the prior four quarters’ trend of $884, $856, $877, and $889.  Gold-mining profits are going to soar withhigher gold.

Gold averaged $1303 inQ1 when the major gold miners were producing it for $893.  That implies they were earning $410 per ouncemined.  $1400 and $1500 gold are only7.4% and 15.1% higher from there.  As theGDX gold miners’ AISCs reveal, gold-mining costs are largely fixed fromquarter to quarter and don’t follow gold higher.  So assuming flat AISCs, gold-mining profitssurge to $507 at $1400 and $607 at $1500.

That’s 23.7% and 48.0%higher from Q1’19 levels on mere 7.4% and 15.1% gold gains from that quarter’saverage price!  And as of the middle ofthis week, gold had already climbed 2.3% of that.  The major gold miners’ fundamentals arealready bullish, but improve greatly at higher prevailing gold prices.  With earnings growth hard to come by ingeneral stock markets this year, the gold stocks will be even more alluring.

All the stars arealigning for big gold-stock gains in coming months, with their technicals,sentiment, and fundamentals all looking very bullish.  This mounting gold-stock upleg has greatpotential to grow much larger later this year, greatly rewarding contrarian tradersbuying in early.  More and more investorsare becoming aware of this sector’s huge potential, including elitebillionaires running major hedge funds.

This week one of them,Paul Tudor Jones, gave an interview in New York.  He was asked what his best trade over thenext year or two will be.  He said, “Thebest trade is going to be gold.  If Ihave to pick my favorite for the next 12 to 24 months it probably would begold.  I think gold goes beyond $1400, itgoes to $1700 rather quickly.  It has everythinggoing for it in a world where rates are conceivably going to zero...”

This is not the summerto check out, but to do your homework and get deployed in great goldstocks.  All portfolios need a 10%allocation in gold and its miners’ stocks! Many smaller mid-tierand junior miners have superior fundamentals and upside potential to themajors of GDX.  And by the time the goldstocks get really exciting again in upside breakouts with gold, much of the easygains will have already been won.

One of my core missionsat Zeal is relentlessly studying the gold-stock world to uncover the stockswith superior fundamentals and upside potential.  The trading books in both our popular weekly and monthly newsletters are currentlyfull of these better gold and silver miners.  Mostly added in recent months as gold stocks recoveredfrom selloffs, their prices remain relatively low with big upside potential asgold rallies!

If you want to multiplyyour capital in the markets, you have to stayinformed.  Our newsletters are a greatway, easy to read and affordable.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks.  As of Q1 we’ve recommended and realized 1089newsletter stock trades since 2001, averaging annualized realized gains of +15.8%!  That’s nearly double the long-termstock-market average.  Subscribe today and take advantage of our 20%-offsummer-doldrums sale!

The bottom line is thisgold-stock upleg is mounting.  Despiteweak early-summer seasonals, the gold miners’ stocks are rallying with gold andnearing a major breakout above GDX $25. Seeing the best gold-stock prices in several years will really motivatetraders to return, fueling a virtuous circle of capital inflows and gains.  Gold-stock technicals, sentiment, andfundamentals all support much-higher prices ahead.

Gold’s own inexorably-nearingmajor bull-market breakout will really light a fire under gold stocks.  The higher gold climbs, the more investorsand speculators will want to own it and its miners.  While summer may force a consolidation, softeningstock markets could easily overcome gold’s weak seasonals.  The potential gold-stock gains as goldreturns to favor are massive, so it’s important to get deployed early.

Adam Hamilton, CPA

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