Gold Stocks Lagging / Commodities / Gold and Silver Stocks 2023

The gold miners’ stocksare lagging gold’s strong young upleg, their gains falling behind.  Their striking performance gap is undermininggold-stock sentiment, leaving traders even warier of this sector.  While definitely vexing, this anomaly has onlyarisen over the past couple weeks.  Goldstocks’ precedent during past major gold uplegs implies this will unwind soon,with miners surging fast to catch up with their metal.

Gold has been blastinghigher on balance for a month now, confirming a new major upleg is underway.  While the sparking catalyst was certainlygeopolitical, gold’s upside since has been fueled by the normal sequentialbuying pattern driving all major uplegs. That’s stage-one gold-futures short-covering buying, then largerstage-two gold-futures long buying, then ultimately vast stage-three investmentbuying returning.

These growing capital-inflowstages are telescoping, ignited by preceding stages.  Those drive gold high enough for long enoughto convince more traders to return, and their buying accelerates gold uplegs.  Gold’s sharp spike gains so far have mostlybeen driven by gold-futures short covering, but long buying has just startedramping up.  I wrote a whole essaylast week analyzing gold’snew major upleg in depth.

The gold miners’ stocksamplify gold’s gains due to their inherent profits leverage.  Their mining costs are largely fixed, sohigher gold prices directly translate into higher earnings.  This sector’s benchmark is the GDX gold-stockETF, which includes the world’s biggest gold miners.  While their Q3 earnings season is underway,it won’t be finished until mid-November. So Q2’23 results are still the most current we have now.

The top 25 GDX gold miners averaged all-in sustaining costs of $1,380 per ounce in Q2.  At $1,820 gold in early October as the last correctionbottomed, that yields $440 in unit profits. But at late October’s $2,005, those soar 42.0% to $625 perounce!  That is 4.1x gold’s 10.2% gainsat best so far in this young upleg. Higher gold prices drivefatter mining profits, so gold stocks are bid higher reflecting betterfundamentals.

Despite this currentreal-world example, GDX’s major gold stocks tend to amplify material goldmoves by 2x to 3x.  I’ve doneextensive research on gold-stock performance for decades, and that range iswhere it usually shakes out.  Gold’s lastmajor upleg peaked up 26.3% in early May, and GDX powered up 63.2% in that exact7.2-month span.  That made for 2.4x upsideleverage, right in line with historical precedent.

Candidly if gold stockscan’t significantly leverage gold, they aren’t worth owning!  Gold mining adds all kinds of risks on top ofthe underlying commodity’s price trends. Those run the gamut from geological to operational to geopolitical.  So much can go wrong in gold mining, andtraders need to be compensated for those additional risks.  If gold stocks only pace and match gold’sgains, sticking to gold is way safer for traders.

GDX’s upside leverage togold was normal in the first couple weeks of this new upleg.  Starting just before the Islamic ResistanceMovement invaded Israel to slaughter and kidnap Jews, gold blasted 5.6% higherover eight trading days.  GDX shot up 12.2%in that span, for 2.2x leverage.  But themajor gold stocks had bottomed one day before gold.  Include that, and GDX’s nine-trading-daysurge grows to 14.0% for 2.5x.

That’s perfectlynormal, especially early in uplegs. Naturally herd sentiment keeps improving the longer they run, with greedmounting as gains grow.  So gold-stockoutperformance tends to peak later in major gold uplegs when universalbullishness reigns.  The major goldminers are more likely to double gold’s gains early on while bearishness andskepticism linger, then gradually improve to triple later on as tradersbelieve.

Yet from mid-October togold’s latest interim high of $2,005 last Friday, gold stocks lookedterrible.  The yellow metal surged another4.3% in that span as Israel prepared to invade Gaza to root out the Hamas terroristsand rescue their hostages.  Yetunbelievably GDX slumped 1.1% in that span, leaving miserable -0.3xleverage in its wake!  Traders would’vebeen far better off in gold over those next eight trading days.

That underperformancewas so bad that it crushed GDX’s leverage ratio for this entire young goldupleg.  Again gold was up 10.2% at bestso far over several weeks, but GDX’s gains even starting at its day-earlier lowwere only 12.7%.  That 1.2x leverage has beenway too low, making gold stocks not worth owning in that span.  Their young parallel upleg with gold has provenvery underwhelming technically too.

When gold started meanreverting sharply higher on that massive terrorist attack, GDX quickly recoveredto regain its uptrend’s lower support. But major gold stocks slumped since, failing at that key technical line.  GDX remains well under its important 200-daymoving average, while gold has blasted way above its own.  At best recently GDX recovered to just 0.966xits 200dma, while gold shot up to 1.038x its 200dma.

There’s nothing good tosay about this latest very-disappointing gold-stock action.  With the miners failing to mirror and amplifythe metal’s gains, bearish sentiment has soared.  Incredibly the gold-stock apathy andskepticism today may rival that of early October before gold surged!  Traders are now faced with two pressing questions,why is this happening and how long is it likely to last?  I’ve sure been wrestling with them.

Surprisingly the rootcause of gold stocks’ underperformance may be the nature of gold’s young upleg.  Normally major gold uplegs are birthed out ofmajor lows by some market-based catalyst, like surprises in major US economicdata that are Fed-dovish.  Examples arecooler-than-expected headline inflation or worse-than-expected US jobs growth,leaving the Fed less likely to hike rates which drives US dollar selling.

The gold-futuresspeculators look to the dollar’s fortunes for their primary trading cues, andthen do the opposite.  Both gold’senormous 20.9% selloff in mid-2022 and latest 11.3% correction in mid-2023 weredriven by massive US DollarIndex rallies.  Those in turn werefueled by aggressive Fed rate hikes and prospects for higher rates forlonger.  Had this latest gold upleg startednormally, it would be more accepted.

Overshadowed by theMiddle East crisis, gold’s upleg technically started the day before Hamasshocked the world with its barbarism.  OnFriday October 6th, gold actually bounced a sizable 0.5% despite a Fed-hawkish way-better-than-expectedmonthly US jobs report that morning. Wall Street was looking for 170k jobs added in September, but the BidenAdministration claimed the actual doubled that at a huge +336k!

Gold should’ve plungedon that kind of beat, but speculators’ gold-futures positioning was already soextremely bearish that their capital firepower available for selling was exhausted.  Total spec shorts were nearing major secularhighs, while total spec longs threatened major secular lows.  Those were the very conditions thatbirthed past major gold uplegs, so a new one was overdue even if Israelhadn’t exploded.

The next morning theIslamic atrocities against the Jews shocked the world, and gold blasted 1.8%higher on Monday the 9th.  So what would’vebeen a normal gold upleg was turned into a geopolitical spike.  That was further confirmed on Friday the 13th,when gold rocketed up 3.2% on indications Israel would soon invade Gaza todestroy Hamas.  Geopolitical spikes canbe fragile, dependent on newsflow that fades.

The last big one camein late February and early March 2022 after Russia invaded Ukraine.  In just eight trading days, gold blasted 7.9%higher to $2,051!  But like manygeopolitical spikes, gold symmetrically collapsed as traders came to acceptthat war as the new norm.  Fully 9/10thsof those gains were lost in just five trading days.  I’ve never been a fan of gold geopoliticalspikes since they are often quickly reversed.

But this Israel-Gazaone has a far-superior setup than that Russia-Ukraie one, due to radically-differentspec gold-futures positioning.  As discussed in my essay lastweek, spec longs generally trade within a range between 240k to 413kcontracts.  The lower they are, the moreroom specs have to keep buying so the more bullish gold looks.  In late February 2022, total spec longs at399.2k were challenging resistance.

So speculators didn’thave much more room to keep adding gold futures no matter what happened.  They surged to 420.6k by early March, andspecs’ capital firepower was spent.  Gold’sgeopolitical spike then fizzled because it happened near the end of awell-established gold upleg.  Had thisIsrael-Gaza one erupted back in early May 2023 as gold’s last major upleg topped,it would be just as bearish for gold’s outlook.

Spec shorts have theirown range between about 95k to 175k contracts, and the higher they are the morebullish gold’s near-term outlook.  Oncespecs have shorted about all the futures they have the capacity to do, symmetricalcovering buying soon comes to normalize their bearish bets.  Back when Russia invaded Ukraine, total specshorts were running 129.5k.  Translatingthese into comparable percentages is useful.

In late February 2022,total spec shorts were 57% up into their secular range while total spec longswere 92% up into their own.  The most-bullish-possiblenear-term setup for gold is 100% shorts and 0% longs, indicating sellingexhaustion necessitating big mean-reversion buying.  It’s also important to realize that speclongs outnumber shorts by about 2.5x on average, making them proportionally moreimportant for gold.

Fast-forward to earlyOctober 2023, and specs’ gold-futures positioning couldn’t have been moredifferent just after Hamas invaded Israel. Total spec shorts were way up at 174.4k contracts, while total speclongs were way down at 264.8k.  Intrading-range terms, that was a whopping 99% shorts and only 14% longs!  So specs had vast room for both stage-one gold-futuresshort covering and stage-two long buying.

When Russia invadedUkraine, specs had room to do 57% of likely short covering and just 8% of longbuying.  When Hamas invaded Israel, specshad room to do a massive 99% of probable short covering and 86% of themuch-larger long buying!  Birthed inradically-different spec-gold-futures-positioning and gold-upleg-correction-cycleenvironments, these two gold geopolitical spikes are very different beasts.

That earlier spikecollapsed as that little bit of remaining gold-futures buying was quickly spentby early March 2022.  But today specs havesuch huge capital firepower available for buying that it can be sustainedfor months.  Just after Hamas invadedIsrael, specs had room to buy a stupendous 227.6k gold-futures contracts of bothlongs and shorts!  Per the latest-availabledata, 152.1k remain despite gold surging.

So fully 2/3rds of likely gold-futures mean-reversion normalization buying remains even aftergold shot up 10.2% in several weeks! That argues that this gold upleg is the real deal, just starting topower higher despite its geopolitical-shock birth.  And if gold continues climbing on balance,bullishness will mount until gold stocks surge and catch up with theirmetal.  GDX’s upside leverage should nearthe 3x high side of its range.

In addition to geopolitical-spikeskepticism, the sharp selloff in the US stock markets in the last coupleweeks also contributed to gold stocks’ dreadful performance.  While miners usually follow gold, they arealso stocks trading in the stock markets. So particularly-intense stock-market sentiment can bully them around,temporarily decoupling them from gold.  Goldstocks can get sucked into material stock-market selloffs.

During this young goldupleg’s first eight trading days where gold and GDX surged 5.6% and 12.2%, theflagship US S&P 500 stock index climbed 2.7%.  So gold stocks didn’t face any general-stockselling pressure.  But during the nexteight trading days where gold rallied another 4.3% but GDX shed 1.1%, theS&P 500 plunged a serious 5.8%! That big selloff into correction territory really tainted sentiment forall stocks.

In my line of work as aspeculator and financial-newsletter guy, I’m blessed to watch and study marketsall day everyday.  On material S&P500 down days, gold stocks tend to split the difference between gold and thestock markets.  October 18th is a recent example,a day with minimal geopolitical news. Gold still surged 1.4% on gold-futures momentum buying, while the S&P500 fell 1.3% on soaring US Treasury yields.

Ideally GDX would’veamplified gold’s big gains by 2x to 3x, surging 2.8% to 4.2% that day.  Instead the general-stock bearishness draggeddown gold stocks, and GDX slipped 0.3% roughly halfway between wheregold and stock markets ended up.  While majorgold stocks tend to amplify gold uplegs by 2x to 3x across their entire spans,within them that leverage is lumpy.  Andbig stock-market selloffs can retard it.

Gold stocks have laggedgold in recent weeks because of gold-geopolitical-spike skepticism and plungingstock markets sucking them in.  The formeris unfounded due to speculators’ exceedingly-bearish gold-futures positioningwhen Hamas invaded Israel.  And thelatter should be over for now with the S&P 500 bouncing sharply within itscorrection downtrend.  So odds are goldstocks will soon resume leveraging gold.

As that hugegold-futures mean-reversion buying continues on normal market news likesurprises in key US economic reports, gold will power higher even as Israelfades from financial headlines.  Thatwill fuel mounting bullishness, which will lead to parallel gold-stockbuying.  The longer and higher GDXrallies, the more traders will want to deploy in high-potential goldstocks.  They will quickly catch up withgold’s gains.

And again as analyzedin last week’s essay on gold’snew major upleg, this one has exceptional upside potential.  Gold is already within spitting distance of newnominal all-time highs, which are only 4.3% above mid-week levels!  Once gold challenges and exceeds August 2020’srecord close of $2,062, the financial-media gold coverage will explode.  That will dramatically ramp bullishness andgreed in this sector.

Traders love chasing winners,and will flock back to gold and its miners’ stocks to ride their gains.  This powerful dynamic soon becomes self-feeding.  The more traders buy, the higher gold and GDXsurge.  The bigger their gains grow, themore excited other traders get to jump in. The last time this happened as gold forged into nominal record territorywas summer 2020.  The gold stocks faredpretty darned well then.

GDX skyrocketed134.1% higher in just 4.8 months, amplifying gold’s underlying monster40.0% upleg by an awesome 3.4x!  Today’sgold upleg merely has to grow to +13.3% before gold gets back into recordterritory, unleashing this potent positive feedback loop.  Gold’s new major upleg should easily hit 25%gains, and probably 40%, before giving up its ghost.  Gold stocks will soar again with gold hittingrecords.

Interestingly the fundamentally-superiorsmaller mid-tier and junior miners tend to enjoy gold-upleg gains well outpacing the majors.  The smaller gold stocks are better able toconsistently grow their production, and their lower market capitalizations makethem much easier to bid higher.  So we’velong specialized in them, and our newsletter trading books are currently fullof great smaller gold miners ready to soar with gold.

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The bottom line is gold stocks have really lagged gold in recentweeks.  That vexing underperformance hasreally damaged sentiment.  Skepticism onthe staying power of gold’s latest geopolitical spike is a major factor.  But speculators’ gold-futures positioning wasexceedingly bearish leading into it, and despite gold’s surge they still havevast room to continue big mean-reversion buying driving gold higher.

A sharp stock-market selloff sucking in gold stocks also contributedto their recent slump, tainting overall market sentiment.  But as gold resumes climbing on balance,traders will return to its miners’ stocks. They should quickly catch up with gold as their accelerating gains attractin more capital, reestablishing normal upside leverage.  Gold entering record territory soon will greatlyboost sector bullishness and greed.

Adam Hamilton, CPA

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