Gold Stocks Crash, V-Bounce! / Commodities / Gold and Silver Stocks 2020
Gold miners’ stocks haveendured epic volatility in this past month, literally crashing before blasting backhigher in a violent V-bounce. That precedingwicked capitulation flush savagely forced the weak hands out, paving the wayfor gold stocks’ next major upleg. The resultingfierce rebound signals it is already underway, with plenty of speculators andinvestors now chasing the huge gains this sector is famous for.
Perspective is essentialand exceedingly-valuable for traders. Ifyou don’t know where we’ve been and how we got here, you can’t figure out wherewe’re likely going. Context is necessaryto frame this past month’s extraordinary gold-stock action, and to successfullygame where this sector should be heading. Extreme volatility creates extreme opportunities, neither of which come aroundvery often. Carpe diem!
The leading andmost-popular gold-stock benchmark is the GDX VanEck Vectors Gold MinersETF. It was the first gold-stock ETFlaunched way back in May 2006, giving it a first-mover advantage that has growninto an insurmountable lead. GDX’s $10.2bin net assets this week were running 34.4x larger than the next-biggest1x-long major-gold-miners ETF! GDX’s recentraging action reveals what just transpired.
The gold stocks havebeen in a bull market since January 2016, but understanding March 2020’s chaosbegins in September 2018. This sectorhad just finished a deep correction driven by forced capitulation selling oncascading stop-loss triggering, heralding a new upleg. The major gold stocks dominating GDX powered it76.2% higher over the next 11.8 months into early September 2019, when GDX peakedat $30.95.
As I warned in an essaythat week, gold stocks werevery overbought. My conclusion thenwas “The powerfulcounter-seasonal rally in recent months catapulted gold-stock benchmarks farbeyond their 200-day moving averages. Such stretched technicals coupled with very-bullish popular sentiment area warning this recent upleg is maturing. It is likely to roll over into a healthy correction soon to restorebalance.”
That proved right, asGDX fell 15.4% over the next 1.3 months into mid-October. Then the major gold miners’ stocks startedgrinding sideways, which isn’t uncommon in corrections. They usually take some time to unfold, asfulfilling their sentiment-rebalancing mission of bleeding away the excessivegreed from the preceding upleg topping doesn’t happen overnight. But oddly that healthy correction was soontruncated.
In late December thegold stocks suddenly surged to break out from their correction downtrend. Their dominant primer driver, the yellowmetal they mine, experienced surging futures buying in the last weeks of 2019. Gold’s breakout rally then extended onextraordinary events, first the short military conflict between the US and Iranthen later the scary COVID-19 outbreak in China spreading into a global pandemic.
I was skeptical of bothgold’s and gold stocks’ rallying in January and February. The reason was gold’s usual dominant primarydrivers of speculators buying gold futures and investors buying gold outright weremissing in action. I warned about gold’s peculiar and precarioussurge in late February, concluding then that “gold’s staying power up hereis questionable.” Gold had just surgedabove $1600, challenging $1650.
You can’t imagine thefirestorm of hate mail, ridicule, and flak that rational data-driven contrarian stance generated! Lots ofessay readers and newsletter subscribers were angry with me for refusing to buyinto gold stocks high. Our trading bookshad been mostly in cash since gold stocks’ last upleg topped back in earlySeptember. There simply hadn’t been agood high-probability-for-success setup to redeploy since.
As I explained inanother essay in mid-February, the gold stocks had stalled. At GDX’s $31.05 peak on February 24th drivenby $1659 gold, this leading gold-stock ETF had merely eked out a 0.3% gain in the 5.7 months since its real upleg first peaked in September! And gold-stock sentiment was really greedybordering on euphoric. This sector isfar too volatile to risk buying in high, that mostly results in tears.
CNBC’s famous JimCramer starts his show every evening with “Other people want to make friends, Ijust want to try to make you money.” In lateFebruary most gold-stock commentators were tickling traders’ ears rationalizingtheir bullishness. My favoriteWarren Buffett quote, which I put on the masthead of our weekly newsletterdecades ago, warns “Be brave when others are afraid, and afraid when others arebrave.”
So despite the heaps ofcontempt hurled at me by readers, I stood my ground and stayed totally out ofgold stocks. The trades recommended inour newsletters took the opposite side of the herd, betting for sharpgold-stock declines with inverse-leveraged gold-stock ETFs and gold-stock-ETFput options. What happened nextvindicated the data and wisdom of a studied contrarian approach, slaughtering naysayers.
This GDX gold-stock-bullchart is stunning, highlighting the extreme brutality of the wickedcapitulation out of late February’s unstable gold-stock highs. That minor marginal new high in late Februaryextended that gold-stock upleg per GDX to +76.7% in 17.5 months. But then the overdue major correction hitwith a vengeance, exhibiting a shocking ferocity that surprised everyone includingme. It was an utter bloodbath!
Despite the mountingglobal COVID-19 pandemic in late February, despite the plunging US stockmarkets outbreak fears drove, gold rolled over hard as that monthwaned. Investors weren’t materiallybuying this metal, and gold-futures speculators’ positioning was so extreme thattheir buying firepower was exhausted. I’dhammered home those points with fresh data in every weekly and monthlynewsletter I’d written.
In the final 4 tradingdays of February, GDX plunged 15.6%. Thatmay have been enough to bleed off the recent near-euphoric sentiment in normaltimes, and the major gold stocks indeed bounced after that into earlyMarch. As always their fortunes were slavedto gold’s, which was overwhelmingly being driven by speculators’gold-futures trading. They in turn werelooking to the US dollar for trading cues like usual.
While I’d alsorecommended put options on the leading S&P 500 ETF and gold ETF in oursubscription newsletters, I certainly didn’t expect a stock panic. These events, technically defined as theS&P 500 plummeting 20%+ in 2 weeks or less, are exceedingly rare. The last one erupted recently in October 2008,which was the first true stock panic in 101 years since the infamous Panic of1907. These aren’t predictable.
But one of the countlesslessons from October 2008’s stock panic is gold doesn’t perform well insuch exceedingly-extreme fear environments. That’s contrary to what everyone expects from this safe-haven asset, whichusually moves counter to stock markets when they are selling off. And if gold gets sucked into stock panics’ epicfear maelstroms, the gold stocks are the last place you want to be during suchevents.
In 21 trading daysending in late October 2008, a single month, the flagship US S&P 500 stockindex plummeted 30.0%! Yet in that identicalspan, gold collapsed 16.7%. The reasonis terrified traders were fleeing everything for cash, which catapulted the USDollar Index 12.6% higher. That unleashedmassive gold-futures selling from speculators, crashing GDX a mind-boggling retirement-slaying 54.3% in that month!
So had I suspected COVID-19would spawn a stock panic, which I sure didn’t, I would’ve screamed to dumpall gold stocks! Very fortuitouslyfor our subscribers, we were already fully out and short this sector for theother reasons described above. Heedingthe data, which already looked all wrong in late February as gold and goldstocks peaked, protected us from the vicious carnage to come. Discipline would pay off big.
While China’s obviously-fabricatedCOVID-19 case counts had magically stopped growing exponentially and froze inmid-February, the rest of the world’s were exploding. On February’s final trading day, the US had 62confirmed cases. Only a month later thisweek on March 31st, they had rocketed parabolic to 177,452! That along with governments’ draconianresponses shutting down the economy annihilated stocks.
The monster single-dayselloffs in the US stock markets mounted, from the S&P 500 plunging 4.4% inlate February to plummeting 7.6%, 9.5%, and 12.0% in ridiculously-ugly downdays into mid-March! The fear thatgenerated was naturally staggering, with the leading VIX implied-volatilityfear gauge rocketing up to an unthinkable 82.7 on that final epic S&P 500down day. That unleashed a franticrush into cash.
After peaking at $1675on March 9th while the US Dollar Index was still weakening, thosecounterintuitive stock-panic dynamics took over. Over the next 8 trading days as the S&P 500choppily collapsed another 12.3%, the US Dollar Index blasted 8.1% higher! That’s an incredibly-big-and-sharp move forthe world’s reserve currency. Thatunleashed the massive pent-upgold-futures selling that I’d warned about in late February.
So despite some of themost-extreme market fear we’ll see in our lifetimes, gold plunged 12.1% inthose 8 trading days! Despite gold-stocktraders’ contrarian bent, they certainly aren’t immune to fear which was spreadinglike wildfire. With gold cratering from$1675 to $1472 in under 2 weeks, the gold stocks didn’t stand a chance. Regardless of their outlook going into astock panic, they will get ravaged like everything else.
On March 9th when goldhit that major 7.1-year secular high of $1675, GDX had already retreated 12.0%since its late-February peak. But thanksto that ultra-rare stock panic, the losses to come would dwarf that. On March 11th, 12th, and 13th, GDX plummeteda catastrophic 8.4%, 11.4%, and 14.8%! Thoselatter two horrific capitulation days constituted a formal crash, which isa 20%+ plummeting in 2 days or less.
GDX closed at $19.00 onFriday the 13th, taking its total losses since late February to an extraordinarily-brutal38.8% in just 0.6 months! Again I sureas heck didn’t expect anything that extreme, we realized the big profits on ourshort-gold-stock trades well before that stock-panic nadir. A crash like that triggered all the stoplosses existing in the markets, forcing everyone out but the most-hardenedlong-term investors.
Another vexing quirk ofstock panics is it’s impossible to tell in real-time just how low they’llplummet on that epic selling. Trying tocatch the neutron-star-heavy falling knives spawned by stock panics is super-risky. It’s more prudent to wait until the violentV-bounce that follows stock panics. But evenpiling into those are risky, as there are often false bounces in theexceedingly-volatile chop before panics truly bottom.
The gold stocks were certainly radically oversold with GDX way down at $19.00, it was trading at just0.694x its 200dma! And at 38.8%, GDX’stotal plummeting since late February was in line with this gold-stock bull’sprior couple outsized corrections which saw 39.4% and 31.3% losses but in longertimeframes of 4.4 and 19.1 months. GDX hadalso plunged into a major multi-year support zone around that $19 level.
GDX’s trading volume onthose two crash days was unbelievably extreme too, adding to the evidence thatcapitulation had exhausted itself. Onthe 12th and 13th as GDX plummeted 11.4% and 14.8%, this ETF’s trading volumeran 2.3x and 4.1x the 3-month average into late February’s peak! The bigger the volume, the greater the odds asharp move is climaxing. GDX’s last 2 daysin October 2008’s panic saw just 1.9x and 1.6x.
So it was tempting to gamea bottom late on Friday the 13th and start redeploying, but I didn’t. Extreme selloffs tend not to end on Fridays,because the traders getting eviscerated have the whole weekend to stew overtheir catastrophic losses. Thus Monday morningsoften see another wave of capitulation as traders pushed to their psychologicallimits run screaming for the exits. Thathappened again in gold stocks.
Right out of the gateson Monday the 16th, GDX collapsed another 14.8% to hit an exceedingly-brutalintraday low of $16.18! That was morethan enough to trigger any new stop losses added on the prior trading day. But those gold-stock levels were fundamentally-absurd given prevailing gold prices and resulting gold-miner profitability, which I’lldiscuss shortly. So buyers startedreturning fueling a stunning reversal.
GDX suddenly startedsoaring that morning, in one of the most-violent V-bounces gold stocks have everseen. This leading major-gold-stockbenchmark skyrocketed 41.8% higher within hours, closing 18.4% higher! Technically it wasn’t an outside-reversal daywhich often mark trend changes, as GDX didn’t rally above the prior trading day’sintraday high. But it was close enough forodds to favor the bottom being in.
So the very next day Istarted aggressively redeploying in fundamentally-superior beaten-downgold stocks in our weekly subscriptionnewsletter. Ultra-rare extreme stockpanics eventually spawn some of the greatest buying opportunities everseen. So I’d spent much time in Marchpainstakingly researching gold stocks, wading through their latest results touncover the ones with the best fundamental outlooks in 2020.
GDX’s violent V-bounce continuedon the 17th, with this ETF soaring 13.4% higher! In just 2 trading days, it had skyrocketed34.2%. But nothing comes easy in stockpanics, and that rebound was way too extreme to be sustainable. So the next day GDX once again crashed with amind-boggling 22.8% loss! That surelooked like a secondary capitulation low, and gold stocks have beengrinding higher on balance since.
That stock-panic-driven extremecapitulation flush had to force out all the weak hands, run all the existingstop losses on gold-stock positions. Itutterly eradicated all the greed that had plagued this sector near its late-Februarypeak, leaving nothing but fear and despair. All that looked like a decisive major bottoming that paved theway for gold stocks’ next major upleg. Andboy you sure want to be riding those when they run!
This gold bull’s maiden upleg mostly in thefirst half of 2016 saw GDX blast stratospheric with a monster 151.2% gain injust 6.4 months. And its last one effectivelypeaking in early September 2019 enjoyed an excellent 76.2% gain in 11.8 months. Given the crushing black depths of thisstock-panic plummeting, this sector’s upside potential is again really big. GDX would have to soar 64.8% merely to regainits bull high.
With gold-stock technicals about asdevastated as they can get at this COVID-19-fueled stock panic’s apparentnadir, and gold-stock sentiment utterly miserable with everyone having givenup, this gold-stock setup is crazy-bullish. And add in major gold miners’ awesome fundamentals,and this gold-stock bull’s next upleg has great potential to grow huge. The GDX gold miners’ Q4’19 results proved outstanding!
I wrote a whole essay on them that week GDXwas literally crashing, which was right after they finished releasing theirlatest financial and operational reports. In Q4’19 the elite top 34 GDX gold miners reported average all-insustaining costs of $942 per ounce. Withgold averaging an excellent $1483 that quarter, the major gold miners were enjoyingfat profits near $541 per ounce. And odds are Q1’20’s will prove even better!
Despite the stock panic sucking in goldthrough big gold-futures selling sparked by a soaring US dollar on safe-havencash demand, Q1’s prevailing gold prices were much better. Gold still averaged $1582 last quarter, upanother 6.7% quarter-on-quarter and a colossal 21.4% year-over-year! Over the past four quarters the GDX goldminers have averaged AISCs of $910, and they should remain stable around therein Q1.
So $1582 gold less $910 AISCs implies themajor gold miners earned enormous $672-per-ounce profits last quarter! That’s up a massive 63.9% YoY from Q1’19’s$410. So when the major gold miners’ Q1’20results are released between late April to mid-May, amazed investors should flockto this truly-exceptional sector. Thegold miners’ earnings will be soaring while COVID-19 shutdowns wreak havoc on mostother sectors.
All this argues that a major new gold-stockupleg is getting underway, portending big gains coming! Gold supports this outlook too. The extreme fear and devastation unleashed bystock panics elevates gold investment demand for years after. Investors with stock-heavy portfolios whoweren’t diversified before the panics wisely up their gold allocationsafter. Every investor needs 10% to 20%of their holdings in gold!
After 2008’s stock-panic low, gold soared166.5% higher over the next 2.8 years on persistent inflows of investmentcapital! In essentially that same span,GDX rocketed 307.0% higher! The major goldstocks could easily quadruple again in the coming years out of thisCOVID-19 stock panic’s lows. As always,the best gains will be won by those buying in the soonest and lowest after theserecent extreme panic lows.
While GDX enjoys excellent gains in majorgold-stock uplegs, they are dwarfed by those seen in smaller fundamentally-superiormid-tier gold miners. As explained in mylatest essay on their Q4’19results just a couple weeks ago, the mid-tiers far-outperform the majors with their superior production growth and smaller market capitalizations enablingbigger ultimate gains. A panic’s wake isa stock pickers’ paradise!
We do all that hard and tedious fundamentalwork at Zeal, winnowing the gold-stock field to uncover the likely bigwinners. And we’re currently redeployingin these fundamentally-superior gold stocks after the stunning events of March,which are recommended in our popular weekly and monthly newsletters. Nearing the end of the last gold-stock upleg’soriginal early-September peak, we realized many big gains up to 110%!
To profitably trade high-potentialgold stocks, you need to stay informed about the broader market cycles that drivegold. Our newsletters are a great way,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. Subscribe today and take advantageof our 20%-off sale! Get onboardso you can mirror our great new trades now being layered in for gold stocks’next upleg.
The bottom line is gold stocks literallycrashed in mid-March, sucked into an ultra-rare and extreme stock panic! While exceedingly painful for traders whoignored the warning signs in late February and rode it down, this capitulationflush exhausted all potential selling and totally reset sentiment. It left gold stocks radically-oversold andmired in deep despair, perfect technical and sentimental conditions to birth majoruplegs.
Indeedgold stocks rocketed higher out of those stock-panic lows in a violentV-bounce, confirming there are lots of traders still eager to buy them relativelylow. The major gold miners’ outstandingfundamentals support a major new upleg too, with already-hefty implied earningsstill soaring in the just-finished Q1’20. As investors wisely re-diversify back into gold in the stock panic’s wake,the gold stocks will power far higher.Adam Hamilton, CPA
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