Gold Stocks Still Marching / Commodities / Gold and Silver Stocks 2019

The gold miners’ stocksare still marching, grinding higher on balance in a solid upleg.  While interest in this sector has faded sincelate February, it is nicely set up for a strong rally.  After consolidating high and establishing asturdy base, the gold miners are likely to soon report greatly-improvedfirst-quarter results.  Couple that with golditself powering higher, and the slumbering gold stocks should surge substantially.

The gold stocks aremired in something of a psychological limbo these days.  They aren’t exactly out of favor, but there’slittle enthusiasm for this sector. Investors and speculators have largely lost interest for technical,sentimental, and fundamental reasons.  It’sbeen 6 weeks since this gold-stock upleg surged to material new highs.  The major gold miners have been mostly grindingsideways since, consolidating and basing.

Contributing heavily totraders’ apathy is gold’s own price action in that recent span.  Gold overwhelmingly drives gold-mining profits,making these stocks leveraged plays on gold. Gold’s own latest upleg high of $1341 came back in mid-February rightbefore gold stocks topped.  Over the next12 trading days gold fell 4.1% to $1285 during its usual pre-spring-rally-pullbackperiod.  Slumps invariably sap traders’enthusiasm.

Gold’s seasonal spring rally launchedright on schedule after that.  By lateMarch this metal had gained back 2/3rds of its pullback losses.  The gold stocks surged right back up tochallenge their late-February highs on that, but couldn’t break out decisively.  Then gold rolled over again during these lastcouple weeks, revisiting those pre-spring-rally lows.  That spooked gold-stock traders, so they soldin sympathy.

Gold’s problem is thegreat complacency and euphoria spewing forth from the massive rally in thegeneral stock markets.  Largely in Q4,the flagship S&P 500 broad-market stock index (SPX) plunged 19.8% from anall-time record peak to deep near-bear lows. But since then it has soared 22.2%higher in what looks like a monster bear-market rally.  The SPX has regained an incredible 9/10ths ofits severe-correction loss!

Gold is the ultimate portfoliodiversifier, tending torally when stock markets fall.  Goldinvestment demand surges as traders rush to diversify stock-dominatedportfolios.  December was a key case inpoint, as gold powered 4.9% higher while the SPX plunged 9.2%.  But complacency mushrooms after stock marketsrally strongly, and prudent money management is quickly forgotten.  So capital inflows into gold wither again.

While sideways-at-besttechnicals and deteriorating sentiment are the main reasons this gold-stock upleghas stalled, fundamentals played a role too. The major gold miners of the leading gold-stock investment vehicle, theGDX VanEck Vectors Gold Miners ETF, reported their Q4’18 operating and financialresults between early February to mid-March.  And they proved fairly lackluster due tolower prevailing gold prices.

Yet despite these considerableheadwinds, the gold stocks are still marching higher on balance.  This chart looks at GDX over the past severalyears or so.  Despite the apathy tradersfeel, this young gold-stock upleg remains solid.  The gold miners’ stocks are still graduallygrinding higher in a well-defined uptrend channel.  They are well-positioned to surge on any goodnews, which is likely right around the corner.

While indifference reignsin this small contrarian sector today, that’s actually a majorimprovement!  Back in early September GDXplunged to a deep 2.6-year secular low. Gold stocks had just been crushed on cascading selling as stop losseswere sequentially tripped.  That brutal forced capitulation was thedirect result of gold getting hammered by all-time-record gold-futures short selling.  This sector was loathed then.

Those extreme gold-stocklows weren’t fundamentally righteous, so a big mean-reversion rebound higherwas inevitable.  That very week in myessay I argued “The technicals and sentiment spawned by capitulations are soextreme they usually birth massive uplegs and entire bull markets.”  As contrarians we aggressively bought goldstocks and recommended our newsletter subscribers load up near those lows.

The gold stocks indeed bouncedand started recovering, gradually fleshing out the solid uptrend channel inthis chart.  GDX rallied to crossmultiple major technical milestones.  A simultaneous triple breakout above threemajor resistance zones was soon followed by a major Golden Cross buy signal.  Triggered by a 50-day moving average climbingback above a 200dma after a major low, these herald big runs higher.

GDX rallied 33.0% over5.3 months, regaining recent years’ large consolidation trend between $21support and $25 resistance.  At itsrecent highs of $23.36 on February 20th and $23.35 on March 26th, GDX edgedinto the upper half of this range forthe first time in 12.6 months!  The bestgold-stock levels in over a year were something to celebrate, technical proof thingsare changing in this long-neglected sector.

Even better, GDX leveragedgold’s own gains over this upleg-to-date span by 2.8x.  That’s strong, onthe high side of the usual historical 2x-to-3x range.  Gold-stock gains hadn’t outpaced gold’s tosuch a degree in years, yet again showing this gold-stock upleg is impressiveand robust.  GDX’s recent high consolidationwas just a normal and healthy mid-upleg drift entirely within its uptrendchannel, nothing to fear.

Uplegs naturally flowand ebb, surging two steps higher before slumping one step back.  This rhythm is essential to keep sentiment balanced,which helps maximize uplegs’ ultimate durations and gains.  Once gold stocks blast higher fast enough torekindle greed, that has to be bled away by subsequent selloffs or drifts.  Without these retreats, too much buying toofast burns out uplegs prematurely truncating their potential.

So technically the majorgold stocks are looking a lot better today than most traders give them credit for.  The consolidating pullback since late Februaryhas done its work brilliantly, heavily dampening sentiment while gold-stockprices remain relatively close to upleg highs. Without this critical perspective, it’s not too surprising traders areso indifferent.  But enthusiasm canreturn fast with the right catalyst, and some are coming.

Without any doubt goldstocks will catch a strong bid when gold’s spring rally resumes.  In December as gold rallied 4.9% while the stockmarkets burned, GDX blasted 10.5% higher. In late January gold surged 3.1% higher in a week, fueling GDX soaring10.7% in that short span!  All gold-stocktraders really care about is gold,and rightly so.  Once gold gets movingagain, the gold stocks are going to surge sharply higher.

There are two bigcatalysts that could start pushing gold considerably higher any day now.  Gold-futures speculators drive much of gold’sshort-term price action, and closely watch the US dollar’s fortunes for tradingcues.  The US Dollar Index (USDX) hit amajor 20.5-month high in early March, and is likely to roll over soon.  The Fed just kneecapped the US dollar by slashing its rate-hike outlook and prematurelykilling QT!

Any meaningful dollar sellingwill drive big gold-futures buying,pushing the yellow metal higher.  A goodexample of this just happened in mid-March. After hitting that major high, the USDX retreated 1.8% over the nextcouple weeks or so.  Gold bottomed thevery day the dollar topped, then rallied 2.2% in that span on gold-futuresbuying.  GDX amplified that with a solid3.9% advance.  Gold stocks rally on a weakerdollar.

The US stock marketsare way overextended and overvalued,also ready to roll over imminently.  Thisweek the monster likely-bearrally in the SPX had carried it back within just 2.0% of late September’sall-time record peak!  But such lofty levelsaren’t fundamentally-justified.  The 500elite SPX stocks left March trading at average trailing-twelve-month price-toearnings ratios way up at 26.4x, nearbubble territory.

And even the WallStreet perma-bulls universally expect SPX earnings growth to be flat at best in 2019.  This is a colossal slowdown from 2018’s 20%+driven by Republicans’ massive corporate tax cuts.  Very-expensive valuations aren’t sustainablewithout surging profits.  As the generalstock markets start selling off again, investors will resume returning togold.  Their capital inflows will driveits price higher, boosting the miners.

A great proxy for gold investmentdemand is the physical gold bullion held in trust for shareholders of the world’slargest and dominant gold ETF, the GLD SPDR Gold Shares.  Back in early October with the SPX still justunder record highs and complacency extreme, GLD’s holdings fell to adeep 2.6-year secular low.  They startedclimbing again the very day the SPX first plunged, as American stock investorsremembered gold.

Their big differential-buyingpressure on GLD’s shares drove its holdings up 12.8% to 823.9 metric tons bylate January.  That helped push gold 8.9%higher over that span, which GDX leveraged with a nice 17.8% gain.  Gold buying, whether from gold-futures speculatorswatching a flagging USDX or American stock investors worried about a rolling-overSPX, will push its price higher.  Thatwill bring traders back to gold stocks.

Gold’s upleg resumingis the key to reigniting gold stocks’ own upleg.  But the major gold miners’ nearing Q1’19earnings season should provide further fundamental justification for biggold-stock buying.  Odds are their resultswill show big improvements over Q4’18,which should catch investors’ and speculators’ attention and entice themback.  The main reason is higherprevailing gold prices really boosting earnings.

Every quarter I divedeeply into the major gold miners’ latest fundamentals.  Several weeks ago I looked at thejust-reported Q4’18 results from the top 34 GDX components.  Thosewere lackluster, with lower production, higher costs, and lower prevailing goldprices.  While gold averaged $1228 perounce in Q4, the major gold miners’ average all-in sustaining costs rose to$889 per ounce.  Profits were thedifference at $339.

Q1 is going to look farbetter, which most gold-stock traders likely haven’t figured out yet given theapathy for this drifting sector.  Thanksto the SPX’s severe near-bear correction largely in Q4, resurgent gold investmentdemand catapulted it a major 6.2% higherquarter-on-quarter to average over $1303 in Q1.  The considerably-higher prevailing gold pricesshould combine with flat-to-lower AISCs to greatly boost earnings.

All-in sustaining costsgenerally don’t change much regardless of gold’s action.  They are largely fixed as mines are beingplanned.  Operating them generallyrequires similar levels of spending on infrastructure and employees quarterafter quarter.  Over the past 4 quarters,the GDX-top-34 gold miners’ AISCs have averaged $884, $856, $877, and $889 perounce.  That works out to a tight mean of$877, close to $875.

If the major gold minersproduced gold last quarter at $877 per ounce, that implies $426 profits giventhe $1303 average prevailing gold prices in Q1. That would make for utterly-enormous 25.7% QoQ growth in gold-miningprofits!  Such massive earnings growthwould really catch investors’ attention, especially with general stocks’profits expected to be flat at best. Gold-stock fundamentals radicallyimprove with higher gold.

And all this ishappening during one of gold stocks’ strongest times of the year seasonally,their powerful spring rally.  I explainedthis next chart in depth about a month ago in my latest spring-rally essay, and it’simportant to remember.  Gold stocks havepowered sharply higher on average between mid-March to early June in modernbull-market years.  We’re talking 12.2%average gains in the benchmark HUI gold-stock index!

Not only is gold stocks’spring rally underway, but it’s this sector’s second-strongest seasonal advance of the year.  Even if much-stronger fundamentals weren’tlikely, even if gold wasn’t due to continue powering higher on a weakening USdollar and rolling-over stock markets, gold stocks tend to rally considerably inthe spring.  Greatly-improving earningsand stronger gold prices will really amplify this seasonal strength.

Strong seasonals actlike tailwinds, boosting gold-stock uplegs fueled by improving technicals,sentiment, and fundamentals.  When allthese forces align, the gold-stock gains can be enormous.  The last major spring rally happened in 2016,part of a monster gold-stock upleg where GDX skyrocketed 151.2% higher in just 6.4months driven by a parallel strong gold upleg. GDX blasted 37.7% higher in that spring-rally span!

Although traders’ apatheticview on gold stocks in recent weeks is understandable, it isn’t justified at all.  Thissector has big potential to run much higher in the next couple months, whichmost traders aren’t yet ready for.  The timeto get deployed is of course before gold stocks surge higher again, when theycan still be bought at relatively-low prices. This consolidation-drift window won’t last long, as gold is due torally.

While investors andspeculators can ride gold stocks’ next move higher in GDX, that is suboptimal.  The largest gold miners dominating its weightings are really struggling with depleting production,retarding this entire ETF’s upside potential. Far-better gains will be won in the smaller mid-tier and junior gold miners.  Plenty of them have superior fundamentals tothe large majors, growing their outputs and driving down costs.

One of my core missionsat Zeal is relentlessly studying the gold-stock world to uncover the stockswith superior 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 recovered from deep lows,our unrealized gains are already running as high as 66% this week!

To multiply your capitalin 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 the markets,why, and how to trade them with specific stocks.  As of Q4 we’ve recommended and realized 1076newsletter stock trades since 2001, averaging annualized realized gains of+16.1%!  That’s nearly double thelong-term stock-market average.  Subscribe today for just $12per issue!

The bottom line is goldstocks are still marching higher despite the pall of apathy hanging over them.  This upleg that excited traders back inFebruary remains intact, with this sector simply pulling back within its uptrend.  That has rebalanced sentiment, bleeding away greed.  This basing has left gold stocks ready to rallyto new upleg highs again, fueled by better gold prices greatly improving gold-miningfundamentals.

Gold-mining earnings areset to surge quarter-on-quarter due to gold’s own upleg powering higher.  It too is on the verge of accelerating againas buyers return.  A weaker US dollar androlling-over stock markets will motivate speculators and investors to buy goldagain.  And naturally the gold miners’stocks will really leverage those gains like usual.  Especially this time of year in the midst of theirstrong spring-rally season.

Adam Hamilton, CPA

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