Over the course of gold's bull, the
companies that explore for and mine this metal have greatly prospered. The
gold-stock sector has thus been one of the top-performing in all the markets
over the last 10+ years, and its investors have been richly rewarded. But
this last year or so has been a tough one, one that sure has tested investors'
mettle.
Gold stocks had been doing
great since their panic lows in 2008. Measured by the venerable GDX Gold
Miners ETF, gold stocks were up nearly 300% to their late-2010 highs.
This well outpaced the gains of both the general markets (+86% as measured by
the S&P 500) and gold (+100%) over this time. But once 2011 rolled
around, gold stocks' powerful upleg started
stalling out. Even though gold prices stayed strong, the gold stocks
succumbed to weakening global equity markets and a weakening commodities
patch.
15 months later, now entering Q2
2012, gold has held steady and the S&P 500 has enjoyed an excellent
two-quarter run that has brought it to new cyclical-bull highs. These
conditions should have boded well for gold stocks. But as you can see in the
chart below, they continue to languish in their slump. And the juniors in
particular have been getting crushed!
Illustrating this gold-stock malaise
are the performances of three of the top gold-stock ETFs that capture the
various stages of the gold ecosystem. GDX is comprised of the world's biggest
and best gold stocks, the bellwether producers. The GDXJ Junior Gold Miners
ETF is comprised of some of the world's finest small-cap producer stocks. And
the GLDX Gold Explorers ETF is comprised of several of the world's elite
pre-production exploration stocks.
Over time gold stocks' primary driver
is gold. Rising gold prices usually lead to rising profits, which
ought to translate into rising stock prices. And for producers and
non-producers alike, rising gold prices increase the value of their in-ground
assets. Consequently in a gold bull gold stocks tend to leverage the metal to
the upside, and for the most part they have.
Unfortunately though there are
seasons where this hasn't been the case. And in the last year or so we've
been entrenched in one of these seasons. As you can see, gold has performed
quite nicely over the last 15 months. Since the beginning of 2011 it is up an
impressive 17.2% to this week. This run encompasses a strong breakout to its
all-time high of $1894 in August, mixed with a few selloffs. All in all, a nice
bullish uptrend.
So with gold performing well, the
gold stocks should have followed suit, right? Well if you're a gold-stock
investor, you hardly need to see this chart to answer this question. Calling
a spade a spade, gold stocks have been dogs! Rather than following
gold higher, since 2011 gold stocks have plagued investors with gut-wrenching
downward momentum.
Of all the gold stocks the majors
have seen the least of the damage. And this is to be expected due to their
larger size and institutional support. The stocks that comprise GDX have a
weighted-average market cap of $21b based on their percentages of net assets,
so naturally it takes a lot more capital inflow/outflow to move these stocks
up/down.
Though GDX did have a run that
briefly saw it achieve a high in September, on balance it has been trending
down. While gold has been up nearly 20% since the beginning of 2011, GDX has
been down nearly 20%. Not only is there no upside leverage, the gold
stocks haven't even been able to keep pace with gold.
And it gets much worse for the
smaller more-risky gold stocks. GDXJ, comprised of a mix of small-producer
and elite exploration stocks, has a component weighted-average market cap of
$757m based on percentage of net assets. It obviously doesn't take much capital
flow in either direction to sharply move the stocks in this ETF. And as you
can see, concerted selling has corralled GDXJ within a tight downtrend over
the last 15 months, down to the tune of 40%.
Speaking of tight downtrends, GLDX
has been subject to the same fate. GLDX is comprised of many of the world's
top explorers, companies that haven't yet built their mines. And with its
component stocks sporting a weighted-average market cap of $530m based on
percentage of net assets, this ETF can move even faster. GLDX has shed a
dismal 49% since the beginning of 2011. Ouch!
Unfortunately the performances of
GDXJ and GLDX are not the worst of it for the juniors. Since the 90 or so
stocks that comprise these ETFs are the crème de la crème of
this group, it's safe to assume that the majority of the hundreds of
lesser known, less prolific, and smaller juniors have fared even worse over
this stretch.
In trying to wrap my mind around this
gold-stock carnage, like most investors I've taken part in my fair share of
commiserating in recent months. And in talking with numerous acquaintances
that have been active in this realm for an extended period of time, I've been
taken aback by the amount of negativity towards gold stocks, especially the
juniors.
Now of course the vast majority of
investors are going to hate any sector if recent performance is rotten. This
is the psychology of the markets. But gold stocks have endured previous
slumps like this, and there's always been a steady group of contrarians that
have used these situations to back up the trucks and load up for the next upleg. But man, even many of the tried-and-true so-called
contrarians seem to have capitulated, all but abandoning this sector.
Seeing such little interest in gold
stocks, I decided to try to quantify it by taking a look at the capital
volumes of these ETFs. Capital volume is a way of measuring volume in dollar
terms, a loose way of gauging interest in a stock. If capital volume
accelerates faster than can be justified by stock-price appreciation, then
investor interest is likely increasing. And if capital volume is falling at a
faster clip than can be explained by declining prices, investor interest is
likely decreasing.
I especially wanted to take a look at
capital volume during the last six months. Since its correction low in early
October, the S&P 500 has been on a tear. And in soaring an impressive 29%
to achieve this week's cyclical-bull high, investors have seemingly gained a
lot more interest in the stock markets.
Even though gold has only been
marginally higher over this same period (+2.3%), this is the type of
environment where gold stocks should be soaring to reestablish positive
leverage. But the gold stocks have ignored this big stock-market run over the
last six months. In fact, over this time the GDX, GDXJ, and GLDX ETFs are
down 6.7%, 2.0%, and 5.6% respectively. And as you can see below, GDXJ's
capital-volume trend really puts this
lack-of-investor-interest-in-gold-stocks phenomenon in context.
Capital volume is calculated by
multiplying share price by volume, and is a measure of the dollar value of
the shares that trade hands on a daily basis. In order to smooth out the
data, essentially normalizing the anomalous high-volume and low-volume days,
I used the 20-day moving average. And this six-month chart really helps
explain some of the pain gold-stock investors have been feeling lately.
Incredibly GDXJ's capital volume is down
38% since the beginning of October. In dollar terms, this ETF has seen
$50m of daily trading activity vanish. And this plunge is more than just the
loss in value of GDXJ shares. It is a combination of lower share value (down
2.0% over this stretch), and to a greater extent lower volume. In the last
six months GDXJ's 20dma of raw share volume is down by 24%.
And this capital-volume decline is
prevalent in GDX and GLDX as well. Over this same period GDX has seen an 18%
drop in volume, which mixed with a 6.7% lower share price leads to a
capital-volume decline of 29%. And GLDX's 14% drop in volume and 5.6%
share-price decline has led to its capital volume being down by 31%.
The fact that gold stocks are down
over the last six months is hard enough to swallow. But this lack of investor
interest implied by lower capital volume can sure be discouraging. And this
begs the questions that have recently been echoing in the beaten-down
gold-stock arena. Is all hope lost for the gold stocks? Are investors ever
going to return?
As bad as things seem right now,
these are questions we've seen many times over the course of gold's bull. And
I believe the answers are the same as they've been in the past, emphatically no
and yes. The only way these answers can be different is if the gold
bull is over. And it is not even close to being over. Gold's structural fundamentals
are way too strong. And this metal needs the miners to thrive in order to
sustain the integrity of its supply
chain.
I know it's hard to believe that
investors will return to gold stocks after looking at these charts. But
rather than fear them, we can embrace these charts for the opportunities they
present. Throughout gold's bull, investor interest in gold stocks has flowed and
ebbed. And this interest tends to overshoot in both directions, either
blasting them unsustainably higher or unrighteously
shunning them like the Black Death.
As mentioned there are seasons where
gold stocks disconnect from their underlying metal. And by all accounts we
are likely at the tail end of a long one where they have indeed
underperformed. But their fortunes are bound to change, and we are overdue
for a major outperformance cycle. My business partner Adam Hamilton clearly
illustrated this concept in his essay last week that took a deep technical
look at how cheap
gold stocks really are.
Gold stocks are actually as cheap now
as they were near 2008's panic nadir! And if the sentiment cycle that has
been so consistent across this entire bull swings back in favor of these
stocks, thus drawing investors back in, then I submit to you that this
sector, especially the juniors, is poised to explode. And I'm not talking a violent
explosion that will lay waste to gold stocks like so many believe,
I'm talking an explosion akin to a rocket ship blasting off into space.
Now is the
time where the mettle of true contrarians is tested. And the rewards for the
brave can be legendary, especially in the beaten-down junior gold stocks. As
seen in the first chart, the juniors (GDXJ and GLDX) have big downside
leverage to the larger less-risky major producer stocks (GDX). But when gold
stocks are in favor, and the majors start to rally, the juniors usually
provide big positive leverage.
In today's environment blood is
indeed flowing in the streets in the little junior sub-sector. These stocks
are being priced with very little value in their assets, as though gold's
bull is over and there will be no need for the next generation of gold mines.
But this bull is not over, and juniors' place in the supply chain has grown
increasingly important with the majors' reserves dwindling.
With juniors solely relying on
selling their shares to fund operations, this carnage simply can't last for
too long or they'll go extinct. And if the juniors go extinct, then the gold
market is in big trouble. Accordingly I expect the
underperformance-to-outperformance swing that juniors have been party to in
the past to spawn a massive explosion.
And there are plenty of quality
junior gold stocks that will explode, via a big inflow of investor capital
that will push them sharply higher. At Zeal we specialize in finding these
top-shelf juniors. And believe me, this is no easy task considering the
multitude vying for investor capital.
Back in December we finished up a
major research project identifying high-potential junior-producer stocks akin
to those found in GDXJ. We packaged this research into a detailed fundamental
report that profiled our
favorite dozen. And it's been a big hit for those investors not afraid to
take a contrarian stance on this sector. These stocks ought to fly once gold
stocks return to favor.
More recently our latest
comprehensive research project waded through the universe of 600+
junior-explorer stocks trading in the US and Canada, akin to those found
constituting GLDX. And in this hot-off-the-presses report, we profile our
current favorite dozen that we believe have the highest probability for
success.
This action-packed report will
certainly better your knowledge of this exciting sub-sector of gold stocks.
And when gold stocks return to favor, these stocks ought to fly with positive
leverage multiples higher than gold and the majors, inverse to what we've
seen lately on the downside. You can buy both of these reports
today, the earlier one at a discount, to have all these profiles at your
fingertips.
These reports not only grow our
knowledge of a given sector, they feed trade recommendations in our acclaimed
weekly and monthly newsletters. And
we've been loading up on the juniors in anticipation of a rally that should
take us into the summer. Round out your understanding and knowledge of these
wild markets with expert analysis and real-world trade recommendations. Buy your newsletter today!
The bottom line is gold stocks have
had a rough last year or so. Not only have they underperformed the markets,
they've underperformed gold. And the juniors in particular have been sold off
with reckless abandon. Consequently this underwhelming sector has flown off
investors' radars.
Thankfully gold stocks will always
have life in them so long as gold's bull is alive and well. And as contrarian
as it is, I believe these stocks will soon be bursting with life. Gold stocks
are overdue for a shift in sentiment, and when the bids start coming in they
ought to explode to the upside. When this happens, those brave enough to buy
the juniors will need to tighten their seatbelts for an exhilarating ride.
Scott Wright
Our expert research team looked at the universe of 100 or so junior
producers trading in the US and Canada, and after thorough analysis whittled
this group down to our dozen fundamental favorites that we believe have the
highest probability for success. Each of these stocks is profiled in detail
in our hot-off-the-presses 34-page research report that is now available for purchase on our website. Buy your copy today!
At Zeal we use reports like this to feed trades in our acclaimed weekly and monthly newsletters. And we recently issued new buy
recommendations on several of our favorite junior gold producers. We
anticipate that these stocks will see gains akin to the 51%+ average
annualized realized gains that we’ve had in nearly 600 stock trades
recommended in our newsletters since 2001, and hopefully better. Subscribe today to see our current trades and get truly contrarian
stock-market analysis.
The bottom line is even though gold continues to forge higher, gold
stocks have disconnected from the historically positive leverage that
investors are used to seeing. Not only have the gold stocks not kept pace
with gold, they’ve sold off hard, with the juniors just getting
brutalized.
But so long as gold’s bull remains intact and its fundamentals
compelling, this gold-stock fear will prove totally unjustified. The most
ardent of contrarians realize that gold stocks can’t be held down for
long, and that the carnage we’ve seen, especially in the juniors,
offers huge buying opportunities. Selling has likely reached the point of
exhaustion, so carpe diem before the herd returns.
So how can you profit from this information? We publish an
acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms
of actual stock and options trading based on all the lessons we have learned
in our market research as well as provides in-depth market analysis and
commentary. Please consider joining us each month at … www.zealllc.com/subscribe.htm
Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the volume of feedback I may
not have time to respond personally, but I will read all messages.
Thanks! Copyright 2000 - 2005
Zeal Research (www.ZealLLC.com)
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