Gold Stocks Upleg Breaking Out / Commodities / Gold and Silver Stocks 2019

The gold stocks’ young uplegis really growing, on a trajectory to become major.  This contrarian sector is breaking out to theupside on multiple fronts technically, which is really improving sentiment.  Traders’ extreme bearishness of late summerhas mostly abated, with bullish shoots taking root.  Fundamentals certainly justify the mountinggold-stock buying, with earnings set to surge on higher gold prices in coming quarters.

This baby new yearshould prove far happier for gold stocks than 2018.  This sector’s performance is measured by theshare price of the flagship gold-stock investment vehicle, which is the GDXVanEck Vectors Gold Miners ETF.  Thisweek it held shares worth $10.5b in 46 major and mid-tier gold and silver minersfrom around the world.  GDX is now 60.1x larger than the next-biggest1x-long major-gold-miners ETF!

2018 was rough for the goldminers, with GDX slumping 9.3%.  Weakergold prices were to blame, as gold is the dominant driver of gold-mining earnings.  While the yellow metal recovered to a mere1.6% loss last year, it slumped much lower in late summer.  By mid-August extreme record gold-futures short selling had pummeled it down 9.9% year-to-date. That eviscerated gold-stock psychology, scaring traders out.

The major gold miners’stocks suffered a brutal forcedcapitulation in that gold low’s wake as stop losses were triggered leadingto cascading selling.  So by mid-September,GDX had cratered 24.4% YTD.  Thisbloodbath really turned traders off from this small contrarian sector.  But as I warned just days later back inmid-September near the lows, that extreme selling heralded the birth of a major new gold-stock upleg.

GDX has indeed poweredhigher on balance ever since, rallying 20.0% in 3.4 months by ChristmasEve.  That was fueled by theroughly-parallel young gold upleg that climbed 9.3% by the middle of this week.  Things are really looking up for the gold stocks.  Investors and speculators alike are startingto remember the big upside this smallsector enjoys in major uplegs.  Keybreakouts are confirming one is underway.

Several weeks ago Iwrote an essay analyzing the imminent upside triple breakout inGDX.  Closing at $20.12 that day, GDX wason the verge of surging back over $21. That is an exceedingly-important level for the major gold minerstechnically.  This updated chart showswhy, and reveals the gold stocks are now enjoying their longest and best-foundationedupleg in years.  And it is going to growa lot larger as gold rallies.

Three major upper resistancezones have converged at GDX $21.  This was strong lower support for the goldminers’ stocks in a major consolidation basing trend that lasted for 21.5months.  It only failed in early Augustwhen gold was pounded by that extreme record futures short selling.  Once they break, old support levels often becomenew resistance zones.  Traders are waryto buy aggressively before they are overcome.

GDX $21 is also where thedownward-sloping upper resistance line from gold stocks’ descending-triangletechnical pattern has ended up.  That connectedthe lower GDX highs that have vexed this sector since September 2017.  The final and most-important resistance zone nearGDX $21 is its key 200-day moving average. This essential line is usually the most-widely-watched by all the technically-orientedtraders.

Market history has longshown 200dmas often prove the key dividing line between bull and bear markets.  When prices surge back above their 200dmasafter long periods underneath them, traders usually flood back in drivingexploding upside momentum.  200dma upsidebreakouts often herald new bull markets or powerful uplegs within existingbulls.  So GDX powering back over its200dma is a major gold-stock buy signal.

While GDX has beenmeandering around $21 since Christmas Eve, that 200dma breakout has alreadyhappened!  Since this leading gold-stockETF’s 200dma is falling, the last time it was actually at $21 was inmid-November.  This week the black 200dmaline above has slumped to $20.72.  A decisivebreakout is 1% over that level.  GDX achievedthis milestone on December 18th, and has mostly maintained it since.

But with that 200dma stillrounding to GDX $21, that is still the triple-resistance zone traders need tosee left decisively behind.  Thatcritical upside breakout is happening before our very eyes!  With GDX closing near $21.50, investors andspeculators alike are going to consider the gold stocks off to the races.  They will rush to buy and chase the upwardmomentum, accelerating it.  This fuels majorgold-stock uplegs.

The more capitaltraders deploy in gold stocks, the faster their share prices rise.  The bigger their gains, the more traders wantto buy.  This virtuous circle of capitalinflows has propelled past gold-stock uplegs to monstrous proportions.  The last example of gold stocks powering higherout of major secular lows happened in largely the first half of 2016.  The setup for that huge gold-stock upleg wasvery similar to today’s.

After being pummeled toa major secular low in mid-January 2016, selling was exhausted and buyersstarted to return.  GDX began powering higher,spurred on by a parallel young gold upleg. GDX blasted up through its 200dma and capital flooded in.  By the time that major buying ran its course,GDX soared an amazing 151.2% higher injust 6.4 months!  Those kinds of returnsare what give gold stocks their allure.

The necessary psychologyto maintain that gold-stock momentum resulted from a relatively-minor 29.9%gold upleg in roughly the same span.  Themajor gold miners of GDX leveraged and amplified gold’s gains by 5.1x!  That was far better than the usual 2x to 3xbecause the gold stocks were so beaten down, trading at fundamentally-absurd levels when that upleg was born.  Yet those hugegains still weren’t too exceptional.

Despite GDX’s mountingpopularity as the leading gold-stockbenchmark, this ETF is relatively new with a May 2006 birth.  The previous secular gold-stock bull ran for10.8 years, extending from November 2000 to September 2011.  During that long span the classic HUI NYSEArca Gold BUGS Index skyrocketed an astounding 1664.4% higher!  The world’s most-hated sector todaymultiplied investors’ wealth by nearly18x.

That was driven by a parallel638.2% secular gold bull, which the major gold stocks of the HUI leveraged by2.6x.  The individual upleg cycles within that mammoth gold-stock bull show uplegs in this sector tend to be verylarge.  Excluding the epic mean-reversionrebound out of late 2008’s first-in-a-century stock-market panic, the HUIenjoyed 11 normal uplegs.  Their averagegain was a staggering 80.7% over 7.9months!

That last seculargold-stock bull offered traders 11 separate opportunities over 11 years to almost double their capital!  So while GDX’s monster 151% upleg in H1’16 wasdefinitely on the huge side, the last bull’s 81% average uplegs weren’ttremendously behind.  When investmentcapital returns to gold stocks in a material way, their upside is massive.  Today’s young GDX upleg could easily grow to80%+ later this year.

Even a full-on doublingis fairly conservative considering how low gold stocks were hammered in early September’scascading forced capitulation.  GDX bottomedat $17.57 on September 11th, which was adeep 2.6-year low.  A 100% gain fromthere would merely carry it to $35.14. That would be a new high for this gold-stock bull, as GDX last peaked at$31.32 in early August 2016.  But GDX $35is still relatively low.

Back in September 2011as that last secular gold-stock bull crested, GDX peaked at $66.63 on close.  It averaged $52.61 in the three full calendaryears of 2010, 2011, and 2012. Gold-stock levels have been muchhigher on balance in the past.  So seeingGDX double from its recent lows in this young upleg isn’t a stretch at all.  And major gold-stock uplegs aren’t just atechnical-buying-fueling-bullish-sentiment thing.

They are also supportedby fundamentals.  Gold-mining costs are essentially fixed duringmine-planning stages.  That’s whengeologists and engineers decide which gold ore to mine, how to dig to it, andhow to process that ore to extract the gold. Once hundreds of millions of dollars are spent to build the mines and mills,the mining costs generally don’t fluctuate much.  Real-world data abundantly confirms this truth.

Every quarter I wadethrough the latest financial and operational reports of the top 34 GDX goldminers.  They finished reporting theirlatest Q3’18 results inmid-November, which I painstakingly analyzed in an essay as usual.  The top 34 GDX gold miners accounted fornearly 94% of this ETF’s total weighting. And their average all-insustaining costs for producing each ounce of gold ran $877.  That was right in line.

The previous fourquarters’ top 34 GDX gold miners’ average AISCs came in at $868, $858, $884,and $856 averaging $867.  So the majorgold miners’ costs for producing gold don’t change much regardless of what thegold price is doing.  Thus higher goldprices feed directly through to bottom lines in amplified fashion.  Gold stocks’ earnings surge during golduplegs, fundamentally justifying monstergold-stock gains.

In Q3’18 plenty of majorgold miners actually reported that they expected AISCs to retreat in Q4’18 asproduction recovered out of various temporary setbacks.  So I expect to see lower average AISCs among the top 34 GDX gold miners in their upcomingQ4 results.  But let’s conservatively assumethat Q3’18’s $877 average AISCs hold into Q4. Higher prevailing gold prices in Q4 portend bigger gold-mining profits.

The average gold price climbed1.4% quarter-on-quarter in Q4 near $1228. That implies the major gold miners of GDX were earning $351 per ounce at$877 average AISCs.  In Q3 the loweraverage $1211 gold price drove profits of $334 per ounce.  So gold-mining earnings are likely to climbby at least 5.1% QoQ in Q4’18 results. That is 3.6x upside leverage to gold, so outsized gold-stock gains arerighteous.

No one knows what goldwill average in Q1’19, but I bet it’s going to be much higher than Q4’s $1228.  Gold thrives during stock-market selloffs as investors remember diversifying their stock-heavy portfolios withalternative investments.  And with burningstock markets rolling over into a young bear driven by full-speed Fed quantitative tightening,gold investment demand is likely to push gold higher for a long time to come.

But let’s assume golddoes nothing on balance in Q1, and merely averages $1280 when the dust settles.  That is still 4.3% higher sequentially fromQ4.  At $1280 gold prices and $877 AISCs,gold-mining profits in Q1 would run $403 per ounce.  That is another14.8% higher than Q4’s projected level, implying 3.4x earnings leverage togold.  As long as gold gradually climbson balance, the gold stocks deserve to soar.

Because their profitssurge much faster than gold, so do gold-stock prices.  Gold stocks again tend to outperform gold by 2x to 3x during major uplegs.  So if gold rallies 30%, GDX will usuallypower up 60% to 90%.  The major gold miners’stocks remain wildly undervalued relative to prevailing gold prices.  Backin mid-October when GDX was just clawing back out of the $18s, I made thatfundamental case in depth.

But while GDX is a finesector investment vehicle with a lot to like, it’s not without itsproblems.  In Q3’18 for example, the top34 GDX gold miners saw their overall gold production retreat 2.9%year-over-year.  The world’s 4 largestgold miners Newmont, Barrick, AngloGold, and Kinross suffered annual productiondrops of 2.0%, 7.6%, 14.6%, and 10.4% in Q3. Goldcorp’s plunged an anomalously-extreme 20.5% YoY!

These 5 major gold minersalone accounted for over 30% of GDX’s total weighting.  Other gold miners among its top componentsare also struggling with production. While GDX has to own the biggest and best gold miners no matter how theyare faring, their underperformance really drags down GDX’s upside.  The biggest and fastest gold-stock pricegains accrue in smaller mid-tier gold miners growing their production.

So instead of buyingGDX, far better gains are highly probable from handpicking fundamentally-superiorGDX-component stocks to own.  These includemid-tier gold miners lower in GDX’s rankings that are still growing their productionorganically, or through new mine builds that recently came online or will soonbe live.  With plenty of great goldminers in this sector, investors and speculators have no need to hold laggards.

With GDX now enjoying amajor upside breakout, massive new investment buying is coming.  And the best gains by far will be won in smallermid-tier and junior gold miners with superior fundamentals.  While GDX itself will power dramatically higherdespite the deadweight in its holdings, the better gold miners will generatemuch-greater wealth creation.  Findingand owning these better gold-mining stocks is essential.

That’s one of my importantmissions at Zeal, relentlessly studying the gold-stock world to uncover thestocks with the greatest upside potential. The trading books in both our weekly and monthly newsletters are currentlyfull of these better gold and silver miners. Most of these trades are relatively new, added in recent months as goldstocks recovered from deep lows.  So it’snot too late to get deployed ahead of big gains!

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The bottom line is thisyoung gold-stock upleg is growing.  It isnow surging in a major upside breakout that should unleash a flood of new buying.  With gold climbing on balance too, everythingis in place to fuel a major gold-stock upleg. That could easily portend a doubling in the major gold miners’ stocks fromtheir recent deep lows.  This sector’s technicals,sentiment, and fundamentals all support massive gains from here.

The higher gold stocksare driven, the more traders want to buy them to chase their outperformance.  The more gold stocks rally, the more bullishsentiment becomes leading to mounting capital inflows.  Higher gold prices justify all thatfundamentally, as gold-mining profits leverage and amplify gold’s gains.  This is the best gold-stock setup seen sinceearly 2016, which led to GDX soaring 151% in just over a half-year.

Adam Hamilton, CPA

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