Gold Stocks Healthy Upleg / Commodities / Gold and Silver Stocks 2020

The gold miners’ stocksjust rolled over into a correction, raising concerns about the staying power oftheir massive post-panic upleg.  Thesehigher prevailing gold prices have driven very-strong fundamentals at the goldminers.  But they are entering the seasonally-weaksummer doldrums.  And current sentimentand technicals play major roles in governing when uplegs remain healthy orready to give up their ghosts.

The GDX VanEck VectorsGold Miners ETF remains the leading and dominant benchmark for this smallcontrarian sector.  Its $14.3b in netassets this week were a colossal 33.2x bigger than those of itsnext-largest 1x-long major-gold-miners-ETF competitor!  GDX’s only real rival is its little-brother GDXJ mid-tier gold-miners ETF,which is only about one-third of GDX’s size. The GDX gold stocks have sure had a wild ride.

Normally the major goldminers of GDX leverage material gold moves by 2x to 3x.  Gold stocks’ excess gains during gold uplegsare necessary to compensate traders for miners’ big additional risks on top ofgold-price fluctuations.  These includeoperational risks at individual mines, geopolitical risks in countries hostinggold mines, financial risks from hedging and currency fluctuations, along with manyother risks.

GDX started 2020 with amodest 6.0% rally into late February. That was really weak compared to gold though, which overwhelminglydrives gold miners’ earnings and thus ultimately stock prices.  The yellow metal surged 9.3% by that point, gold-stockleverage to gold ran a miserable 0.6x. Traders are better off owning the metal itself rather than its minerswhen they are really underperforming.  Goldstocks were unloved.

The subsequent stockpanic into mid-March spawned by governments’ draconian COVID-19 economiclockdowns crushed gold stocks.  In lessthan several weeks, GDX plummeted 38.8%. The last couple days of that brutal capitulation selloff weretechnically a full-on crash, with GDX cratering 24.5% in just 2 tradingdays!  Gold stocks’ leverage to gold overthat ugly several weeks skyrocketed to a super-high 4.7x.

By mid-March headinginto the stock panic’s nadir, the gold stocks were radically oversold andabsurdly undervalued fundamentally.  Sothey were overdue for a massive mean reversion higher.  We had been all-out of gold stocks leading into that panic,actually actively shorting them.  But westarted redeploying aggressively within a couple trading days after that extremeanomalous panic bottoming at fire-sale prices.

The major gold stocksdominating GDX indeed soared out of those deep panic lows.  Over the next 2.2 months into mid-May, GDX skyrocketeda breathtaking 95.8% higher!  Thisgold-stock-technicals chart shows how incredibly volatile this leadinggold-stock benchmark has been.  Afteressentially doubling in just a couple months, can the gold stocks have any gasleft in the tank?  That’s the critical questionnow.

There’s no doubt goldstocks’ post-panic upleg has been huge and violent.  And normally such a wildly-outsized movewould leave this sector at upleg-slaying levels of overboughtness.  But interestingly that hasn’t happened.  This gold-stock upleg ignited at such an excessively-subterraneanbase that most of it was simply mean reverting back out of thestock-panic plummeting!  Those originsare key to GDX’s outlook.

That epic 95.8% soaringconsisted of $18.21 of GDX rallying from mid-March to mid-May.  But leading into that stock panic, GDX hadplummeted $12.05 in just several weeks since late February.  So fully 2/3rds of this massive upleg poppingoff the charts was merely a mean reversion regaining lost ground!  From February 24th’s $31.05 interim high to May19th’s latest $37.21 peak, GDX only climbed 19.8%.

The major gold stocks’net gains cross-panic were just 19.8% over 2.8 months, which sounds a heck of alot more reasonable than 95.8% gains in 2.2 months.  Like all stock panics, this latest one provedan extreme anomaly leaving incredibly-unsustainable super-low prices.  So the gains out of stock panics are some ofthe biggest witnessed in all of history. The gold stocks were due to mean revert higher violently!

GDX’s leverage to gold’sadvance during that 19.8% high-to-high rallying span was 3.8x, which is on thehot side.  But stepping back a little togain the longer-term perspective so crucial to making wise trading decisions,the major gold stocks still weren’t going great guns year-to-date.  GDX had surged 27.1% YTD by its recentmid-May peak, but that only amplified gold’s parallel 15.1% YTD rally by arather-weak 1.8x.

Once you realize that2/3rds of this lightspeed-fast doubling was just a mean reversion out ofstock-panic extremes, and gold stocks aren’t soaring from a broader perspective,this latest upleg looks much less mature. And even at 95.8%, it remains on the small side for a post-stock-panicone.  After the last stock panic inOctober 2008, GDX skyrocketed 172.1% higher over the next 7.2 months!  Post-panic uplegs are epic.

But over the lastcouple weeks into the middle of this one, GDX did fall 11.8% crossing whatwould be considered 10%+ correction territory in general stock markets.  But those conventional metrics don’t applywell to gold stocks, which are vastly more volatile.  And GDX’s recent selling has been wayoutsized compared to gold’s, running big 4.3x downside leverage.  That has spawned major concerns among traders.

But neither sentiment ortechnicals were sending the kinds of signals that usually accompany uplegs givingup their ghosts.  The former is moreethereal and harder to measure, but I have a rather unique view into it.  For over a couple decades now, I’ve beenblessed to watch the markets all day every day as a financial-newsletterguy.  I’ve intensely-studied and actively-tradedgold stocks throughout that entire span.

Our subscribers acrossall 50 US states and dozens of foreign countries give me lots of feedback.  They e-mail when they are excited or scared.  The kinds of questions and their tones arevery distinctive at both major gold-stock toppings and bottomings.  At the former, enthusiasm runs high andtraders are salivating at what and when to buy. They are convinced a major gold-stock move is only starting and arerushing in.

In mid-May as GDX surgedto a new 7.1-year secular high, I didn’t see the greedy e-mail flow typical at majorgold-stock toppings.  I suspect thereason why is the gold stocks hadn’t surged higher long enough yet to generateserious excitement.  GDX first challenged$34 in this post-panic upleg in late April. While it forayed above there briefly in early May, by mid-May GDX wasright back down near that same $34 level.

So the major gold stockshad largely been consolidating high for several weeks, bleeding off enthusiasm for this sector.  To suck inupleg-exhausting kinds of capital, the gold stocks have to surge for several weeksplus.  That potentially started inmid-May, when GDX blasted 9.2% higher to $37.21 in only 4 trading days.  But that sharp rally quickly fizzled, and GDXrolled over into its recent greed-burning selloff.

My e-mail flow, whichis usually an excellent read of prevailing gold-stock sentiment at majortoppings and bottomings, looked nothing like past upleg-slaying times.  Interest was growing, but it was stilltentative devoid of unbridled enthusiasm. Gold stocks weren’t overbought enough to reflect that.  While sentiment is ethereal, overboughtness can be directly measured.  GDX didn’t getanywhere near upleg-killing extremes.

One simple andeffective way to measure overboughtness is to look at GDX’s closes as multiplesof its trailing 200-day moving average. 200dmas are excellent baselines from which to gauge how fast sectors areclimbing or falling.  They aren’t staticwhich would soon leave them outdated, but gradually evolve slowly followingprevailing price levels.  The fartherabove its 200dma GDX stretches, the more overbought it is.

Dividing GDX’s dailyclose by its daily 200dma yields the Relative GDX, or rGDX.  This multiple effectively flattens out 200dmasto zero, rendering distances between prices and 200dmas in constant-percentageterms which are perfectly-comparable over time. In trending markets, this relative multiple conveniently forms horizontaltrading ranges.  The rGDX both revealsand quantifies critical gold-stock overboughtness.

This chart superimposesGDX and its technicals over the rGDX.  Idefine relative trading ranges based on the last 5 calendar years of data, whichleave the current rGDX one running from 0.85x to 1.50x.  Gold stocks are extremely oversold when GDXsinks under 0.85x its 200dma, the best times to aggressively buy them.  They are extremely overbought when GDX surgesover 1.50x its 200dma, truly upleg-slaying levels.

When GDX hit thatlatest interim high of $37.21 in mid-May, this leading gold-stock ETF had stretchedto just 1.311x its 200dma.  That wascertainly very overbought, but not extremely so.  And since then during the correction of the lastcouple weeks, the rGDX has rapidly collapsed back down to 1.145x.  This isn’t the kind of behavior that typicallyaccompanies major upleg toppings.  It ismuch more mid-upleg-like.

The last time tradersgot euphoric about gold stocks was when this bull’s mighty maiden upleg waspeaking into the summer of 2016.  GDX skyrocketed151.2% higher over 6.4 months in that massive run, and none of that was a mean reversionout of panic lows.  Leading into thattopping, GDX soared so far so fast on extreme greed that the rGDX blasted to anosebleed 1.615x and 1.646x!  Now that’soverbought.

The day that colossal uplegfinally gave up its ghost, the rGDX was still way up at 1.567x.  Historically in both GDX and the earlier HUI indexgold-stock benchmark, stretching more than 50% above 200dmas was thedanger zone for major uplegs topping and rolling over into severe selloffs.  So as that metric nears, it is prudent to ratchetup trailing-stop-loss percentages to lock in more of the big gold-stock gainsaccrued.

After that extremeoverboughtness in summer 2016, GDX plummeted 39.4% over the next 4.4 months.  Contrast that euphoric upleg topping andaftermath to the next time gold stocks started returning to favor last summer.  Heading into early-September 2019, the rGDXsurged as high as 1.341x.  Again that isvery overbought, but not extremely so. That overboughtness level exceeded the 1.311x we just saw in mid-May.

While gold stocksindeed sold off to bleed off excess greed, that proved relatively mild.  GDX merely slid 15.4% over the next 1.3months, which proved more of a mid-upleg pullback by gold-stock standards.  Then that same gold-stock upleg resumedbefore peaking in late February.  Whilethat only happened at a really-low 1.153x rGDX, the gold stocks were getting suckedinto an ultra-rare and crazy-violent stock panic.

GDX’s 11.8% selloffover the last couple weeks is similar in magnitude and technical profile to thatseen last autumn.  Back then the majorgold stocks hadn’t soared to upleg-slaying levels of overboughtness, so thatupleg wasn’t finished despite needing a healthy breather.  Today’s setup is very similar, and remainsvery different to what was witnessed back in the summer of 2016.  This gold-stock upleg still looks healthy.

Odds are it has considerablyhigher to climb yet before it surges fast enough to drive excessively-bullish sentiment,which sucks in and exhausts all near-term buying firepower.  That’s what kills uplegs!  They can keep powering higher on balance evenin the summer doldrums if they aren’t mature yet.  Yes this isthe weakest time of the year seasonally for gold and its miners’ stocks.  But seasonals are a secondary driver.

Gold stocks have no problemrallying in June, July, and August if major capital inflows are driving golditself higher.  Last summer was a greatcase in point.  GDX rocketed 38.3% higherduring that market-summer span in 2019 on a 16.7% gold surge!  Gold’s strength in turn was driven by majorinvestment buying as evident in its leading GLD SPDR Gold Shares goldETF.  Its gold-bullion holdings soared18.2%!

Think of weak seasonals like headwinds, they are only relevant if the motors are off on gold’sprimary drivers.  When capital inflowsare strong, they easily overcome the resistance from weak seasonals.  And leading into this summer of 2020, goldinvestment demand has provenincredibly strong.  GLD’s holdingssoared 9.3% in April, another 6.3% in May, and are already up still-another0.9% in June’s first few days!

While a big topic thatneeds another essay soon to analyze, American stock investors are piling into goldfor obvious reasons.  Despite the Fed-goosedstock-market levitation, the US economy is really hurting thanks to governments’draconian COVID-19 lockdowns.  Tens ofmillions of Americans are out of work which will really hurt consumer demandand thus corporate profits.  That portendssharply-lower stock markets.

And the panicking Fed haspulled out all the stops to disconnect the stock markets from their underlying economy.  Between mid-March to late May, the Fed’sbalance sheet has skyrocketed a dumbfounding 64.6% or $2,785.4b in just 11 weeks!  This record near-hyperinflation guaranteesprice inflation with that vast deluge of newly-conjured dollars competingfor shrinking pools of goods and services to spend it on.

Serious inflation fueledby extreme central-bank money printing, and more likely stagflation sincethe US economy is rapidly shrinking due to governments’ unconstitutional lockdowns,is powerfully bullish for gold.  Goldremains exceptionally compelling for portfolio diversification this summergiven the colossal stock-market downside risks and mounting inflation.  If gold investment demand continues, goldwill rally.

And if gold keepsgrinding higher on balance this summer, the major gold stocks of GDX willfollow it up and amplify its gains. Another near-term bullish factor for gold is the price-dominating gold-futuresspeculators haven’t been buying much throughout this post-stock-panicupleg.  Their positioning is far fromall-in, they have big room to buy catapulting gold even higher.  It’s a great setup for gold and its miners’stocks!

The major gold miners’ fundamentalsare outstanding too.  As I discussed in acomprehensive essay on the GDXgold miners’ Q1’20 results a few weeks ago, their earnings are soaringthanks to these higher prevailing gold prices. That is despite COVID-19 shutdowns around the world that are being wounddown for the gold miners.  Gold-stockfundamentals are incredibly strong, the best they’ve been in many years!

Considering all this,this post-panic mean-reversion gold-stock upleg continues to look healthy.  Leading into this current salubriouscorrection, sentiment wasn’t greedy enough nor technicals overbought enough to warnof upleg-slaying potential.  Everythingon those fronts looks much more mid-upleg-like than seen in late uplegs going terminal.  That gives gold stocks a long runway to keep amplifyinggold’s gains on balance.

Far from being threats,mid-upleg selloffs are great gifts to traders. They offer the best mid-upleg entry opportunities to add newgold-stock trades at relatively-low prices! So if your gold-stock allocations aren’t yet sufficiently large, mid-uplegselloffs are when to buy more.  While gold-stockgains are already huge since the stock-panic lows, they will grow much biggerstill as this gold-stock upleg keeps powering higher.

At Zeal we started aggressivelybuying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscriptionnewsletters back in mid-March right after the stock-panic lows.  We’ve been layering into new positions eversince, with unrealized gains already growing huge.  Today our trading books are full of these fundamentally-thrivinggold and silver miners that aren’t done running yet.

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!  Seizethis gold-stock weakness to mirror our many winning trades before this powerfulupleg resumes.

The bottom line is thispost-stock-panic gold-stock upleg continues to look healthy.  While the major gold stocks effectivelydoubled in a couple months, fully 2/3rds of that was merely a mean reversionout of the extreme stock-panic lows. Gold stocks haven’t rallied excessively from a cross-panic perspective,and haven’t yet seen anything resembling upleg-slaying levels of greedysentiment and overbought technicals.

Like usual thisgold-stock upleg will follow gold, which continues to see exceptionally-stronginvestment demand into this summer. Prudent investors fear the Fed’s mind-boggling inflation, and worry thestock-market levitation it has fueled will roll over hard to reflect an uglierpandemic economic reality.  As long asinvestment capital is migrating into gold to prudently diversify portfolios,gold stocks will leverage its gains.

Adam Hamilton, CPA

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