The
world’s leading gold-stock ETF is nearing a major upside breakout
from key technical levels. GDX is getting closer to challenging and
powering above $25. That would accelerate the sentiment shift in
this deeply-undervalued sector back to bullish, enticing investors
to return. Good operating results from the major gold miners in
their upcoming Q4’17 earnings season could prove the catalyst to
fuel this GDX $25 breakout.
The
classic way to measure gold-stock-sector price action is with the
HUI NYSE Arca Gold BUGS Index. But
the HUI benchmark
is being increasingly usurped by the GDX VanEck Vectors Gold Miners
ETF as the gold-stock metric of choice. GDX is used far more often
than the HUI in gold-stock analyses these days, both online and on
financial television. I haven’t seen the HUI mentioned on CNBC for
years now.
GDX
does have major advantages over the HUI. Most importantly it is
readily tradable as an ETF and with options. GDX’s component
stocks and their weightings are also regularly updated by elite
gold-stock analysts, keeping it current. The HUI is rarely if ever
updated to reflect company-specific changes in the ranks of the
world’s top gold miners. GDX is dynamic where the HUI is
effectively static and outdated.
GDX
also has limitations as a gold-stock metric though. It was only
born in May 2006, so that’s the limit of its price history available
for analysis. And because its managers are paid 0.51% of its assets
each year to maintain this ETF, GDX is not as pure of measure of
gold-stock performance as a normal index. Over a decade that adds
up to a substantial 5% difference. Nevertheless GDX’s popularity
continues to grow.
This
week GDX had $7.7b in assets under management, dwarfing its direct
competitors. That was 21x larger than the next-biggest
1x-long major-gold-stock ETF! GDX’s sister GDXJ Junior Gold Miners
ETF weighed in at $4.7b, but that generally includes
smaller gold
miners. GDX is the undisputed king of the gold-stock ETFs. As
a contrarian speculator, I watch GDX’s price action in real-time all
day every day.
For
an entire year now, GDX has meandered in a relatively-tight trading
range between $21 to $25. As gold stocks periodically fell even
deeper out of favor, this ETF slumped down near $21 lower support.
Then as they inevitably rallied back out of those lows, GDX climbed
back up near $25 resistance. That made for a roughly-20% gold-stock
price range, certainly narrow by this sector’s standards and tough
to trade.
This
GDX chart over the past couple years or so highlights 2017’s
gold-stock consolidation. With this unloved sector neither rallying
nor falling enough to get interesting, investors mostly abandoned it
over the past year. So gold stocks largely drifted sideways on
balance, which certainly proved vexing for the few remaining
contrarian speculators and investors. A GDX $25 breakout would
greatly improve psychology.
Last
year’s gold-stock performance per GDX was very poor. This ETF’s
price climbed 11.1% in 2017, which is better than a kick in the
teeth. But gold’s impressive 13.2% gain last year well outpaced the
gold stocks’ performance. Normally the major gold miners’ stocks
amplify gold advances by 2x to 3x, so GDX should’ve powered 26%
to 40% higher in 2017. Gold stocks are only worthwhile if they
outperform gold.
That’s because gold miners face many additional operational,
geological, and geopolitical risks compared to just owning gold
outright. So if the gold stocks don’t outperform gold, they simply
aren’t worth owning. Seeing them lag the metal which drives their
profits for essentially an entire year is extremely anomalous. It’s
a reflection of the entire global markets proving extremely
anomalous in 2017, an exceedingly-weird year.
Gold
stocks normally perform much more like 2016 than 2017. A couple
years ago GDX rocketed 52.5% higher in one of the best
major-sector-ETF performances in all the stock markets. That
greatly amplified 2016’s underlying 8.5% gold advance by 6.2x.
All those gains rapidly accrued in that year’s first half, as GDX
skyrocketed 151.2% higher in 6.4 months on a parallel 29.9% gold
upleg! Gold stocks can really move.
But
last year as extreme
record-high stock
markets and the even-more-extreme
bitcoin popular
speculative mania stole the spotlight from gold, gold stocks
were largely left for dead. Speculators and investors alike wanted
nothing to do with classic alternative investments when everything
else proved much more exciting. Thus GDX hasn’t been able to
decisively break out above its $25 upper resistance, despite trying.
GDX
did power 34.6% higher in 1.8 months early last year, peaking on a
closing basis at $25.57 in early February 2017. But that rally
fizzled with gold’s when stock markets started surging to new
records on hopes for big tax cuts soon from the
newly-Republican-controlled US government. By early March GDX had
retreated back down to $21.14, right at its $21 support line. At
least that held strong throughout 2017.
The
gold stocks soon rebounded into another rally, but that topped at
$24.57 in GDX terms in mid-April. Again gold had stalled out amidst
epic general-stock euphoria. Gold is the key to gold-stock
fortunes, as traders only think about the gold miners when gold
itself catches their attention. GDX was repelled right at its
200-day moving average, which can prove both major support or
resistance depending on market direction.
By
early May GDX was right back down to $21.10 again, increasingly
establishing the clear consolidation trend seen in this chart. The
gold stocks couldn’t rally significantly heading into their
summer-doldrums lull, and GDX was soon right back down to $21.21 in
early July. That very day I published an essay on
gold stocks’
summer bottom, predicting a new upleg once those usual weak
summer seasonals passed.
And
that indeed happened, with GDX rebounding and then accelerating to
power 20.2% higher to $25.49 by early September. That was right at
its early-February peak, a critical level technically to see a major
upside breakout. But once again gold didn’t cooperate, selling off
sharply as general stock markets yet again blasted to another series
of record highs on renewed hopes for big tax cuts soon. Taxphoria
was huge!
Thus
the gold stocks slumped again, falling back down near GDX’s strong
$21 support as this ETF hit $21.42 on close in mid-December. That
was the day before the Federal Reserve’s fifth rate hike of this
cycle, so gold-futures speculators were scared. They irrationally
fear Fed rate hikes are bearish for gold, even though history has
long proven just
the opposite. Gold and gold stocks surged after that hike
as I predicted.
From
the day before that latest FOMC meeting to this week, GDX rallied
13.8% to $24.37. Wednesday morning when I decided to pen this
essay, GDX was nearing $24.50. So the long-awaited decisive $25
breakout is in easy reach. Gold stocks are a volatile sector, with
3%+ daily swings in prices relatively common. So all it will take
to propel GDX above its $25 resistance is a few solid-to-strong
sector up days.
The
upcoming Q4’17 earnings season for the major gold miners in the next
few weeks could prove the catalyst to spark serious gold-stock
buying. Because gold stocks are so deeply out of favor, the small
fraction of traders that even think about them assume they are
struggling operationally. Throughout all the markets, traders
wrongly attribute prices stretched to anomalous levels by extreme
herd sentiment to fundamentals.
A
month ago bitcoin skyrocketed near $20k as many traders believed
such extremes were fundamentally righteous due to the underlying
blockchain technology. Yet it was a popular speculative mania,
extreme greed sucking people in.
In early December
I warned “Once this mania bitcoin bubble bursts, and it will, the
odds are very high that bitcoin will lose 50% to 75% of its value
within a few months on the outside!”
This
week just over a month later bitcoin has indeed been cut in half,
falling to $9k intraday. Extreme prices are the result of
irrational and ephemeral herd sentiment, not fundamentals. Gold
stocks are now stuck on the other end of the psychology spectrum,
plagued with extreme fear. Since their prices have been so weak,
traders think poor fundamentals must be the reason. But that’s
simply not true at all.
As a
contrarian speculator and market-newsletter writer for the past
couple decades, few people are more deeply immersed in the
gold-stock realm than me. Every quarter just after earnings season
I dive into the actual operating and financial results of the major
GDX gold miners. I’m eagerly looking forward to doing that again
with their new Q4’17 results, which will be reported between late
January and mid-February.
So
now the latest quarterly results available from the major gold
miners are Q3’17’s. I explored them for the top 34 GDX gold miners,
representing almost 92% of its total holdings, back in
mid-November. In Q3’17 these elite gold miners reported average
all-in sustaining costs of
$868 per ounce.
That’s what it costs them not only to produce gold, but to explore
for more and build new mines to maintain production levels.
Q3’17’s average gold price was $1279, which means the major gold
miners were collectively earning profits around $411 per ounce.
That made for hefty 32% profit margins, revealing an industry
actually thriving fundamentally instead of struggling as
herd-sentiment-blinded traders wrongly assume. Gold miners make
such excellent investments because their mining costs generally
don’t follow gold prices.
Gold-mining costs are essentially fixed during mine-planning stages,
when engineers and geologists work to decide which ore to mine, how
to dig to it, and how to process it. Once mines’ necessary
infrastructure is built, their actual mining costs don’t change
much. Quarter after quarter generally the same levels of equipment,
employees, and supplies are needed to mine gold. So all-in
sustaining costs hold pretty steady.
In
the four quarters leading into Q3’17, the top-34 GDX gold miners’
all-in sustaining costs averaged $855, $875, $878, and $867. That
works out to an annual average of $869, virtually identical to
Q3’17’s $868 per ounce. Those flat AISCs happened despite the gold
price varying greatly in that five-quarter span, with this metal
slumping as low as $1128 and surging as high as $1365. Gold-mining
costs are static.
So
as long as prevailing gold prices remain well above all-in
sustaining costs, mining gold remains very profitable and spins out
big positive operating cashflows. And relatively-flat mining costs
generate big gold-miner
profits leverage
to gold. These core fundamental truths about gold-mining stocks
are what could help their upcoming Q4’17 results ignite the buying
necessary to propel GDX above $25 for a major breakout.
These new Q4 results aren’t going to be spectacular, as gold’s $1276
average price last quarter was just under Q3’s $1279 average. But
assuming flat all-in sustaining costs as usual, $868 in Q4 would
still yield fat profit margins of $408 per ounce. That too is
virtually unchanged from Q3’s $411. So the major gold miners as
a sector shouldn’t see collective downside surprises in earnings
in Q4, avoiding damaging sentiment.
It’s
not the Q4’17 results that should spark major gold-stock buying, but
their implications for the current Q1’18 quarter. While Q1 is
young, gold is averaging nearly $1323 so far as of the middle of
this week. That is already 3.6% above Q4’s average, which is a big
move higher. If these gold levels hold and the major gold miners’
all-in sustaining costs hold, they are looking at Q1’18 profits way
up at $455 per ounce!
That’s a whopping 11.5% higher quarter-on-quarter! Not many
if any sectors in all the stock markets can even hope for such
massive earnings gains. And if gold continues powering higher in
the coming months in
a major new upleg,
Q1’s average gold price will be pulled higher accordingly. That
means even larger major-gold-miner profits growth. These
super-bullish prospects ought to rekindle material gold-stock
demand.
Investors usually buy stocks not because of current earnings, but
because of what they expect profits to do over the coming year or
so. Rising gold prices coupled with flat costs give gold-mining
profits growth in 2018 some of the greatest upside potential in the
entire stock markets. Institutional investors should take notice of
this as Q4’17 results are released, leading to funds upping their
tiny allocations to gold stocks.
On
top of that January tends to be a big news month for the gold
miners, as many publish their cost and production outlooks for the
new year. These reports tend to be bullish on balance, with the
major gold miners forecasting higher production and lower costs
tending to garner the most attention. So there’s good odds of
positive newsflow over the coming weeks as well, drawing investors’
focus back to gold stocks.
All
this shows why the gold miners’ stocks have usually enjoyed
strong seasonal
rallies in January and most of February. So GDX now has its
best chance in a year of decisively breaking out above $25 in the
coming weeks. That would work wonders for bearish gold-stock
psychology. The more gold stocks rally, the better herd sentiment,
and the more traders want to buy them. And GDX’s potential upside
is huge.
This
last chart encompasses nearly all of GDX’s entire history going back
to early 2007, a half-year after it was birthed. Gold stocks remain
wildly undervalued today, so GDX $25 and even its $31.32 seen at
gold stocks’ latest major interim high in early August 2016 are
super-low in longer-term context. GDX is actually still down
near stock-panic levels, highlighting vast upside as gold stocks
inevitably mean revert higher.
The
shaded area in the lower right encompasses the last couple years.
Despite GDX seeing one heck of a bull-spawning upleg in early 2016,
the gold stocks remain very low. GDX itself actually hit an
all-time low in January 2016. The gold stocks were trading at
fundamentally-absurd prices as I pointed out that very week.
That extreme anomaly was the product of fleeting herd sentiment, it
had nothing to do with fundamentals.
So
far in young 2018, GDX is averaging $23.66 on close. That’s
actually worse than Q4’08’s $25.13, which was during the
most-extreme market-fear event of our lifetimes. For the first time
since 1907, the general stock markets suffered a full-blown panic
in late 2008. Everything else including gold and its miners’ stocks
were sucked into that epic maelstrom of fear. Traders were
terrified, fleeing in horror from everything.
So
GDX plummeted as low as $16.37 in late-October 2008, climaxing a
devastating 71.0% drop in just 7.5 months. In that panic quarter of
Q4’08, gold averaged just $797. While industry costs were lower
then, the major gold miners were still earning much less in both
profit-margin and absolute terms than they are today. Yet the
average GDX share price was much higher in Q4’08 than it’s been over
the past year!
The
fact GDX could trade around $25.13 during a stock-panic quarter with
$797 gold highlights the sheer madness of today’s gold-stock
prices. Since 2017 dawned, GDX has averaged just $22.99 with $1261
average gold levels. Seeing gold-stock prices 8.5% lower despite
strong profits and average gold prices being a whopping 58.2% higher
makes zero sense! The gold stocks have to mean revert far higher
from here.
That’s what happened after the extreme pricing anomalies of that
late-2008 stock panic too. Over the next 2.9 years, GDX more than
quadrupled with a 307.0% gain! Another proportional mean-reversion
bull out of early 2016’s all-time GDX low would catapult this ETF
back up near $51. That’s still more than another double from
today’s levels. And with gold mining so profitable, this new bull’s
gains should be far larger.
While investors
and speculators alike can certainly play gold stocks’ powerful
coming upleg with 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
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The
bottom line is the leading GDX gold-stock ETF looks to be on the
verge of a major breakout. The upcoming Q4’17 results from the
major gold miners along with Q1’s higher prevailing gold prices
ought to catch investors’ attention. The gold miners should prove
very profitable in Q4, with prospects for big and fast earnings
growth in Q1 and all of 2018 as gold powers higher. This should
help GDX get bid well over $25.
Once
gold stocks power decisively above that vexing upper resistance
level of the past year, the shift in trader psychology back to
bullish will really accelerate. Gold stocks should enjoy
relatively-large capital inflows from institutional investors
looking for undervalued sectors in an extremely-overvalued stock
market. The forgotten gold miners’ stocks have a good chance to
outperform everything again this year like in 2016. |