Gold Stocks Surge Higher | Adam Hamilton

by Adam Hamilton     February 22, 2019

The gold miners’ stocks surged strongly this week, blasting to new upleg highs.  The mounting gains are naturally driving more interest in this small contrarian sector, shifting sentiment towards bullish.  Despite their accelerating rally, gold stocks still remain fairly low technically and deeply undervalued relative to gold.  So their strengthening upleg likely has plenty of room to run considerably higher in coming months.

The gold miners’ stocks are ultimately leveraged plays on gold, which overwhelmingly drives their profits.  The much-maligned yellow metal has enjoyed a strong upleg since mid-August, when record gold-futures short selling pounded it to a deep 19.3-month low of $1174.  Gold has been gradually powering higher on balance ever since, surging near $1341.  That makes for 14.2% gains over 6.1 months, an excellent run.

Gold miners’ earnings are amplifying these higher gold prices, driving this parallel gold-stock upleg.  This is readily evident in the most-popular gold-stock benchmark, the GDX VanEck Vectors Gold Miners ETF.  Launched back in May 2006, GDX has an insurmountable first-mover lead.  This week its net assets of $11.1b were a whopping 50.6x larger than the next-biggest 1x-long major-gold-miners-ETF competitor!

The gold stocks as measured by GDX have certainly capitalized on gold’s advance.  Between its own brutal 2.6-year low in early September and this week, GDX has surged 33.0% higher in 5.3 months.  That works out to gold stocks leveraging gold’s gains by 2.3x in recent months.  That is right in line with the 2x to 3x usually seen historically in the major gold miners.  Many smaller gold miners are doing even better.

As this upleg was being born and growing, I wrote multiple essays explaining what was happening and why it was important to get heavily long gold stocks.  We filled the trading books in our newsletters with great smaller gold and silver miners with superior fundamentals to the majors.  Our unrealized gains this week were already running 60%+ on multiple trades!  This young gold-stock upleg is even now quite lucrative.

While it is always better to buy in earlier than later, GDX’s 33.0% upleg to date remains relatively small.  In essentially the first half of 2016, GDX soared 151.2% higher in just 6.4 months in its last major upleg!  Really-big uplegs are par for the course in the volatile gold-stock sector.  Gold stocks’ last secular bull ran from November 2000 to September 2011.  Half of that was in the pre-gold-stock-ETF era before GDX’s launch.

During that long 10.8-year span, the classic HUI NYSE Arca Gold BUGS Index skyrocketed an incredible 1664.4% higher!  That life-changing secular bull consisted of 12 separate uplegs.  One was an anomaly, the mean reversion out of 2008’s first stock panic in a century.  Excluding that behemoth, the 11 normal ones averaged hefty gains of 80.7% over 7.9 months.  So GDX’s recent run is nothing by this sector’s standards.

At this stage all gold stocks have really done is regain their sharp late-summer losses.  This GDX chart over the past few years or so illuminates the gold-stock technicals.  The major gold miners’ stocks have merely climbed back up into their multi-year consolidation basing trading range.  The lion’s share of this upleg’s gains are most probable as GDX breaks out above longstanding resistance, likely in coming months.

For fully 21.5 months leading into August 2018, GDX consolidated in a well-defined trading range from $21 lower support to $25 upper resistance.  That sideways grind bled away bullish psychology, leading many traders to abandon this drifting sector.  By late last summer not many were left, and most of them were soon driven out too.  August’s extreme record gold-futures short selling spawned a washout in gold stocks.

Because this sector is so volatile, running loose trailing stops is essential for managing risk.  The lower gold was hammered, the more selling pressure mounted in its miners.  That forced them to stop losses, unleashing more mechanical selling and fueling a vicious circle.  Gold stocks cascaded lower in a brutal forced capitulation into mid-August, and a secondary echo capitulation bashed them lower still in early September.

GDX’s $21 support was shattered as this benchmark ETF plunged to $17.57 by mid-September.  Several days later I published an essay Gold-Stock Forced Capitulation explaining all this right in those depths of bearish despair.  I concluded “…the aftermath of capitulations is exceedingly bullish. … The technicals and sentiment spawned by capitulations are so extreme they usually birth massive uplegs and entire bull markets.”

With GDX just plunging to an extreme and unsustainable 2.6-year low, we were aggressively buying great gold stocks and recommending them to our newsletter subscribers.  Being bullish when everyone else was bearish was the right call of course.  The gold stocks started powering higher in their upleg persisting to today.  I did my best to let speculators and investors know about the great upside opportunities in this sector.

Since that forced-capitulation essay, I’ve published 23 more weekly essays on subsequent Fridays.  Fully 14 of those were about gold stocks, exploring their deep undervaluation relative to gold, their excellent technicals, and strong fundamentals.  If you want to multiply your wealth in the stock markets, you have to pay attention all the time.  Most traders make the costly mistake of ignoring sectors until they get exciting.

I’ve been trading stocks for over three decades now, and doing it full-time professionally to earn a living for 2/3rds of that long span.  One of the most-important lessons I’ve learned is it’s critical to always keep plugged in.  If you are not following the markets, you are missing great opportunities.  The only way to buy low before later selling high is staying abreast of beaten-down sectors, especially when they are despised.

The gold stocks kept marching higher on balance after that anomalous forced capitulation, carving higher lows and higher highs.  In mid-October with GDX under $19 I explained why gold stocks were Stocks’ Last Cheap Sector.  I concluded, “These gold miners’ stock prices are wildly undervalued relative to the metal which drives their profits.  So they are overdue for a massive mean reversion and eventually overshoot.”

This new gold-stock upleg mostly drifted sideways in November, discouraging even early contrarians.  I did my usual quarterly analyses of the newest Q3’18 results of the major gold miners of GDX and mid-tier gold miners of the GDXJ Van Eck Vectors Junior Gold Miners ETF.  This critical fundamental homework proved “…the major gold miners’ fundamentals remain far stronger than implied by their left-for-dead stock prices.”

While few traders cared about gold stocks in this upleg’s initial few months, December’s action started to change that.  Gold surged 4.9% higher to $1282 that month as the US stock markets rolled over into a severe near-bearcorrection.  Down 19.8% at worst since its late-September peak, the flagship S&P 500 broad-market stock index plunged 9.2% in its worst December since 1931 in the midst of the Great Depression!

The gold miners’ stocks ignored the burning stock markets to follow gold higher and leverage its gains like usual.  GDX blasted up 10.5% that month, amplifying gold’s strong advance by a solid 2.1x!  Finally this young gold-stock upleg was getting big enough to attract traders’ attention.  I continued to do my best to spread awareness, writing about an imminent Gold-Stock Triple Breakout in mid-December with GDX near $20.

This leading gold-stock benchmark was on the verge of breaking out above three major upper-resistance zones simultaneously.  These included the old $21 support of its consolidation basing trend, a downward-sloping resistance line from a bearish descending-triangle technical pattern, and most importantly GDX’s key 200-day moving average.  Gold stocks’ improving technicals were on the verge of getting far more bullish.

I concluded, “Three major GDX resistance zones have converged just above current levels.  Once the gold stocks surge decisively over, the technically-oriented traders will take notice.  They will likely start chasing the momentum accelerating the gains, with buying begetting buying.”  That indeed came to pass.  By early January that super-bullish upside triple breakout in GDX had already become a fait accompli.

 I wrote another essay Gold-Stock Upleg Breaking Out to explain the huge upside potential the gold stocks had after clearing those essential technical hurdles.  I concluded this gold-stock upleg “is now surging in a major upside breakout that should unleash a flood of new buying.  With gold climbing on balance too, everything is in place to fuel a major gold-stock upleg.”  There were many opportunities to buy gold stocks low.

January was a roller-coaster month for gold stocks, with GDX rallying then swooning then surging to big new upleg highs at month-end.  But on balance this leading gold-stock benchmark continued carving both higher lows and higher highs.  In late January I explained why Gold-Stock Upleg Pauses were nothing to worry about.  All major uplegs flow and ebb, surging two steps forward before slumping one step back.

Speculators and investors needed to remember that “Uplegs don’t shoot higher in straight lines, pullbacks within them are normal and expected.  They serve to rebalance sentiment keeping uplegs healthy.”  Then in early February GDX flashed one of the most-powerful buy signals of all, the fabled Golden Cross.  That is when its 50dma crosses back above its 200dma soon after a major secular low in GDX, a wildly-bullish omen.

But gold stocks again retreated in early February after surging in late January, again worrying traders who lacked perspective.  So a couple weeks ago with GDX just over $22, I published another essay showing Gold Stocks Gather Steam.  It explained that rare Golden Cross buy signal and concluded, “All this has really started to shift sentiment back to bullish, which will attract in lots more capital to chase the momentum.”

That indeed proved correct again.  The more you study markets, the deeper you understand them and the more sense their seemingly-capricious rhythms make.  The more your market experience and knowledge grow, the higher the odds you can figure out what’s most likely next.  If you aren’t in a position to watch markets full-time for decades, it’s essential to spend a little time and money to learn from someone who is and has.

I started investing in stocks when I was 12 years old, using money earned from summer jobs.  I had very little market knowledge in those early years.  So I subscribed to a few financial newsletters written by market experts with vastly more experience and wisdom than me.  Their hard-earned insights from long decades of study kept me on the right track to gradually grow my meager capital at the time.  I loved those guys!

Universally in life, the more time anyone spends doing anything the better they get at it.  Success is often directly proportional to time on task.  So if you can’t or don’t want to devote your life to trading, you need to diligently and consistently learn from those who have.  Being right on this gold-stock upleg is no big deal, as it’s been garden-variety and in line with precedent so far.  It has been both predictable and gameable.

After drifting lower in the first half of February, GDX started surging again late last week.  Heading into last weekend the major gold stocks enjoyed solid 1.0% and 1.3% daily rallies per this ETF.  Those were directly driven by gold climbing 0.5% and 0.7% after slumping to its own mid-month lows.  While US stock markets were closed Monday, that gold-stocks-rallying-and-amplifying-gold trend really accelerated on Tuesday.

After edging up to a new upleg high last Friday, gold continued climbing modestly in foreign trading over the long weekend in the US.  By Tuesday morning gold-futures speculators were seeing gold at its best levels in 10.1 months.  So they apparently rushed to buy, catapulting gold 1.5% higher to $1341!  GDX surged 3.2% that day, leveraging gold’s advance by 2.1x.  That momentum drove another 1.0% rally Wednesday.

But despite the major gold stocks climbing 33.0% in 5.3 months as of the middle of this week, they remain fairly low technically.  At $23.36, GDX was merely back up to the middle of its old multi-year consolidation basing trend between $21 to $25.  Traders aren’t going to get really excited until GDX powers decisively above $25 for the first time since mid-2016.  While improving, gold-stock psychology is still relatively bearish.

I suspect GDX will challenge $25 in the next few months.  Though this sector often experiences a seasonal lull into mid-March, gold stocks then enjoy a strong spring rally.  As long as gold continues slowly climbing on balance, the gold stocks have excellent upside potential.  Remember GDX’s last major upleg soared 151.2% in essentially the first half of 2016, and the prior secular gold-stock bull’s uplegs averaged +80.7%!

While the major gold miners’ technicals and sentiment both support bigger gains to come, perhaps the most-bullish argument of all comes from the fundamental side.  The gold stocks remain relatively low compared to prevailing gold prices, the metal which directly drives their profits.  They need to mean revert much higher to regain normal levels compared to gold.  A simple ratio of gold stocks to gold illustrates this.

The GLD SPDR Gold Shares is the world’s dominant gold ETF.  Dividing GDX’s daily close by GLD’s daily close yields the GDX/GLD Ratio, a great fundamental proxy for gold-stock valuations.  Hammered to the low side by gold stocks’ late-summer forced capitulation, the GGR is just now regaining average levels for recent years’ gold bull.  But mean reversions rarely stop at the averages, instead overshooting proportionally.

I explained this chart in depth a couple weeks ago in another essay, so just a brief update today.  This Wednesday the GGR clawed back up to 0.185x, which is exactly at the 3.2-year average since today’s gold bull was born in mid-December 2015.  At worst in mid-September, the GGR plunged to a deep 2.6-year secular low of 0.155x.  That was 0.030x under this bull’s mean, portending a proportional overshoot higher.

Before this gold-stock upleg gives up its ghost, the odds really favor the GGR surging back to 0.215x.  At this week’s gold-upleg-to-date high of $126.70 in GLD, that implies GDX near $27.25.  That would be a powerful breakout above that old $25 consolidation-trend resistance line, and would catalyze a lot more trader interest in this small sector!  It would extend this current gold-stock upleg’s gains to a more-normal 55.1%.

But if gold keeps rallying like it ought to as these overvalued and overbought US stock markets roll over again, the potential gold-stock upside is far greater.  $1400 gold is just 4.4% above this week’s levels, not a stretch at all.  That would be a new bull-market high exceeding July 2016’s $1365, generating serious excitement to attract in new traders.  At a proportional-overshoot 0.215x GGR, that leaves GDX near $28.50.

That’s still not particularly high, as GDX traded over $31.25 in early August 2016 in its own gold-bull-to-date peak.  With speculators and investors actually excited about gold stocks then, the GGR hit 0.244x.  Apply that to $1400 gold, and the GDX target climbs above $32.25.  That would grow this upleg to +84%, right in line with the prior secular bull’s average.  Make no mistake, the gold-stock upside from here is still big!

And that’s just this upleg, not the entire gold-stock bull.  In the 2 years before 2008’s stock panic radically changed the markets, the GGR averaged 0.591x.  In the 2 years after of 2009 and 2010, the GGR was still far higher than recent levels averaging 0.422x.  Plug in the much-higher historical GGRs seen when gold stocks were far more popular, and higher gold prices, and GDX’s potential upside in this bull gets huge.

The best gains in today’s mounting gold-stock upleg are likely still yet to come.  While you can play it in GDX, the major gold miners dominating this ETF are really struggling to grow their production.  And that problem is even worse in the newly-merged super-majors, further retarding GDX’s performance.  So the best gains will be won in smaller gold miners with superior fundamentals that are still expanding their outputs.

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

Coming gold-stock gains should be similarly huge as today’s strengthening gold and gold-stock uplegs grow.  To multiply your wealth in the stock markets you have to do your homework 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 $12 per issue!  That’s a trivial pittance for decades of hard-won market experience, knowledge, wisdom, and ongoing research.

The bottom line is gold stocks just surged higher again, their upleg getting stronger on balance.  GDX continues to carve higher lows and higher highs, fueling improving sentiment.  More traders are getting interested in this sector and bringing in more capital, driving gold stocks higher to strengthen a virtuous circle of buying.  Gold-stock technicals, sentiment, and fundamentals all argue for bigger gains to come.

This current upleg remains relatively small by sector precedent.  And gold stocks are just regaining their bull-average levels relative to gold, with lots of room to rally on a proportional mean overshoot.  While a seasonal lull nears, mid-upleg pullbacks or consolidating drifts are normal and healthy.  This gold-stock upleg is likely to grow a heck of a lot bigger in coming months’ major spring rally.  Get deployed if you aren’t yet!

Adam Hamilton, CPA     February 22, 2019     Subscribe