The
small contrarian gold-mining sector remains deeply out of favor,
universally ignored. Thus the gold stocks are largely drifting
listlessly, totally devoid of excitement. But that’s the best time
to buy low, when few others care. The gold stocks continue to form
strong technical bases, paving the way for massive mean-reversion
uplegs. And they remain exceedingly cheap relative to gold prices,
which drive their profits.
Being a gold-stock investor feels pretty miserable and hopeless
these days. The gold stocks have been consolidating low for 14.2
months now, stuck in a seemingly-endless sideways grind. There are
still gains to be won, but they are mostly within that
low-trading-range context. We haven’t seen one of the huge uplegs
gold stocks are famous for since the first half of 2016. So most
traders have given up and moved on.
That’s understandable psychologically, but unfortunate for
multiplying wealth. Sometimes it takes a while for gold stocks to
catch a bid, but once they get moving they often soar. This
sector is so small relative to broader stock markets that even minor
shifts in capital flows can drive enormous gains. While it’s hard
waiting for gold stocks to return to favor, the vast upside when
they do is well worth the buying-low pain.
The
leading gold-stock measure and trading vehicle is the GDX VanEck
Vectors Gold Miners ETF. It was the original gold-stock ETF
launched in May 2006, and still maintains a commanding advantage in
popularity. This week, GDX’s net assets of $7.7b were 24.0x larger
than its next-biggest 1x-long major-gold-stock-ETF competitor! GDX
is as big as all the other gold-stock ETFs trading in the US
combined.
GDX’s price action shows why gold stocks are such compelling
investments when everyone hates them. After gold stocks were
universally despised in mid-January 2016, GDX soared 151.2% higher
in just 6.4 months! After the previous time sentiment turned so
overwhelmingly against gold stocks in October 2008, GDX rocketed
307.0% higher over the next 2.9 years. Buying gold stocks low
has proven very lucrative.
That
quadrupling of GDX after 2008’s first-in-a-century stock panic was
actually the tail end of a vastly-larger secular gold-stock bull.
Many years before GDX was even a twinkle in its creators’ eyes, that
gold-stock bull started stealthily marching higher out of total
despair. It can’t be measured by GDX since that ETF started too
late, but the classic HUI NYSE Arca Gold BUGS Index reveals the
magnitude of that bull run.
Over
10.8 years between November 2000 and September 2011, the gold stocks
as measured by the HUI skyrocketed an astounding 1664.4% higher!
And that was during a long bear-market span in the general stock
markets, where the flagship S&P 500 drifted 14.2% lower. The gains
in gold miners’ stocks as they mean revert from out of favor to
popular are so epically enormous that they far outweigh any time
lost waiting.
Gold
stocks are even more attractive today given the
exceedingly-overvalued and dangerous US stock markets, which are
on the verge of a long-overdue major bear. Market valuations
remain deep in literal bubble territory despite
early-February’s
correction. The simple-average trailing-twelve-month
price-to-earnings ratio of the elite S&P 500 stocks was still 31.5x
at the end of last month, above the 28x bubble threshold!
The
market-darling stocks investors love today are crazy-expensive,
portending huge downside in the next bear. The most-popular stock
among professional and individual investors alike is Amazon.com, a
great company. Yet AMZN stock is now trading at a ludicrous
252.5x earnings! That means if profits held steady it would
take new investors today a quarter millennium just to recoup their
stock purchase price.
Meanwhile the world’s largest gold miner in 2017-production terms,
Barrick Gold, is now trading at a TTM P/E of 9.5x. That’s
dirt-cheap by any standards! And ABX’s profits-growth potential is
greater than AMZN’s. Last year Barrick mined 5.32m ounces of gold
at all-in sustaining costs of $750 per ounce. That was $508 under
gold’s average price of $1258 last year, fueling fat full-year
profits over $1.5b on $8.4b in sales.
Every 10% increase in prevailing gold prices boosts Barrick’s
earnings by 25%. And the average gold price so far in 2018 is
already up 5.7%, so gold miners’ profits are growing fast.
I’m not a Barrick Gold investor, and am just using this leading
major gold miner as an example. There are plenty of smaller
mid-tier gold miners with far more upside profits leverage to gold
prices. Gold stocks are darned attractive!
They
are one of the last bargain sectors remaining in these overheated
stock markets. They are one of the only sectors that can rally
in major bear markets, because they follow gold which drives
their profits. Gold investment demand
surges in weak
stock markets, which brings investors back to gold stocks. At
some point, investors are going to figure out how compelling gold
stocks are today and stampede back in.
Despite the apathetic sentiment plaguing them, the gold stocks are
still looking fine technically and even better fundamentally. This
first chart looks at gold-stock technicals as rendered by their
dominant GDX ETF. Given how bearish traders have waxed on gold
miners, you’d think they are spiraling relentlessly lower. But they
are actually consolidating nicely, establishing a strong base
from which to launch their next upleg.
After plunging to
fundamentally-absurd all-time lows in mid-January 2016, GDX
soared into a major new bull market. While its 151.2% surge in just
6.4 months was undoubtedly extreme, that emerged out of
even-more-extreme lows. And it merely catapulted GDX to a 3.3-year
high in early-August 2016, nowhere close to secular topping levels.
But the gold stocks were very overbought then, and soon corrected
hard.
GDX’s enormous 39.4% correction in 4.4 months after that initial
bull peak was also extreme, the result of a couple major anomalies.
First gold-futures
stops were run on major gold support failing, which ignited
parallel cascading stop-loss selling in the gold miners’ stocks.
Then investors
fled gold in the wake of Trump’s surprise election victory,
which led stock markets to soar on widespread hopes for big tax cuts
soon.
Gold-stock selling finally exhausted itself in mid-December 2016,
the day after the
Fed’s 2nd rate
hike of this cycle. Just a couple weeks later, GDX entered its
now-14.2-month-old trading range that persists to this day. It is a
basing consolidation trend running from $21 support to $25
resistance, which makes for a 19.0% trading range. This has
held rock solid ever since, which has made gold-stock trading fairly
easy.
My
strategy has been simple. Given the extreme undervaluations in gold
stocks that I’ll discuss shortly, a massive new upleg is
likely to ignite anytime. So I want a full trading book to reap
those enormous gains when they inevitably arrive. Thus every time
GDX slumped down into the lower quarter of its consolidation range,
between $21 to $22, I’ve been adding positions in great mid-tier
gold miners with superior fundamentals.
All
this is shared in real-time with our newsletter subscribers, who
graciously support our research work. Buying low in the context of
this vexing gold-stock consolidation has driven some great trades
despite lackluster overall action. One example is Kirkland Lake
Gold, an elite mid-tier miner. I added a new position in our
popular weekly
newsletter in December 2016. A year later I sold it for
a hefty 184% realized gain!
So
while this gold-stock trading range has sure felt dull, it has still
created plenty of trading opportunities. And over the past month or
so since that sharp stock-market correction, GDX has largely
meandered in that lower quarter of its range near support again.
That means it’s an excellent time to deploy capital in the unloved
and cheap gold miners’ stocks today. Another surge higher is due,
and it could be a big one.
While GDX $21 support has proven strong since the end of 2016, so
has GDX $25 resistance. The gold stocks have tried and failed to
break out above $25 four separate times since early 2017. A couple
of the attempts were close, but weren’t sustainable as gold
retreated. Once that $25 breakout finally comes to pass, investors
will realize something different is happening and rush to chase gold
stocks’ upside momentum.
Before early February’s sharp stock-market plunge that changed
everything, I was looking to the release of gold miners’ Q4’17
operating and financial results as a potential catalyst
to fuel that $25
breakout. That didn’t happen though, as gold and especially
gold stocks were sucked into the fear surrounding the unprecedented
stock-market
volatility shock a month ago. That dragged GDX back down near
support, which held.
This
recent support approach is probably a blessing in disguise, offering
another chance for investors to deploy capital in cheap gold stocks
before they really start moving again. The great and sad paradox of
the markets is investors are least willing to buy when stocks are
low and out of favor, which is the exact time they should be buying
before later selling high. Gold-stock prices can’t and won’t stay
this low forever.
With
stock-market volatility back, the highly-likely catalyst to ignite
that GDX $25 breakout is gold rallying on
resurgent
investment demand. Gold is largely ignored when stock markets
are high and investors are euphoric, as they feel no need to
prudently diversify their portfolios. But once stock markets sell
off for long enough to spook investors, they start shifting capital
back into gold which often moves counter to stocks.
With
the US stock markets still trading deep into bubble territory in
late February, and euphoria remaining rampant as evidenced by
the blistering bounce rally following that early-month plunge,
there’s no way the stock-market selling is over yet. It will have
to resume sooner or later with a vengeance to actually start
rebalancing away greedy sentiment. When that happens, gold and gold
stocks will soon catch major bids.
The
fact gold stocks have held strong in their consolidation trading
range for well over a year now is a glass-half-full kind of thing.
It testifies to relatively-strong investment demand given the
terribly-bearish sentiment pervasive in this sector. The longer
prices base during bull markets, the greater the upside potential in
their next upleg. It likely won’t take much of a gold rally to
blast GDX back up through $25 again.
This
strong technical picture and an inevitable sentiment mean reversion
are reason enough for gold stocks to surge dramatically higher. But
supercharging that is the dirt-cheap state of gold stocks today in
fundamental terms. That includes current gold-mining profits
compared to prevailing gold-stock prices, as well as near-future
earnings-growth potential as gold itself continues mean reverting
much higher ahead.
I’m
well into my
quarterly research work analyzing the Q4’17 results from
the major gold miners of GDX. Unfortunately due to the complexities
of preparing annual reports, the Q4 reporting season up to 90 days
after quarter-ends is double the 45-day deadlines for Q1s through
Q3s. So all the data isn’t quite in yet, but I expect to have
enough to delve deeply into the major gold miners’ Q4’17 results in
next Friday’s essay.
In
the meantime, a great fundamental proxy for gold-stock valuations is
the HUI/Gold Ratio. This is as simple as it sounds, dividing the
daily close of that classic gold-stock index by the daily gold close
and charting the resulting ratio over time. This reveals when gold
stocks are expensive or cheap relative to the metal which drives
their profits. And this sector has rarely been more undervalued
than it is today!
This
week the HGR was way down at 0.131x, meaning the HUI index’s close
was running just over 13% of gold’s close. That’s incredibly low
historically, showing that the gold miners’ stocks have been wildly
underperforming gold. The gold stocks are trading at levels today
implying gold and their profits were radically lower. This is a
colossal fundamentally-absurd disconnect that can’t last forever, it
has to unwind.
GDX
and the HUI were way down at $21.57 and 173.4 in the middle of this
week. The first time the HUI ever hit this level was way back in
August 2003, years before GDX was even born. Back then gold was
only running $357, and had yet to trade above $380 in its entire
young secular bull. Let that sink in for a second. Gold stocks are
trading at prices today first seen when gold was in the $350s
fully 14.6 years ago!
This
week gold was trading near $1325, an enormous 3.7x higher.
That should certainly be reflected in gold miners’ stocks. Today’s
super-low gold-stock levels aren’t much above the HUI’s stock-panic
lows back in October 2008. There was only a week where the HUI
traded lower than today at peak fear in the stock markets, and gold
averaged $732 during that extreme span. This week it was trading
81% higher!
This
is incredibly illogical, only explainable by irrational sentiment.
If any other stock-market sector was trading at levels from a decade
or more earlier despite the selling prices of its products
doubling to quadrupling, investors would be beating down the
doors to buy. That would rightfully be seen as a huge and
unsustainable anomaly, a rare chance to buy deeply-undervalued
stocks at decade-plus-old prices.
And
it’s not just gold that’s far higher, so are the profit margins
for mining it. With the new Q4’17 results from GDX’s major gold
miners not all out yet, the latest data we have this week is
Q3’17’s. During that previous quarter, the top GDX miners averaged
all-in sustaining costs of just
$868 per ounce.
The costs of mining gold industrywide don’t change much, which is
what creates profits’ big upside leverage to gold prices.
My
still-incomplete Q4’17 analysis shows AISCs very similar to last
quarter’s. That makes sense, as the past year’s quarters ending in
Q3’17 had collective GDX AISCs of $875, $878, $867, and $868.
Mining gold costs similar amounts regardless of prevailing gold
prices, at least over medium-term multi-year spans too short for
new gold mines to be built. So Q4’17 AISCs are likely to remain
around these levels.
Assuming $868 carries forward into Q4’17 and Q1’18, gold-mining
profits are really growing. Average gold prices surged from $1276
in Q4 to $1330 quarter-to-date in Q1. That’s up 4.2% sequentially,
really strong. This implies major gold miners’ earnings are
surging 13.2% QoQ in our current Q1’18 from $408 to $462 per
ounce! That would make for strong 3.1x upside profits leverage to
gold, which is impressive.
And
whether the major gold miners are collectively earning $400, or
$450, or even $500 per ounce today, such profits alone are much
greater than the $350s prevailing gold price the first time the HUI
traded at today’s levels. With fat profits like this heading
much higher as this gold bull continues, it’s ridiculous for
gold stocks to be priced as if gold was still in the $350s like
mid-2003 or the $730s like in 2008’s stock panic.
This
extreme anomaly can’t and won’t last. The gold stocks should be
priced for today’s prevailing gold prices around $1325. The first
time gold hit $1325 in October 2010, the HUI was trading at 522.
That is triple today’s ludicrous levels! The gold stocks
more than quadrupled in the years following 2008’s stock panic,
another irrational situation where sentiment had battered gold
stocks to fundamentally-absurd levels.
Between that first-in-a-century stock panic and
extreme
central-bank easing that really hit full steam in 2013, the last
quasi-normal years in the markets were 2009 to 2012. During that
post-panic span the HGR averaged 0.346x. If the HUI would merely
mean revert back up to those levels relative to gold, it would have
to soar to 458. That’s 164% higher than this week’s levels, upside
unparalleled in any other sector.
For
5 years before the stock panic, the HGR averaged 0.511x. While gold
stocks might not be able to sustain levels so high anymore, they
could certainly blast up there in a temporary mean-reversion
overshoot. After extremes, prices don’t simply migrate back to the
average. Instead they overshoot proportionally to the
opposing extreme as sentiment is equalized. That implies a HUI
level of 677, 290% higher from here.
No
one knows how high gold stocks can go, but there is zero doubt they
are radically undervalued given today’s gold prices and the
gold-mining profits they generate. Whether you expect this battered
sector to quadruple again like after the stock panic, or merely
double, that dwarfs the potential of the rest of the stock markets.
Especially with the S&P 500 trading at bubble valuations after a
long
central-bank-goosed bull.
The
gold stocks are truly
a coiled spring
today, ready to explode higher soon and trounce everything else.
They are deeply out of favor, incredibly undervalued, and one of the
only sectors that can rally sharply when general stock markets sell
off. If you want to multiply your wealth this year by fighting the
crowd to buy low then sell high, this small and forgotten contrarian
sector is the place to be. Nothing else rivals it.
While investors
and speculators alike can certainly play gold stocks’ coming
powerful upleg with the major ETFs like GDX, the best gains by far
will be won in individual gold stocks with superior fundamentals.
Their upside will far exceed the ETFs, which are burdened by
over-diversification and underperforming gold stocks. A
carefully-handpicked portfolio of elite gold and silver miners will
generate much-greater wealth creation.
At Zeal we’ve
literally spent tens of thousands of hours researching
individual gold stocks and markets, so we can better decide what to
trade and when. As of the end of Q4, this has resulted in 983 stock
trades recommended in real-time to our newsletter subscribers since
2001. Fighting the crowd to buy low and sell high is very
profitable, as all these trades averaged stellar annualized realized
gains of +20.2%!
The key to this
success is staying informed and being contrarian. That means
buying low before others figure it out, before undervalued gold
stocks soar much higher. An easy way to keep abreast is through our
acclaimed weekly
and monthly
newsletters. 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. For only $12 per issue,
you can learn to think, trade, and thrive like contrarians.
Subscribe today,
and get deployed in the great gold and silver stocks in our full
trading books!
The bottom line is
gold stocks are basing technically and cheap fundamentally today.
While this small contrarian sector has largely been forgotten, its
past year’s consolidation trading range continues to hold solid.
The longer the basing, the greater the potential upleg when
investors return. And despite trading at levels implying
vastly-lower gold prices, the major gold miners are actually earning
fat profits today.
Those earnings
will surge dramatically as gold continues powering higher in its own
bull market. It’s only a matter of time until investors see the
extreme market-leading value inherent in the gold miners’ stocks.
And with stock-market volatility roaring back after long years of
central-bank suppression, diversifying portfolios with gold will
soon return to favor. The gold stocks will soar as investment
buying drives gold higher. |