Gold Stocks Upleg Pauses / Commodities / Gold & Silver 2019

The gold miners’ stockshave slumped in January, tilting sentiment back to bearish.  This sector’s strong December upward momentumwas checked by gold’s own upleg stalling out. Gold investment demand growth slowed on the blistering stock-marketrally.  But uplegs always flow and ebb,and this young gold-stock upleg merely paused. The gold miners’ gains will likely resume soon, rekindling bullishpsychology.

Most investors andanalysts track the gold-mining sector with its leading ETF, the GDX VanEckVectors Gold Miners ETF.  GDX was thissector’s pioneering ETF birthed in May 2006, creating a huge first-moveradvantage that is insurmountable.  Thisweek GDX’s net assets of $9.9b were an incredible 56.7x larger than the next-biggest 1x-long major-gold-miners ETF!  GDX dominates this space with littlecompetition.

Back in early September,the gold stocks plunged to a major 2.6-year secular low per GDX.  This sector suffered a brutal forced capitulation oncascading stop-loss selling, devastating sentiment.  The triggering catalyst was gold getting poundedto its own major lows in mid-August on record futures short selling. At worst GDX fell to $17.57 on close, whichwas down an ugly 24.4% year-to-date. Most traders fled in disgust.

But major new uplegsare born in peak despair, and thatwas it.  The gold stocks startedrecovering out of those fundamentally-absurd levels, gradually carving a solidupleg.  By early January GDX had rallied 22.3%higher in 3.7 months, fueling more-optimistic sector sentiment.  Plenty of speculators and investors includingme were comparing 2019’s setup for gold stocks to the first half of 2016, awildly-lucrative stretch.

That was just aftertoday’s gold bull ignited, and its maiden upleg surged 29.9% higher in just 6.7months.  Such gold strength ignited aflood of capital into the gold miners, catapulting GDX an enormous 151.2%higher in essentially that same span!  Thisyear when GDX’s latest closing upleg high of $21.48 was achieved on January 3rd,traders were salivating at the prospects of another mighty H1’16-like gold-stockupleg.

But instead of poweringhigher, the gold stocks stalled and started drifting lower.  By last Friday the 18th, GDX had slumped 5.4%over a couple of weeks or so to $20.31. That really discouraged the gold-stock traders, torpedoing the nascentbullishness driven by GDX’s powerful 10.5% December rally.  I’ve been getting lots of e-mails fromdiscouraged traders moping, and often convinced this gold-stock upleg fizzled.

Sentiment has really deterioratedin recent weeks as gold-stock prices retreated. One manifestation of this resurgent bearishness is apparent in how individualgold miners’ stocks are reacting to company-specific news.  Early in new quarters, many gold minersreport their prior quarter’s production. And early in new years, plenty also give guidance for new full-yearproduction.  Traders are selling hard onthis news.

Even though theseproduction reports and outlooks have generally been flat to good, they arebeing used as excuses to sell.  When traders wax bearish, all news is consideredbad.  So when pessimism reigns early innew quarters, it’s not unusual to see traders flee.  Conversely when gold stocks are rallyingnicely early in new quarters, this news is typically bought.  Gold stocks’ reaction to news is a sentimentindicator.

Interestingly sellingon full-year production guidance is usually a poor decision.  Gold-miner managers try to maximize theircompensation which is heavily driven by their stock’s price.  So they tendto lowball their production estimates early in new years, leaving room to beatthem later in those years.  Then when theyexceed their own expectations, their stocks catch strong bids into year-ends maximizingtheir personal earnings.

Plenty of traders have writtenme worrying that January 2019 is nothing like January 2016, arguing that amajor new gold-stock upleg isn’t underway. They are dead wrong, everyone forgets the gold stocks also fell in muchof that pivotal month.  In the firstcouple weeks of January 2016, GDX actuallydropped 9.1% despite a parallel 2.5% gold surge!  Then like now, emotional gold-stock traders wereirrationally scared.

That monster H1’16gold-stock upleg didn’t start until January 20th that year, which was thatmonth’s 12th trading day.  That was aftermost of the post-quarter and new-year news releases.  This year’s slump is actually better, not worse.  GDX was only down 3.7% month-to-date on thismonth’s 13th trading day, on gold’s slight 0.1% drift lower over that span.  Early-year weakness doesn’t preclude majoruplegs brewing!

While most traders wantto assume otherwise, gold stocks’ young upleg remains very much alive and well.  This chart is updated from my essay severalweeks ago heralding GDX’s major upside triple breakout, a super-bullishtechnical event.  While GDX did slump inrecent weeks after achieving that, its upleg is still rock-solid.  All uplegs meander higher in fits and starts,taking two steps forward before one step back.

I’m not going to rehashthis chart after analyzing it in depth just a few weeks ago.  But scared gold-stock traders can take solacein some brief observations.  First notethe early-January-2019 pullback in GDX is far less severe than theearly-January-2016 one.  While that monthbirthed a monster upleg, it wasn’t all rainbows and unicorns until the veryend.  Weak-handed excitable traders hadto be shaken out before the surge.

Second look at GDX’ssolid upleg since early September 2018, which again rallied 22.3% at best over3.7 months as of January 3rd.  Uplegs aresimply series of higher lows and higher highs often unfolding in a defineduptrend channel.  All that still perfectlyapplies to GDX, its technicals remain very bullish.  Both its upleg lows and highs are gradually marching higher, revealing zerotechnical strain on this young upleg.

Once again this uplegwas born at GDX’s deep 2.6-year low of $17.57 on September 11th.  Over the next few weeks into early October,GDX surged 8.4% to $19.05.  Then itquickly pulled back to $18.39, which was still 4.7% above upleg-start levels.  From there GDX powered up another 9.3% overthe next couple weeks to $20.10 in late October.  Then it suffered a bigger retreat to $18.42 bymid-November, still a higher low.

GDX rebounded stronglyfrom there, surging another 16.6% to $21.48 by early January.  And after such a strong run it slumped againto $20.31 last Friday.  While it remainsto be seen if that proves the latest upleg low, the higher lows so far have run$18.39, $18.42, and $20.31.  And thehigher highs clocked in at $19.05, $20.10, and $21.48.  This is a textbook-perfect gold-stock uplegso far, offering nothing to worry about.

These higher lows andhigher highs have formed an excellent uptrend channel for this upleg.  Connecting these lows and highs creates parallellower-support and upper-resistance lines. I didn’t draw them in this chart because they’d be difficult to see atthis scale, but they are really well-defined. As of this week the support line extends near $19.50.  So even if GDX slumped that low, its uptrendchannel would remain intact.

Resistance now projectsnear $21.75, which would be another new upleg high.  Odds are GDX will head back up there tochallenge it in the coming few weeks or so. GDX may have started bouncing from last Friday’s level a bit under its200-day moving average, which is now running $20.65.  It could head a little lower first to its 50dmawhich is down near $20.14.  And maybe itwill even drop to $19.50 lower support.

It’s important torealize that as long as GDX remains above that uptrend-channel support line, its upleg is just fine.  Any action over that is merely upleg noise thatisn’t worth worrying about technically. It is normal for pullbacks within uplegs to bleed away bullishness and rekindlebearishness.  That’s actually essentialfor uplegs’ health and longevity, keeping sentiment balanced so uplegs don’t prematurelyburn out.

All the upside triple-breakout analysis andbullishness I discussed in early January remains valid and in force today.  This gold-stock upleg has just paused, which is par for the course.  All uplegs flow and ebb, gradually meanderinghigher on balance.  None shoot up instraight lines, not even that monster one in H1’16.  That was riddled with multiple strong selloffs,with one even hitting support below GDX’s 50dma.

The reason this younggold-stock upleg paused in recent weeks was gold’s own upleg stalled out.  Gold miners’ stocks are ultimately justleveraged plays on gold.  Their profits reallyamplify changes in gold’s price, which lets major gold miners’ stocks leveragegold’s underlying moves by 2x to 3x.  Gold’s own young upleg that is driving goldstocks’ one hit its latest high near $1294 in early January the same day asGDX.

At that point gold hadrallied 10.2% upleg-to-date, which GDX’s 22.3% upleg leveraged by a normal 2.2xin a similar span.  Gold had bottomed a fewweeks before the gold stocks, in mid-August instead of early September.  Gold stocks’ performance relative to gold inthis upleg has been normal.  That leverage is often on the low side of itsrange early in young uplegs, then climbs to the high side later as momentum mounts.

At worst since its ownJanuary 3rd high, gold had slumped 1.0% to $1280 on last Friday.  It is certainly no coincidence that is theexact span of gold stocks’ latest pullback. GDX’s young upleg will resume as soon as gold catches a bid again. That is dependent on gold investment demand resuming.  It was strong in Q4, but faded significantlyin January.  This next chart looks at theleading proxy for gold investment demand.

That is the physical bullionholdings the dominant GLD SPDR Gold Shares gold ETF holds in trust for itsshareholders.  They are reported daily, afar-higher-resolution read than the quarterly supply-and-demand data from theWorld Gold Council.  In last week’s essayI explained this chart in depth, analyzing why the capital flows into and out of GLD alone by Americanstock investors overwhelmingly drive the global gold price.

It superimposes GLD’sbullion holdings in blue over the gold price in red.  Rising GLD holdings show that Americanstock-market capital is moving into gold via the conduit of this leading goldETF.  In Q4 and especially December gold surgedhigher on heavy differential buying of GLD shares.  But in January that GLDbuying has moderated.  That’s why gold’sadvance stalled out, which in turn drove gold stocks’ pause.

Again I discussed thischart just last week, so there’s no need for more comprehensive analysis.  For our purposes today, note how GLD’sholdings climbed modestly in October and November after they had fallen to adeep 2.6-year secular low of their own in early October.  GLD had suffered 5 consecutive monthly draws of24.2 metric tons, 28.0t, 18.8t, 45.0t, and 12.9t between May and September, anugly streak.

But that trend ofAmerican stock-market investors selling gold via GLD shares ended in earlyOctober.  GLD enjoyed its first big build the very day the US stock marketssuffered their first sharp plunge!  Thatsnowballed into an 11.8t build in October and 7.7t in November.  That investment buying fueled modest goldrallies of 2.1% and 0.5% those months.  Thenin December that GLD-share buying really accelerated.

Last month enjoyed asizable 25.9t build in GLD’s holdings, the biggest since September 2017.  Those capital inflows fueled a much-larger4.9% gold rally in December.  When investmentcapital is flowing into gold, its price naturally climbs.  And that in turn drives the gold miners’stocks higher.  Gold’s 2.1%, 0.5%, and4.9% gains in the last several months drove parallel 2.2%, 0.8%, and 10.5%monthly rallies in GDX.

On the surface Januaryhas looked good too, with GLD’s holdings surging another 22.1t month-to-date asof the middle of this week.  But nearly9/10ths of that build came on only 2 trading days, January 2nd and 18th.  Out of 15 trading days so far, January hasseen 4 GLD-holdings build days, 3 draw days, and fully 8 unchanged.  American stock investors’ differential GLD-sharebuying hasn’t been consistent thismonth.

That’s enabledgold-futures speculators to push gold modestly lower.  Unfortunately we can’t know how much sellingthey’ve done, or whether it was exiting longs or adding new shorts, because ofthe federal-government partial shutdown. The weekly Commitments of Traders reports usually published by the CFTChaven’t been released since mid-December,so there is no data on gold-futures speculators’ trading.

But gold drifting lowerthis month despite a solid GLD build on balance proves they have to be selling. A sharp bounce in the US Dollar Index is a major factor driving thosegold-futures sales.  But the main one isthe surging US stock markets.  They arereally retarding gold investment demand, making investors forget the wisdom ofprudently diversifying their stock-heavy portfolios with gold.  That has paused gold stocks.

The flagship US S&P500 broad-market stock index (SPX) plunged 19.8% over 3.1 months between lateSeptember and late December, a severecorrection nearly enteringbear-market territory.  It was that SPXdrop that reignited gold investment demand and fueled gold’s latest young upleg.  Last week’s essay dug intothis critical relationship between the SPX and gold.  The SPX’s sharp rebound since weighed on golddemand.

Between the SPX’s ChristmasEve near-bear low and last Friday, this leading index rocketed up 13.6% in justseveral weeks!  That violent bounce thatlooked and felt exactly like abear-market rally nearly erased 4/7ths of the preceding correction.  That has reignited widespread greed and complacencyin the stock markets, the exact mission of bear rallies which are the biggestand fastest seen in all of stock-market history.

Gold stalled out inJanuary because the SPX is surging so fiercely, retarding the impetus to diversifywith gold.  And the gold-stock uplegpaused because gold stopped advancing.  Sothis probable bear rally in the stock markets is to blame for gold stocks’early-year weakness.  But once theseoverbought US stock markets roll over decisively again, gold psychology willflip back to favorable and big investment buying will resume.

When gold startspowering higher again, gold stocks will be off to the races.  That portends big gains still coming in GDX,and even larger ones in its little brother GDXJ.  It is effectively a mid-tier gold miners ETF thesedays, and its upleg gains during recent years’ bull market have outpaced GDX’sby about 1.4x on average.  GDXJ simplyhas a better mix of gold miners than GDX, with fewer problems expanding production.

Yet the best gains byfar won’t be won in the ETFs, but in the smaller mid-tier and junior goldminers with superior fundamentals.  GDXJstill has deadweight in its top holdings, miners struggling with decliningproduction and rising costs.  The bettergold miners are growing their output through new mine builds and expansions,generating greater gains.  Finding andowning these better gold-mining stocks is essential.

The earlier you getdeployed, the greater your gains will be. That’s why the trading books in our popular weekly and monthly newsletters are currentlyfull of better gold and silver miners mostly added in recent months.  The gains we won in 2016 were amazing thelast time American stock investors returned to gold.  Our newsletter stock trades that yearaveraged +111.0% and +89.7% annualized realized gains respectively!

The gold-stock gains shouldbe similarly huge in this next major gold upleg.  The gold miners are the last undervalued sector in these still-very-expensive stock markets, and rally with gold duringstock-market bears unlike anything else. To multiply your wealth in the stock markets you have to do yourhomework and stay abreast, which our newsletters really help.  They explain what’s going on in the markets,why, and how to trade them with specific stocks.  You can subscribe today for just $12per issue!

The bottom line is thisyoung gold-stock upleg is just paused.  Thecurrent technicals certainly don’t justify increasingly-bearish sentiment.  This sector’s leading benchmark GDX iscarving higher lows and higher highs, climbing on balance in a well-defineduptrend channel.  Uplegs don’t shoothigher in straight lines, pullbacks within them are normal and expected.  They serve to rebalance sentiment keepinguplegs healthy.

Gold stocks’ pullback thismonth was driven by gold’s own young upleg stalling.  Strong gold investment demand fueled by recentmonths’ serious stock-market selloff moderated after stocks screamed higher ina violent bear-market-rally-like bounce. The resulting rekindled bullish psychology overshadowed gold again.  But once stock-market selling resumes, sowill the young uplegs in gold and its miners’ stocks.

Adam Hamilton, CPA

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