Gold Stocks Gather Steam / Commodities / Gold and Silver Stocks 2019

Gold stocks’ youngupleg is gathering steam, marching steadily to higher lows and higherhighs.  These bullish technicals aregradually improving sentiment, fueling mounting interest in this contrariansector.  That’s helping the gold stocksregain lost ground relative to gold, the driver of their profits.  Fundamentals are growing more favorable asgold itself powers higher.  All thisportends much-bigger gold-stock gains coming.

Despite a strong reboundupleg in recent months, the gold miners’ stocks are still flying under the radarsof most speculators and investors.  Theyaren’t aware the gold stocks are running again, and likely don’t realize howmassive gold-stock uplegs can grow.  That’sunfortunate, because the biggest gains are won early in young uplegs beforethey are universally recognized.  Buying low early on is the key to multiplyingwealth.

The most-populargold-stock benchmark these days is the GDX VanEck Vectors Gold Miners ETF.  It was launched way back in May 2006, givingit a first-mover advantage that has grown into an insurmountable lead.  This week GDX’s net assets of $10.5b were a colossal52.4x larger than the next-biggest 1x-long major-gold-miners-ETF competitor!  GDX is the lens through which most traders nowview gold-stock fortunes.

And they’ve been excellentin recent months, with GDX boasting performance well outpacing gold as well asthe general stock markets.  This firstchart looks at this sector ETF’s price action over the last several years orso.  That’s technically been a gold-stockbull, because gold itself remainedin a bull market over that span.  Sincegold overwhelmingly drives gold-stock performance, it defines gold-stockbull-bear cycles.

In mid-September GDX sharesplunged to a deep 2.6-year secular low.  That was fueled by an extreme forced capitulation ingold-stock shares, the result of stop losses being sequentially triggered incascading fashion.  The GDX price action ofrecent years setting the stage for this latest low and subsequent upleg isimportant to understand, and I’ve written recent essays explaining it.  Today’s focus is the young upleg since.

It’s actually beenquite impressive, and more traders will soon take notice.  After bottoming at $17.57 on September 11th,GDX started powering higher in the tight well-defined uptrend bracketed above.  Despite the incredibly-bearish sentiment you’dexpect after a capitulation plunge leading to major lows, the gold stocksstarted marching higher on balance.  Theiryoung upleg has gathered steam and achieved much since.

GDX has carved atextbook-perfect series of higher lows and higher highs.  That inexorably pushed it to a major triple breakout inlate December and early January.  GDXclawed back above three major overhead resistance lines.  The first was the longstanding $21 support ofGDX’s prior consolidation basing trend, which had persisted for 21.5 monthsbefore early August.  Following a majorbreakdown, it became resistance.

The second was the downward-slopingresistance of a bearish descending-triangle technical pattern that had formedsince GDX crested in early September 2017. And the third and most important was GDX’s 200-day moving average, shownin black in this chart.  Seeing GDX overcomeall three of these major overhead resistance zones in short order was a verybullish sign implying gold stocks were off to the races.

At best so far theiryoung upleg per GDX has powered 29.1% higher in 4.7 months!  That’s impressive by any standard.  For comparison the S&P 500 broad-marketstock index actually fell 6.4% during that span.  And gold only rallied 10.3% in its ownparallel upleg, so the major gold stocks have enjoyed good 2.8x upside leverageto the metal which drives their profits. That’s on the high side of the typical 2x to 3x range.

GDX has pulled back modestlysince hitting its latest upleg high on January 31st, which was a breakout above its uptrend channel.  Mid-upleg retreats within trend are perfectlynormal and expected.  They keep uplegshealthy and extend their longevity by periodically bleeding off excess greed.  Without pullbacks, it would flare brightenough to suck in enough near-future buying for the upleg to prematurely exhaustitself.

And just this week thisyoung gold-stock upleg reached another major technical milestone.  On Tuesday GDX flashed a Golden Cross buy signal as its 50dma climbed back above its200dma.  Golden Crosses following deepoversold lows are incredibly bullish, signaling major new uplegs or entire bullmarkets!  So they are one of themost-widely-followed and heeded buying signals among technically-oriented traders.

The initial major uplegof this gold-stock bull soared in essentially the first half of 2016, when GDXskyrocketed 151.2% higher in just 6.4 months! Nearly 2/3rds of those entire gains happened after the last Golden Crossfollowing super-oversold lows flashed in early March 2016.  These powerful buy signals aren’t just hardtechnical confirmation that a major upleg is underway, but they occur fairly early in upleg lifespans.

Today’s young gold-stockupleg is the most-consistent, longest-lived, and technically-sound one seensince that H1’16 monster!  In general themore gradually uplegs rally, the stronger their technical and sentimentalfoundations and the longer they are likely to last.  Slow-and-steady gains help prevent traderpsychology from getting too unbalanced and extreme, granting more time for capitalinflows to push prices higher.

GDX did enjoy a larger34.6% surge over just 1.8 months leading into early February 2017.  But that was so sharp it soon burned itselfout and failed.  Today’s young upleg isfar more solid with a lot more staying power. And it remains on the small side by gold-stock standards, implying thelion’s share of its gains are stillcoming.  While GDX’s massive 151.2%blast higher in H1’16 was unusual, gold-stock uplegs tend to get big.

The last seculargold-stock bull ran from November 2000 to September 2011.  Just over half of that was in thepre-gold-stock-ETF era before GDX’s launch, so a different benchmark was usedto measure it.  During that long 10.8-yearspan, the classic HUI NYSE Arca Gold Bugs Index skyrocketed an astounding1664.4% higher!  Today’s hated goldstocks were the best-performing stock-marketsector of that decade.

That life-changingsecular gold-stock bull consisted of 12 separate uplegs.  Excluding a giant anomalous one soaring after2008’s first stock panic in a century, the 11 normal ones averaged gains of 80.7% over 7.9 months!  Large uplegs are par for the course in thesmall and volatile gold-stock sector.  Sothe 29.1% GDX gains we’ve seen so far in today’s young upleg are nothing.  It’s likely to grow much larger in comingmonths.

Technically GDX shouldeasily rally to $25 fairly soon, which was the old upper-resistance line of itslong consolidation basing trend.  Thatwould extend this upleg’s gains over 42%. At that point GDX’s upside momentum would likely drive an upsidebreakout.  And seeing GDX climbing to newmulti-year highs over $25 would certainly catch traders’ attention, leading toa surge in capital inflows to chase gold stocks’ upside.

GDX’s bull-to-date peakwas $31.32 in early August 2016, which wasn’t lofty as a mere 3.3-year high.  It wouldn’t surprise me at all to see GDXchallenge those levels before this young upleg matures then gives up its ghost.  Rather interestingly that would grow thisupleg to 78% gains, which is right in line with the previous secular bull’saverage.  The gold stocks still have lotsof room to power much higher from here.

Their coming gains areinexorably intertwined with gold like usual. Gold-stock uplegs are directly driven by parallel gold uplegs.  Rising gold prices boost gold stocks bothsentimentally and fundamentally.  Theymotivate speculators and investors to redeploy capital in the gold miners, and buying begets buying.  The longer and higher gold stocks rally, themore traders want to buy them.  Goldgains fuel this virtuous circle.

But more importantlyhigher gold prices directly drive higher earnings at the gold miners, fundamentally justifying higher gold-stock prices.  This critical relationship is approximated bythe ratio between gold-stock and gold price levels.  It also portends big gold-stock gainscoming.  This next chart looks at theGDX/GLD Ratio during recent years’ gold-stock bull.  GLD SPDR Gold Shares is the world’s leadinggold ETF.

When this GGR is risingit means gold stocks are outperforming gold. That’s normally what happens in gold-stock uplegs.  Like GDX itself, its ratio to gold is also climbing in a strong uptrendsince those deep mid-September gold-stock lows. But the GGR remains on the low side of today’s gold bull, and has vastroom to mean revert higher to pre-bull averages.  I explained all this in depth back in a mid-October essay.

In mid-September as goldstocks’ forced capitulation decimated sentiment, the GGR collapsed to merely0.155x.  A single share of GDX was worthless than 1/6th of a single share of GLD. That also happened to be a 2.6-year secular low in the ratio of gold-stockprice levels to gold prices.  That simplyreflected the seriously-bearish psychology that invariably accompanies majorlows.  But the GGR has recovered since.

By that latest interim GDXhigh on January 31st, the GGR had mean reverted back up to 0.182x.  That is actually still below this bull market’saverage of 0.186x over the past several years or so.  But the climbing GGR proves gold stocks aremaking a major recovery relative togold.  Note above today’s young upleg isseeing the longest, strongest, and solidest GGR rally since H1’16!  This upleg is the real deal, no flash in thepan.

After the GGR is forcedto major lows or highs well off its averages, it tends to not only mean revertbut overshoot proportionally.  Since this key fundamental metric of goldstocks fell 0.030x below its bull mean at worst in mid-September, it ought topower a similar amount back above it before this upleg matures.  That implies a 0.216x GGR is likely as goldstocks get more popular the longer their upleg rallies higher.

This week GLD tradednear $124, so GDX regaining 0.216x means its price would rally to $26.78.  That would make for a 52% upleg at today’sgold prices, and would drive that major breakout over GDX’s old $25 resistanceline.  And of course higher gold priceswould lead to proportionally-higher GDX targets at any given GDX/GLD Ratio.  Looking at today’s gold-stock levels comparedto past means shows huge upside.

Back in mid-October whenGDX was still only trading in the $18s and few believed a new gold-stock upleghad been born, I explored the GGR.  Thissmall contrarian sector was thelast cheap one in wildly-expensive stock markets.  I looked at some past GGR levels from thelast secular gold-stock bull to point out how far gold stocks could soar.  Consider the couple-year spans surrounding 2008’swild stock panic.

In the 2 years afterthat extreme anomaly, 2009 and 2010, the GGR averaged 0.422x.  And in the 2 years before that fearsuperstorm, it averaged 0.591x.  Thoseare not high levels at major gold-stock toppings when euphoria reigned, butmere means.  GDX ought to be able to regainthose well-established levels later on in this bull market.  At today’s gold prices, the post-panic averagewould catapult GDX to $52.33.

That would make for 198%gains from the recent secular low, atripling in major gold miners’ stock prices!  And that still wouldn’t be close to GDX’s$66.63 record hit at the end of gold stocks’ last secular bull back inSeptember 2011.  At the pre-panic 2-year-averageGGR, this week’s gold levels would support an all-time GDX high of $73.28.  That’s 317% higher than recent lows, morethan a quadrupling in gold-stock price levels!

And all this assumesflat gold in the low $1300s, which is very unlikely.  Gold is enjoying its own young upleg powering higher, which was sparked by the serious stock-market selloff in Q4.  At $1350, $1400, or $1450 gold, the gold-stockprice levels implied by GGR mean reversions aremuch higher.  And that doesn’taccount for the typical proportional overshoot towards the opposite extremeafter deep GGR lows are hit.

The key takeaway hereis gold stocks’ upside potential remainsvery large despite the progress so far in this young upleg.  The big majority of this particulargold-stock upleg almost certainly remains ahead, so it’s not too late to getdeployed before everyone else figures it out. Once gold stocks start surging faster than gold, the resulting bullishpsychology becomes self-feeding enticing in more capital fueling bigger gains.

Big gold-stock uplegsare fully justified fundamentally byhigher gold prices.  Consider anexample.  The gold miners are nowreporting their Q4 results, but the last complete set was Q3’s.  Then the major gold miners of GDX reported average all-in-sustaining costs of $877 per ounce.  These generally don’tchange much regardless of prevailing gold prices.  Mining costs are largely fixed when mines arebeing planned.

That’s when engineersand geologists decide which ore to mine, how to dig to it, and how to processit to recover the gold.  So higher gold pricesdirectly amplify gold miners’ bottom lines. While I’ll wade through the gold miners’ Q4 results once they are allreleased and write a new essay on them, AISCs are highly likely to remain nearQ3 levels.  Let’s call it $875 perounce.  In Q4 gold’s price averaged $1228despite the rally.

That means the majorgold miners were collectively earning about $353 per ounce mined.  Meanwhile so far in Q1 gold is averaging$1296, which is a hefty 5.5% higher quarter-on-quarter.  Assuming AISCs are flat across this industry,that implies gold miners are now earning $421 per ounce.  That’s a massive 19.3% QoQ jump in profits ona 5.5% higher gold price, making for strong 3.5x upside leverage to gold.

The higher prevailinggold prices thanks to its own upleg are fueling fatter earnings for the goldminers.  That provides the criticalfundamental underpinning supporting major gold-stock uplegs.  They are not just psychological phenomenadriven by shifting sentiment, but actually reflect better operating conditions.  I doubt historical gold-stock uplegs could’veaveraged such big gains without real fundamental foundations.

The unfortunate thingabout major gold-stock uplegs is most speculators and investors ignore them untilway too late.  Traders love buying highand chasing momentum, but hate buying low before those big gains happen.  So sadly the great majority of traders missthe great majority of major gold-stock uplegs. They don’t start deploying capital until after most of the gains are alreadywon, which usually leads to later losses.

While today’s young uplegis gathering steam, we’ve likely only seen thefirst third or so.  Thus there isstill time to buy gold stocks relatively low before others start chasing theirmomentum in coming months after they are much higher.  Why buy high later when you can still buy lownow?  And the best gains won’t be won in bigETFs like GDX, but in the stocks of fundamentally-superior smaller mid-tier and junior gold miners.

The major gold miners dominatingGDX are really struggling togrow their gold production.  Depletionis outpacing mine growth leading to higher costs and lower profits.  That really retards their and thus GDX’supside potential.  But plenty of smallergold miners are growing their output through new mine builds and expansions, whichalso lowers their costs.  Their stocks’upside potential utterly trounces the GDX majors.

The earlier you getdeployed, the greater your gains will be. That’s why the trading books in our popular weekly and monthly newsletters are currentlyfull of better gold and silver miners mostly added in recent months.  The gains we won in 2016 were amazing the lasttime American stock investors returned to gold. Our newsletter stock trades that year averaged +111.0% and +89.7%annualized realized gains respectively!

The gold-stock gainsshould be similarly huge as today’s young gold and gold-stock uplegs grow.  The gold miners are the last undervaluedsector in these still-expensive stock markets, and rally with gold duringstock-market bears unlike anything else. To multiply your wealth in the stock markets you have to do yourhomework and stay abreast, which our newsletters really help.  They explain what’s going on in the markets,why, and how to trade them with specific stocks.  You can subscribe today for just $12per issue!

The bottom line is thisyoung gold-stock upleg is really gathering steam.  Technically it has rallied higher on balance formonths now in a strong uptrend, carving higher lows and higher highs.  GDX has broken out above three majorresistance lines, and just flashed a key Golden Cross buy signal!  All this has really started to shiftsentiment back to bullish, which will attract in lots more capital to chase themomentum.

And these mountinggold-stock gains are fundamentally justified by gold’s own growing upleg.  Gold-stock earnings amplify underlying gainsin gold, making big stock-price surges righteous.  Now is the time to get deployed relativelylow, before most traders figure this out and start piling in.  The evidence suggests a major gold-stockupleg is underway and mounting, and they tend to average gains far bigger thantoday’s.

Adam Hamilton, CPA

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