Gold Stocks Decisive Breakout! / Commodities / Gold and Silver Stocks 2019

The gold miners’ stocksjust blasted higher to a major decisive breakout this week!  Driven by gold’s own huge bull-marketbreakout, the gold stocks surged well above vexing years-old upper resistance.  The resulting new multi-year highs are a gamechanger, starting to shift long-apathetic sector sentiment back towardsbullish.  This will increasingly attract backtraders, with their buying unleashing a virtuous circle of gains.

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 original gold-stock ETF.  That big first-mover advantage has helped propelGDX to sector dominance.  This week itsnet assets of $10.5b ran 44.6x larger than the next-biggest 1x-longmajor-gold-miners ETF!  GDX is thissector’s leading benchmark.

And as recently as lateMay, neither speculators nor investors wanted anything to do with gold stocks.  GDX slumped to $20.42 on May 29th, down 3.2%year-to-date.  That was much worse thangold’s own slight 0.2% YTD decline then warranted.  The gold stocks were really out of favor,largely ignored by apathetic traders. What a difference a month makes though, as their fortunes changed radicallyin June.

The gold miners startedreanimating on May 31st, after Trump unleashed a bombshell warning to Mexicothe evening before.  He said tariffswould be imposed on all of its exports to the US if it didn’t seriously clampdown on illegal immigration across the US southern border.  While Trump subsequently suspended those tariffson Mexico’s promises to take action, that was the catalyzing event that awokegold from its slumber.

A couple weeks ago Iwrote an essay on the resulting mounting gold-stock upleg, explainingwhat was going on.  But the developmentssince have been stunning, a colossal bullish surprise.  Long neglected, GDX kept on marching highermid-month leading into last week’s highly-anticipated Federal Open MarketCommittee decision.  GDX closed at $23.67the day before, already 15.9% higher in only several weeks.

The Fed kowtowed to stocktraders’ hyper-dovish expectations and shifted its future rate bias fromtightening to cutting, lighting a fire under gold.  In last week’s essay I analyzed the gold bull breaking out,which was a momentous sea-change event. Gold rallied 1.0% to $1360 that day with top Fed officials forecasting anew rate cut next year.  Gold-stocktraders just shrugged at gold’s best close in 2.9 years.

They only bid GDX 1.4%higher to $24.00 after the Fed’s dovish shift. That only amplified gold’s gains by 1.4x, far short of the major gold stocks’normal upside leverage to gold of 2x to 3x.  While gold was high, it had tried and failed foryears to break out above its $1350 resistance zone.  And gold stocks suffered big and sharpselloffs after those previous forays proved unsuccessful.  Traders didn’t expect this time to bedifferent.

That Fed-Day eveningNew York time, Asian markets reopened as their Thursday morning rolledaround.  The Asian cultures have a deepcultural affinity for gold, and aggressively piled on in early trading.  All that buying catapulted gold from $1358 to$1383 in about an hour!  Partially thanksto Iran shooting down a big and sophisticated US surveillance drone overnight,gold’s Asia gains held in last Thursday’s US trading.

Gold closed 2.1% higherthat day at $1389, a decisive breakout 1%+ beyond its previous bull-markethigh of $1365 from way back in early July 2016! That also happened to be a 5.8-year closing high, so gold-stock traders realizedbig changes were afoot.  They pouredcapital into gold stocks with a vengeance, catapulting GDX 4.4% higher on 3.5xits 3-month-average daily volume!  That propelledit to $25.05 on close.

That was a criticaltechnical level, as this GDX chart shows. It looks at the gold-stock price action of the last several years or soduring gold’s own parallel bull market. GDX is rendered in blue, its key 50-day and 200-day moving averages inwhite and black, and 2.5-standard-deviation bands in light yellow.  This leading gold-stock ETF had to decisivelybest years-old upper resistance at $25 to prove this time is different.

Since late 2016, GDXhas largely been trapped in a giant consolidation basing trend running from $21support to $25 resistance.  $25 hadproven a graveyard in the sky for gold stocks since November 2016, and neededto be overcome to change bearish psychology. GDX’s $25.05 close last Thursday on that new secular gold high wasright there.  But $25 resistance hadto be broken decisively to impress traders.

Last Friday goldclimbed another 0.7% to $1399 on pure momentum, yet gold-stock traders wereworrying again.  So GDX’s resulting 0.6%rally was pathetic, actually lagging gold. While not a decisive breakout over $25.25, or 1% above that long-vexingresistance line, GDX’s $25.21 close was darned close.  The major gold stocks as measured by this ETFhadn’t been higher in 21.4 months.  Thatwas certainly bullish.

Last Friday and this Mondayit was becoming evident that new-high psychology was taking root ingold.  That is a powerful force motivatingspeculators and investors to buy.  GDX$25 finally being materially surpassed has long been the key to unleashing thisself-reinforcing sentiment in gold stocks. A couple weeks ago when GDX had merely climbed to $23.33 at best, Iwrote about this coming criticalbreakout.

“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.”  Nothing drives trader interest and thuscapital inflows like major new highs.  And GDX was right on the verge of entering thatexcitement-fueling zone decisively over $25 as markets opened for trading thisweek.

This Monday gold surgedanother 1.4% higher to a dazzling $1419 close! That new 6.1-year high was fueled by sheer momentum, there was littlegold-moving news that day.  Gold’s new-highpsychology was already feeding on itself. And that enthusiasm spilled into gold stocks, with traders bidding GDXanother 3.8% higher to $26.17.  That wasthe long-awaited decisive $25 breakout, with GDX blasting 4.7% beyond!

The importance of goldstocks powering through to new 2.7-year highs cannot be overstated.  Major new highs act like magnets attractingtraders’ attention, interest, and capital. They prove that the long-ignored gold stocks are in bull-market-rallyingmode again, portending massive gains to come. They also garner media coverage, which greatly increases the number oftraders looking to ride the breakout momentum.

Since late May’s depressinglow, GDX had rocketed a huge 28.2% higher in just 18 trading days!  Stock traders would kill for those kinds offast gains.  And the major gold stocks’upleg-to-date advance per this ETF had grown to 48.9% over 9.4 months.  That would be impressive for any sector, butis actually still on the smaller side for the high-potential gold stocks.  Their uplegs have tended to grow much largerin the past.

The last time gold washitting new bull-market highs was in the first half of 2016.  That was the maiden upleg of this bull, wheregold soared 29.9% higher in just 6.7 months. The resulting excitement fueled a deluge of capital roaring into goldstocks, which skyrocketed GDX an incredible 151.2% higher in roughlythat same span!  While that upleg was exceptionallylarge, the last major gold-stock bull’s uplegs were big.

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 the HUI!  So GDX’s 48.9% upleg-to-date advance as of earlythis week remains well below precedent to be mature.  Odds are it will grow much larger in linewith past major uplegs before giving up its ghost.

Gold stocks paid a terribleprice as gold drifted sideways over the last several years, trapped under that$1350 resistance zone which masked its in-progress bull.  That’s why GDX mostly meandered between those$21 support and $25 resistance lines since late 2016.  That chronic inability to break out to newhighs gradually scared away the great majority of traders, leaving gold stocks incrediblyundervalued.

Gold-stock prices areultimately determined by gold, because it overwhelmingly drives their earnings.  So one way to measure gold-stock “valuations”is looking at them relative to gold. This can be done using the GDX/GLD Ratio, the leading gold-stock ETF’sprice divided by the flagship gold ETF’s price. That of course is the GLD SPDR Gold Shares.  I last wrote about and analyzed the GGR in anearly-February essay.

This Monday as GDX finallydecisively broke above $25 to close at $26.17, GLD’s shares closed way up at $133.94.  That made for a GGR of just 0.195x at thebest gold-stock levels in several years. Yet that was still really low by historical standards.  The last normal years for the gold marketwere arguably 2009 to 2012.  That stretchwas sandwiched between 2008’s stock panic and the Fed’s QE3 stock-market levitation.

The resulting extremeand irrational stock euphoria had a devastating impact on gold.  But from 2009 to 2012 before markets becamewildly central-bank-distorted and fake, the GDX/GLD ratio averaged 0.381x.  That encompassed all kinds of gold environments,from strong bull to budding bear.  Sothere’s no better recent span to approximate gold stocks’ “fair value” relativeto gold.  Applying that today is super-bullish.

At Monday’s $133.94 GLDclose, that historical-average fair-value GGR would put GDX at $51.03.  That is a whopping 95.0% higher than itsactual close that day!  Gold stocks areliterally trading at just half of where they ought to be at today’s goldprices, meaning they still need to double just to catch up.  And that doesn’t account for higher futuregold prices or the GGR overshooting proportionally higher after mean reverting!

At best GDX has powered151.2% higher within gold’s current bull. But during gold’s last secular bull, the HUI skyrocketed an astounding 1664.4%higher over 10.8 years!  Gold stocks areone of the highest-potential sectors in the entire stock markets.  When they really start running the resultinggains can truly generate life-changing wealth. That’s why contrarians are willing to suffer between their mighty bullruns.

This week’slong-awaited GDX $25 breakout is a critical technical milestone that is likely signalingmuch-bigger gains to come.  The gold-stocksurge this month is really special, actually the strongest early-summerperformance for this sector in modern gold-bull history!  Normally this time of year I’d be updating my gold-summer-doldrums research, highlighting the weakest time of the year seasonally for goldstocks.

Hopefully I can find timenext week.  This chart looks at the HUI’saverage 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 lines averagedtogether form the red one, revealing the center-mass drift trend of gold stocksin market summers.  Gold stocks’ current 2019summer action is superimposed over all that in dark blue.  As you can see, this past month’s action is thebest summer start gold stocks have seen since at least 2001!  They are even tracking better than the summerof 2016 in this gold bull’s mighty maiden upleg.

This chart reallyilluminates how unique gold stocks’ powerful June rally has been.  This is more evidence that a sea-changesentiment shift is underway in this long-neglected sector.  That sure implies the gains to come will be muchlarger than traders expect, driving GDX towards its own new bull highs onbalance.  In early August 2016, GDX hitits bull-to-date high of $31.32.  That’s19.7% higher than Monday’s breakout close.

The major gold miners’fundamentals remain strong and bullish too, supporting much-higher stockprices.  After every quarterlyearnings season, I dig deep into the GDX gold miners’ fundamentals.  They finished reporting their latest Q1’19 results about6 weeks ago, and I wrote a comprehensive essay analyzing them.  At that point GDX was still really out offavor, languishing under its $21 multi-year support line.

Stock prices are ultimatelydetermined by underlying corporate earnings, and for the gold miners that istotally 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 earlier this week,gold had already climbed 9.2% of that. The major gold miners’ fundamentals are already bullish, but improve greatly at higher prevailing gold prices.  With earningsgrowth hard to come by in general stock markets this year, the gold stocks willbe 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 breaking-out gold-stock upleg has excellentpotential to grow much larger later this year, greatly rewarding contrariansbuying in early.  More and more tradersare becoming aware of this sector’s huge potential, and their buying will pushthe gold stocks much higher.

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 goldstocks get really exciting again hitting their own new bull highs, 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 stocks withsuperior 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 unrealized gains were already running as high as +109% thisweek!

If you want to multiplyyour capital in the markets, you have to stay informed.  Our newsletters are a great way, easy to readand affordable.  They draw on my vast experience,knowledge, wisdom, and ongoing research to explain what’s going on in themarkets, 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-term stock-marketaverage.  Subscribe today and take advantageof our 20%-off summer-doldrums sale!

The bottom line is goldstocks have joined gold with their own decisive breakout!  GDX finally burst back above itslong-oppressing $25 upper-resistance line this week.  These multi-year highs are a game changer forgold stocks, ushering back long-absent bullish psychology enticing traders toreturn.  They’ve been gone for so longthat this entire gold-mining sector is deeply undervalued relative to prevailinggold prices.

That portends hugeupside potential as gold and its miners’ stocks return to the limelight ontheir major breakouts.  Traders lovechasing winners to ride their upside momentum, and buying begets buying.  Of course gold-stock uplegs don’t powerhigher in straight lines, periodic selloffs to rebalance sentiment are normaland healthy.  So any material gold-stockweakness should be used to accumulate sizable positions.

Adam Hamilton, CPA

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