Gold Stocks Technical Breakout / Commodities / Gold and Silver Stocks 2023

Gold-stock technicalsare dramatically improving, turning increasingly bullish.  After slumping to major support zones in thesummer doldrums, the gold miners’ stocks have surged sharply in the past coupleweeks.  That strong advance has achieveda decisive breakout above the main gold-stock benchmark’s key 50-day movingaverage.  Similar breakouts in recent yearshave heralded imminent big sector rallies.

Gold-stock price actionhas been really interesting lately, so I’ve written several recent essays analyzingit.  Between late September to mid-April,the leading GDX gold-stock ETF powered 63.9% higher in 6.5 months.  That amplified gold’s underlying parallel25.7% upleg by 2.5x, right in the middle of the major gold stocks’ usual leveragerange of 2x to 3x.  Then gold rolled overinto a healthy pullback in early May.

GDX closed just shy ofa new upleg high on May 4th, the day gold hit its own latest of $2,050.  But with gold getting seriously overboughtand greed growing excessive, the yellow metal reversed to work off bothconditions.  So over the next 1.8 monthsinto late June, gold pulled back 6.9% to $1,908.  That perfectly-normal mid-upleg selloff was right in line with February’s 7.2% pullback, and restored sentiment balance.

Gold stocks are ultimatelyleveraged plays on the metal they mine, so GDX sold off in concert with gold.  By early July, it had corrected 18.9% in 2.8months from mid-April’s slightly-higher high. That amplified gold’s downside by 2.7x, and was very similar to February’searlier mid-upleg correction of 19.8%. After that one, GDX quickly mean reverted higher in its upleg’s uptrend blastingup 34.4% to new upleg highs!

In late June when thatgold-stock selloff was nearly finished, I wrote an essay detailing this sectorbeing a strong seasonal buy.  June is its weakest time of the yearseasonally due to gold’s summer-doldrums lull in investment demand.  The resulting bearish sentiment exacerbated gold’slatest pullback, extending and deepening GDX’s parallel one.  By late June, GDX had been hammered back toits 200-day moving average.

With gold stocks at key support,I wrote another essay at the end of last month analyzing the very-bullishtechnical implications of that.  Both GDXand its underlying driver gold were nicely set up for strong mean-reversionbounces.  Those indeed soon ignitedand accelerated following two major Fed-dovish economic reports.  Both monthly US jobs and headline CPIinflation missed expectations, fueling gold-futures buying.

Last week I looked at gold stocks’ CPI surge,which was quite impressive.  GDX rocketed5.2% higher the day that most-watched inflation metric printed cooler thanexpected!  That really outstripped gold’sown lower-Fed-rate-hike-odds surge of 1.3% that day, making for fantastic 3.9xgold-stock upside leverage to gold! In just four trading days, GDX had blasted up 9.5% off major supportwhich was 3.8x gold’s 2.5% rally.

While that powerfulmean-reversion bounce was a really-bullish omen as explained in my last essay, itwas lacking an important technical confirmation.  Last Wednesday’s CPI surge was big and impressive,but it carried GDX just 0.6% above its trailing 50dma.  Since prices sometimes challenge importanttechnical lines then fail, I’ve long waited until 1%+ breakouts beforeconsidering them meaningful and decisive.

In the week since goldstocks’ CPI surge, GDX has advanced well beyond that important milestone.  This latest gold-stock rally has nowtechnically confirmed a major upside 50dma breakout!  Those have proven very-bullish portents inrecent years, flashing early in big gold-stock rallies that soon power muchhigher.  This GDX chart over the past fewyears or so reveals why decisive 50dma breakouts are strong buy signals.

Mid-upleg selloffs likeGDX’s recent one exist to rebalance sentiment, to eradicate greed and ramp fear.  Still the resulting gold-stock bearishness inlate June and early July sure felt really overdone.  GDX was bottoming at the convergence of two majorsupport zones, its 200dma and upleg uptrend’s lower support line.  Gold stocks were still carving higher lowsand higher highs on balance, their strong upleg remained intact.

Yet many tradersfoolishly capitulated in what was a textbook good mid-upleg buyingopportunity.  During that bottoming monthinto early July, I pounded the table about how bullish that setup was forboth gold and its miners’ stocks.  All myrecent essays analyzed the reasons why, and we took advantage of that to aggressivelyadd new fundamentally-superior mid-tier and junior gold and silver stocks inour newsletters.

We had been stopped outof many trades earlier in gold’s pullback, with big realized gains running as high as +83.3%.  Then we waitedto redeploy that capital until GDX was clearly bottoming technically with bearishnessrunning rampant.  So we added fully 20new gold-stock trades total in both our newsletters over several weeks intoearly July.  Mid-week their unrealizedgains are already running as high as +29.3%!

And GDX’s new 50dmaupside breakout argues these are only the beginning.  The day after that inflation surge, GDX achievedthat decisive metric closing 1.8% over its 50dma.  In the four trading days since, that key breakouthas been further confirmed with GDX hitting 1.3%, 1.5%, 3.8%, and 3.2% above its50dma on close!  So there’s no technical ambiguityleft here, today’s latest 50dma breakout is the real deal.

Over the past few yearsor so, GDX has enjoyed five previous decisive 50dma breakouts which are notedin this chart with the white circles. These buy signals occur early in major gold-stock-upleg rallies.  The first during this recent timespan flashedin early April 2021.  Including thatinitial 50dma breakout day, GDX surged 17.7% in the next 1.4 months.  Then another 50dma breakout happened in mid-October2021.

That proved the weakestof this bunch for reasons beyond the scope of this essay, yet GDX still rallieda respectable 12.1% during the next 1.1 months. Remember GDX is dominated by major gold miners, butfundamentally-superior smaller mid-tiers and juniors usually well outperform themajors.  So measuring this sector’supside in GDX terms understates gold-stock gains for studious traders picking superiorminers.

GDX’s next decisive 50dmabreakout arrived not long after that truncated gold-stock upleg in mid-January2022.  Over the next 3.0 months includingthat breakout-surge day, GDX blasted up another 33.6%!  Then that gold upleg was interrupted by extreme Fed rate hikes catapulting the US dollar parabolic, unleashing withering gold-futures selling.  That pounded gold and GDX to late September’sdeep secular lows.

Bull markets consist ofalternating upleg-correction cycles, and 50dma breakouts are rarely seen in thelatter.  But soon after gold stocks’ nextupleg ignited, GDX shot back over its 50-day moving average again in early October.  Over the next 3.7 months, the major goldstocks soared another 32.9% higher! While buying 50dma breakouts isn’t as ideal as buying in precedingbottomings, it is still very profitable.

Finally GDX’s previous decisive50dma breakout before last week’s flared in mid-March, soon after gold stocks’ earliermid-upleg selloff bottomed leaving festering bearish sentiment.  Right after that GDX surged sharply, rallyinganother 22.9% in just 0.9 months!  Averageall these recent post-50dma-breakout performances together, and GDX shot up23.8% in 2.0 months following them. Such gains are well worth chasing.

Gold stocks’ newest decisive50dma breakout again happened last Thursday July 13th, the day after that CPIsurge.  That implies another 24%ishupside from there, which would boost GDX up near $39.50 or so around earlySeptember.  While such merely-averagepost-breakout gains are nothing to sneeze at, those are conservative giventoday’s scenario.  Odds are this coming gold-stockupside will prove considerably larger.

There are plenty ofreasons, and I analyzed the primary ones in the last six weeks’ essays.  They center around gold’s own bullish outlook driven by speculators’ low positioning in gold-futures long contracts and investors’ lack of meaningful buying so far in today’s gold upleg.  Again gold stocks are leveraged plays ongold, so they will amplify its coming upside like usual.  GDX will keep leveraging material moves by 2xto 3x.

But there are othergold-stock-specific reasons this sector is likely to power much higher in themonths ahead.  GDX rallying that average24%ish after a 50dma breakout near $39.50 wouldn’t be a stretch at all technically.  That would carry this dominant gold-stock benchmarkback up near the upper resistance line of its upleg uptrend, where it lastwas in late January and mid-April.  Andthat is well under April 2022 highs.

GDX was above $40.75then before that strong upleg was prematurely slaughtered by the Fed’sblistering rate hikes.  That was just amonth after the Fed started its epic extreme 500-basis-point hiking cycle overjust 13.6 months.  There’s a strong argumentto be made that all the gold-stock rallying necessary to lift GDX back over $40is merely a mean-reversion rebound after last summer’sexceedingly-anomalous selloff.

And that happeningalong that average timespan by early September wouldn’t leave GDX extremely overbought.  Baseline 200dmas from which overboughtness ismeasured tend to parallel upleg uptrend channels.  GDX’s 200dma climbed $0.77 in May and $0.60in June, leaving it with an ascending monthly slope near $0.69.  Double that for two more months, and GDX’s200dma would be near $31.00 in early September.

GDX rallying back upnear that $39.50 post-50dma-breakout target would leave it stretched 27% aboveits 200dma, which is seriously overbought. But that remains well short of upleg-slaying extremes starting at35% over.  At this upleg’s last majorinterim high in mid-April, GDX surged an even-bigger 29.5% over its200dma.  So overboughtness shouldn’tlimit GDX from at least seeing average gains after this breakout.

And gold-stock seasonalssupport technicals in showing another GDX 50dma breakout surge is no bigdeal.  This chart reveals gold stocks’indexed summer performances in all modern gold-bull years since 2001.  My latest summer-doldrums research thread explained this methodology in depth.  Theblue line is how the older HUI gold-stock index which mirrors GDX is performingsummer-to-date since May’s final close.

The red line shows majorgold stocks’ average indexed summer performances from 2001 to 2012 and 2016 to2022.  Partially because of these weakseasonals, gold stocks’ latest mid-upleg selloff waxed overdone.  With sector bearishness mounting on gold’sown June pullback, gold stocks were pounded lower than usual last month.  Much of GDX’s surge since merely returnedthem back near seasonal norms.

After the worst oftheir summer-doldrums slump in June, both gold and gold stocks tend to enjoy strongautumn rallies gathering steam in July then accelerating in August andSeptember.  I hope to update that research thread innext week’s essay.  Since gold stocks’latest surge erupted at below-normal summer levels, there’s lots of room for itto keep mounting without getting excessive. Seasonals support big upside.

That should be boostedby strong fundamentals, as gold miners report their latest quarterly resultsinto mid-August.  Earnings in thisindustry are generally the difference between prevailing gold prices and all-insustaining costs.  Gold climbing while miningcosts retreat fuels great profitability, which boosts gold-stock prices.  Gold averaged an all-time-record $1,978 on close in Q2’23, climbing 5.6% year-over-year!

Meanwhile plenty ofgold miners are forecasting production improving as 2023 marcheson.  As analyzed in my essay on GDX stocks’ Q1’23 results,Q1s have proven years’ weakest gold-output quarters for a variety of reasons.  Rising production usually drivesproportionally-lower unit mining costs, since there are more ounces to spread mining’sbig fixed costs across.  So gold miners’AISCs should decline some in Q2.

Some miners havealready reported Q2 production updates ahead of full quarterly results beingreleased in coming weeks.  I alwaysanalyze those releases as they happen for our open trades in our weekly newsletter.  Among the fundamentally-superior mid-tiers andjuniors we specialize in, plenty of production growth is being reported.  That ranged from +4% YoY from a new mid-tiergold to +92% at a junior silver miner!

In the comparable Q2’22,the top 25 GDX gold miners’ AISCs averaged $1,161 per ounce excluding a coupleextreme outliers.  Raging inflationpushed that same adjusted metric to $1,210 in Q1’23.  With production growth happening, last quarter’sAISCs should shake out somewhere in between. My best guess is around $1,175 without that handful of outliers.  That would imply sector unit profits around$803 per ounce.

A year ago those ran$591, so that would make for awesome 36% YoY earnings growth!  While we can’t know for sure until mid-Augustafter all the gold miners report full Q2’23 results, by all indications profitswill be strong.  That will encourageinstitutional investors like funds to add gold-stock positions, boosting thisrally.  As usual I’ll analyze the latestresults from the top 25 GDX and GDXJ gold stocks later in August.

While GDX’s latest decisive50dma upside breakout last week is impressive alone, it is buttressed by other bullishfactors making it a higher-probability-for-success buy signal.  Not only is underlying gold’s outlook verybullish on speculators’ and investors’ positioning, but other gold-stock technicals,sector seasonals, and the latest quarterly fundamentals look great.  With this setup, this breakout has bigpotential.

With it still only aweek old, it is not too late to add gold-stock trades at still-decent prices.  Our newsletter subscribers didn’t need towait for technical proof, they snatched up excellent bargains in those severalbottoming weeks before GDX resumed surging. While the unrealized gains are mounting fast in our trading book full offundamentally-superior smaller miners, they ought to grow much larger in comingmonths.

Successful trading demands always staying informed on markets, tounderstand opportunities as they arise. We can help!  For decades we’ve publishedpopular weekly and monthly newsletters focused on contrarian speculation andinvestment.  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.

Our holistic integrated contrarian approach has proven very successful,and you can reap the benefits for only $8 an issue now (33% off!).  We research gold and silver miners to find cheapfundamentally-superior mid-tiers and juniors with outsized upside potential.  Signup for free e-mail notifications when we publish new content.  Even better, subscribe today to our acclaimed newsletters and start growing smarter andricher!

The bottom line is the leading gold-stock benchmark just staged adecisive breakout above its key 50-day moving average.  This offers strong technical confirmationthat a major new gold-stock rally is underway. After previous 50dma breakouts in recent years, GDX surged about anotherquarter higher from those in the next couple months.  Today even-better gains are likely technically,seasonally, and fundamentally.

Gold stocks ultimately leverage gold, and its own outlook looksreally bullish mainly due to speculators’ gold-futures positioning.  Gold stocks amplifying gold’s gains fuelstheir uplegs.  A typical post-breakoutrally would leave GDX within its upleg’s uptrend, well under upleg-slaying overboughtnesslevels.  And the gold miners are likelyto report great Q2 results in coming weeks, giving more fundamental reasons tobuy.

Adam Hamilton, CPA

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