Gold-stock technicals are dramatically improving, turning
increasingly bullish. After slumping to major support zones in the
summer doldrums, the gold miners’ stocks have surged sharply in the
past couple weeks. That strong advance has achieved a decisive
breakout above the main gold-stock benchmark’s key 50-day moving
average. Similar breakouts in recent years have heralded imminent
big sector rallies.
Gold-stock price action has been really interesting lately, so I’ve
written several recent essays analyzing it. Between late September
to mid-April, the leading GDX gold-stock ETF powered 63.9% higher in
6.5 months. That amplified gold’s underlying parallel 25.7% upleg
by 2.5x, right in the middle of the major gold stocks’ usual
leverage range of 2x to 3x. Then gold rolled over into a healthy
pullback in early May.
GDX
closed just shy of a new upleg high on May 4th, the day gold hit its
own latest of $2,050. But with gold getting seriously overbought
and greed growing excessive, the yellow metal reversed to work off
both conditions. So over the next 1.8 months into late June, gold
pulled back 6.9% to $1,908. That perfectly-normal mid-upleg
selloff was right in line with February’s 7.2% pullback, and
restored sentiment balance.
Gold
stocks are ultimately leveraged plays on the metal they mine, so GDX
sold off in concert with gold. By early July, it had corrected
18.9% in 2.8 months from mid-April’s slightly-higher high. That
amplified gold’s downside by 2.7x, and was very similar to
February’s earlier mid-upleg correction of 19.8%. After that one,
GDX quickly mean reverted higher in its upleg’s uptrend blasting
up 34.4% to new upleg highs!
In
late June when that gold-stock selloff was nearly finished, I wrote
an essay detailing this sector being a
strong seasonal
buy. June is its weakest time of the year seasonally due
to gold’s summer-doldrums lull in investment demand. The resulting
bearish sentiment exacerbated gold’s latest pullback, extending and
deepening GDX’s parallel one. By late June, GDX had been hammered
back to its 200-day moving average.
With
gold stocks at
key support, I wrote another essay at the end of last month
analyzing the very-bullish technical implications of that. Both GDX
and its underlying driver gold were nicely set up for strong
mean-reversion bounces. Those indeed soon ignited and
accelerated following two major Fed-dovish economic reports. Both
monthly US jobs and headline CPI inflation missed expectations,
fueling gold-futures buying.
Last
week I looked at
gold stocks’ CPI surge, which was quite impressive. GDX
rocketed 5.2% higher the day that most-watched inflation metric
printed cooler than expected! That really outstripped gold’s own
lower-Fed-rate-hike-odds surge of 1.3% that day, making for
fantastic 3.9x gold-stock upside leverage to gold! In just
four trading days, GDX had blasted up 9.5% off major support which
was 3.8x gold’s 2.5% rally.
While that powerful mean-reversion bounce was a really-bullish omen
as explained in my last essay, it was lacking an important technical
confirmation. Last Wednesday’s CPI surge was big and impressive,
but it carried GDX just 0.6% above its trailing 50dma. Since prices
sometimes challenge important technical lines then fail, I’ve long
waited until 1%+ breakouts before considering them meaningful
and decisive.
In
the week since gold stocks’ CPI surge, GDX has advanced well beyond
that important milestone. This latest gold-stock rally has now
technically confirmed a major upside 50dma breakout! Those
have proven very-bullish portents in recent years, flashing early in
big gold-stock rallies that soon power much higher. This GDX chart
over the past few years or so reveals why decisive 50dma breakouts
are strong buy signals.
Mid-upleg selloffs like GDX’s recent one exist to rebalance
sentiment, to eradicate greed and ramp fear. Still the resulting
gold-stock bearishness in late June and early July sure felt really
overdone. GDX was bottoming at the convergence of two major support
zones, its 200dma and upleg uptrend’s lower support line. Gold
stocks were still carving higher lows and higher highs on balance,
their strong upleg remained intact.
Yet
many traders foolishly capitulated in what was a textbook good
mid-upleg buying opportunity. During that bottoming month into
early July, I pounded the table about how bullish that setup was
for both gold and its miners’ stocks. All my recent essays analyzed
the reasons why, and we took advantage of that to aggressively add
new fundamentally-superior mid-tier and junior gold and silver
stocks in our newsletters.
We
had been stopped out of many trades earlier in gold’s pullback, with
big realized gains running as high as +83.3%. Then we waited
to redeploy that capital until GDX was clearly bottoming technically
with bearishness running rampant. So we added fully 20 new
gold-stock trades total in both our newsletters over several weeks
into early July. Mid-week their unrealized gains are already
running as high as +29.3%!
And
GDX’s new 50dma upside breakout argues these are only the
beginning. The day after that inflation surge, GDX achieved that
decisive metric closing 1.8% over its 50dma. In the four trading
days since, that key breakout has been further confirmed with GDX
hitting 1.3%, 1.5%, 3.8%, and 3.2% above its 50dma on close! So
there’s no technical ambiguity left here, today’s latest 50dma
breakout is the real deal.
Over
the past few years or so, GDX has enjoyed five previous decisive
50dma breakouts which are noted in this chart with the white
circles. These buy signals occur early in major
gold-stock-upleg rallies. The first during this recent timespan
flashed in early April 2021. Including that initial 50dma breakout
day, GDX surged 17.7% in the next 1.4 months. Then another 50dma
breakout happened in mid-October 2021.
That
proved the weakest of this bunch for reasons beyond the scope of
this essay, yet GDX still rallied a respectable 12.1% during the
next 1.1 months. Remember GDX is dominated by major gold miners,
but fundamentally-superior smaller mid-tiers and juniors usually
well outperform the majors. So measuring this sector’s upside in
GDX terms understates gold-stock gains for studious traders picking
superior miners.
GDX’s next decisive 50dma breakout arrived not long after that
truncated gold-stock upleg in mid-January 2022. Over the next 3.0
months including that breakout-surge day, GDX blasted up another
33.6%! Then that gold upleg was interrupted by
extreme Fed rate
hikes catapulting the US dollar parabolic, unleashing withering
gold-futures selling. That pounded gold and GDX to late September’s
deep secular lows.
Bull
markets consist of alternating upleg-correction cycles, and 50dma
breakouts are rarely seen in the latter. But soon after gold
stocks’ next upleg ignited, GDX shot back over its 50-day moving
average again in early October. Over the next 3.7 months, the major
gold stocks soared another 32.9% higher! While buying 50dma
breakouts isn’t as ideal as buying in preceding bottomings, it is
still very profitable.
Finally GDX’s previous decisive 50dma breakout before last week’s
flared in mid-March, soon after gold stocks’ earlier mid-upleg
selloff bottomed leaving festering bearish sentiment. Right after
that GDX surged sharply, rallying another 22.9% in just 0.9 months!
Average all these recent post-50dma-breakout performances together,
and GDX shot up 23.8% in 2.0 months following them. Such
gains are well worth chasing.
Gold
stocks’ newest decisive 50dma breakout again happened last Thursday
July 13th, the day after that CPI surge. That implies another
24%ish upside from there, which would boost GDX up near $39.50 or so
around early September. While such merely-average post-breakout
gains are nothing to sneeze at, those are conservative given today’s
scenario. Odds are this coming gold-stock upside will prove
considerably larger.
There are plenty of reasons, and I analyzed the primary ones in the
last six weeks’ essays. They
center around
gold’s own bullish outlook driven by speculators’ low
positioning in gold-futures long contracts and investors’ lack
of meaningful buying so far in today’s gold upleg. Again gold
stocks are leveraged plays on gold, so they will amplify its coming
upside like usual. GDX will keep leveraging material moves by 2x to
3x.
But
there are other gold-stock-specific reasons this sector is likely to
power much higher in the months ahead. GDX rallying that average
24%ish after a 50dma breakout near $39.50 wouldn’t be a stretch at
all technically. That would carry this dominant gold-stock
benchmark back up near the upper resistance line of its upleg
uptrend, where it last was in late January and mid-April. And that
is well under April 2022 highs.
GDX
was above $40.75 then before that strong upleg was prematurely
slaughtered by the Fed’s blistering rate hikes. That was just a
month after the Fed started its epic extreme 500-basis-point hiking
cycle over just 13.6 months. There’s a strong argument to be made
that all the gold-stock rallying necessary to lift GDX back over $40
is merely a mean-reversion rebound after last summer’s
exceedingly-anomalous selloff.
And
that happening along that average timespan by early September
wouldn’t leave GDX extremely overbought. Baseline 200dmas from
which overboughtness is measured tend to parallel upleg uptrend
channels. GDX’s 200dma climbed $0.77 in May and $0.60 in June,
leaving it with an ascending monthly slope near $0.69. Double that
for two more months, and GDX’s 200dma would be near $31.00 in early
September.
GDX
rallying back up near that $39.50 post-50dma-breakout target would
leave it stretched 27% above its 200dma, which is seriously
overbought. But that remains well short of upleg-slaying
extremes starting at 35% over. At this upleg’s last major
interim high in mid-April, GDX surged an even-bigger 29.5% over its
200dma. So overboughtness shouldn’t limit GDX from at least seeing
average gains after this breakout.
And
gold-stock seasonals support technicals in showing another GDX 50dma
breakout surge is no big deal. This chart reveals gold stocks’
indexed summer performances in all modern gold-bull years since
2001. My latest
summer-doldrums research thread explained this methodology in
depth. The blue line is how the older HUI gold-stock index which
mirrors GDX is performing summer-to-date since May’s final close.
The
red line shows major gold stocks’ average indexed summer
performances from 2001 to 2012 and 2016 to 2022. Partially because
of these weak seasonals, gold stocks’ latest mid-upleg selloff waxed
overdone. With sector bearishness mounting on gold’s own June
pullback, gold stocks were pounded lower than usual last month.
Much of GDX’s surge since merely returned them back near seasonal
norms.
After the worst of their summer-doldrums slump in June, both gold
and gold stocks tend to enjoy strong autumn rallies gathering
steam in July then accelerating in August and September. I hope to
update that
research thread in next week’s essay. Since gold stocks’ latest
surge erupted at below-normal summer levels, there’s lots of room
for it to keep mounting without getting excessive. Seasonals
support big upside.
That
should be boosted by strong fundamentals, as gold miners report
their latest quarterly results into mid-August. Earnings in this
industry are generally the difference between prevailing gold prices
and all-in sustaining costs. Gold climbing while mining costs
retreat fuels great profitability, which boosts gold-stock prices.
Gold averaged an all-time-record $1,978 on close in Q2’23,
climbing 5.6% year-over-year!
Meanwhile plenty of gold miners are forecasting production
improving as 2023 marches on. As analyzed in my essay on
GDX stocks’ Q1’23
results, Q1s have proven years’ weakest gold-output quarters for
a variety of reasons. Rising production usually drives
proportionally-lower unit mining costs, since there are more ounces
to spread mining’s big fixed costs across. So gold miners’ AISCs
should decline some in Q2.
Some
miners have already reported Q2 production updates ahead of full
quarterly results being released in coming weeks. I always analyze
those releases as they happen for our open trades in our weekly
newsletter. Among the fundamentally-superior mid-tiers and juniors
we specialize in, plenty of production growth is being
reported. That ranged from +4% YoY from a new mid-tier gold to +92%
at a junior silver miner!
In
the comparable Q2’22, the top 25 GDX gold miners’ AISCs averaged
$1,161 per ounce excluding a couple extreme outliers. Raging
inflation pushed that same adjusted metric to $1,210 in Q1’23. With
production growth happening, last quarter’s AISCs should shake out
somewhere in between. My best guess is around $1,175 without that
handful of outliers. That would imply sector unit profits around
$803 per ounce.
A
year ago those ran $591, so that would make for awesome 36% YoY
earnings growth! While we can’t know for sure until mid-August
after all the gold miners report full Q2’23 results, by all
indications profits will be strong. That will encourage
institutional investors like funds to add gold-stock positions,
boosting this rally. As usual I’ll analyze the latest results from
the top 25 GDX and GDXJ gold stocks later in August.
While GDX’s latest decisive 50dma upside breakout last week is
impressive alone, it is buttressed by other bullish factors making
it a higher-probability-for-success buy signal. Not only is
underlying gold’s outlook very bullish on speculators’ and
investors’ positioning, but other gold-stock technicals, sector
seasonals, and the latest quarterly fundamentals look great. With
this setup, this breakout has big potential.
With
it still only a week old, it is not too late to add gold-stock
trades at still-decent prices. Our newsletter subscribers didn’t
need to wait for technical proof, they snatched up excellent
bargains in those several bottoming weeks before GDX resumed
surging. While the unrealized gains are mounting fast in our
trading book full of fundamentally-superior smaller miners, they
ought to grow much larger in coming months.
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The
bottom line is the leading gold-stock benchmark just staged a
decisive breakout above its key 50-day moving average. This offers
strong technical confirmation that a major new gold-stock rally is
underway. After previous 50dma breakouts in recent years, GDX
surged about another quarter higher from those in the next couple
months. Today even-better gains are likely technically, seasonally,
and fundamentally.
Gold
stocks ultimately leverage gold, and its own outlook looks really
bullish mainly due to speculators’ gold-futures positioning. Gold
stocks amplifying gold’s gains fuels their uplegs. A typical
post-breakout rally would leave GDX within its upleg’s uptrend, well
under upleg-slaying overboughtness levels. And the gold miners are
likely to report great Q2 results in coming weeks, giving more
fundamental reasons to buy. |