Gold Stocks Continue to Frustrate and Confuse Investors
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Since early2017, precious metal miners have not risen along with U.S. equites, crypto's,and pot stocks. Yet when these high flyers were aggressively sold recently,gold stocks have been sold in unison with all three. As I type this missive,the gold price is trading just $45 from a major break-out of a nearly five-yearbase. Yet for the second time this month the GDX is again selling down towardscritical support at $21, which has been tested five times since early 2017 andwas visited in mid-December when gold was nearly $100 lower.
One of theprimary attributes that makes gold stocks so attractive to investors is thefact that costs do not change much regardless of prevailing gold prices.According to mining analyst Adam Hamilton, quarterly major gold miner averageall-in sustain costs (AISC) within this gold upswing since late 2015 have beenaveraging $866 per ounce. At present, there is a giant disconnect between theprice of gold and the stock prices of the miners, especially when consideringthe margins of the miners doing so well because they have had to keep theircosts low.
The profitmargins of the global miners are now twice as high as they were when the GDXwas trading just 25% lower than it is trading today. At the end of 2015, themajor miners were only making $225 net of AISC and now, it's more than doublethat at over $460, yet the miners haven't rallied.
I believe abig reason for this is the huge short position now existing in the GDX. According to Fred Hickey, who is a frequently cited expert on Bloomberg Newsand Barron's Roundtable, the GDX short position is now 55 million shares. And sincethe major miner ETF is a barometer for the entire mining space, this 20% shortposition has kept pressure on the junior sector as well. In March of 2017, theGDX had 510 million shares outstanding and just a week ago, it was 40% lower at310 million.
I feel thishuge disconnect has continued in the entire miner space due in part to many sectorinvestors being duped into selling by this large GDX short position keepingpressure on the global miners. The entirety of the gold stock space representsless than 1% of the combined global investible equity space and the entitieswhich control these short positions have the ability to borrow at very lowlevels, due to central banks keeping rates artificially low. This means theycan play games with this sector and keep participants frustrated and confuseduntil their collective short position continues down to levels where they areforced to cover due to market irrationality extremes.
As long asthe gold price remains below $1375, this huge short position in the GDX maycontinue to coerce miner speculators into selling their positions to valueinvestors who are awaiting the inevitable - a short-cover move which will usherin a new miner bull market. In order to cash in on a short position, the ownermust buy back the short to collect his/her profit and this is why most major lowsin this sector begin with a high-percentage move to the upside. A bigshort-cover move, when combined with large amounts of value-based buying,culminates in huge upswings within a relatively short period of time in thistiny sector. Witness the previous short-cover based run in the GDX, which sentit zooming up 180% in just six months in the first half of 2016.
I can onlyhazard a technical guess as to what level the short-cover move may begin, whichcould possibly take place at the December 2016 low around the $18 region in theGDX. We had a glimpse of some short-covering when the major miner ETF became veryoversold at critical support on the daily chart. This coincided with the endingof the panic selling in the U.S. market on February 9th. However, after abounce back to the $23 resistance level, the GDX is back to under-performingwith rallies being sold into, despite the move higher in the U.S. stock marketand a sideways consolidation in bullion.
Unfortunately,this gold/miner dichotomy has happened historically with regularity in the goldspace, then the miners sling-shot higher once the shorts are forced to cover. Since1939, there have been 14 triple digit percentage moves up in gold stocks, withthe majority of these advances happening within a 6 to 7- month time-frame. Ibelieve there is a high probability of a sling-shot move set-up taking shape atthis time in the gold space. When you combine this possibility with the alreadyextreme miner undervaluation in relation to the gold price, positions taken inquality juniors during this sell-off could see massive gains in a short periodof time. With this in mind, I will continue to hold my positions with a bit ofcash until we see the inevitable short-cover bottom.
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By David ErfleContributing tokitco.com
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