The
gold-mining stocks’ usual volatility has proven outsized so far this
year, spooking investors. A fast initial surge in a new upleg was
soon fully reversed by a sharp major correction, which spawned much
bearish sentiment. That combined with the great distraction from
the Trumphoria stock-market rally has left gold stocks unloved and
overlooked. But their outlook is very bullish, and major upside
breakouts near.
It’s
hard to find bargains in today’s extreme stock markets. They’ve
been radically distorted by the post-election euphoria centered on
universal hopes for big tax cuts soon. Nearly every sector
has been bid up to dizzying valuations. Except gold stocks, which
everyone still hates. They may very well be the last remaining
contrarian sector in these crazy markets, and thus a great buying
opportunity for smart traders.
Gold
stocks have been left behind by the wild Trumphoria stock-market
rally over the past 5 months. As of the middle of this week, the
benchmark S&P 500 stock index is up 10.0% since Election Day. But
the gold stocks as measured by their flagship HUI index are down
1.1% over that span. The gold stocks have really suffered since the
election, which explains the stubbornly-bearish sentiment plaguing
them today.
But
perspective is everything in the markets, and that post-election
snapshot is very misleading. So far in 2017, the HUI has rallied
12.5% to easily best the S&P 500’s 5.1% gain. And despite the
post-election gold-stock carnage, the HUI still rocketed 64.0%
higher in full-year 2016! That trounced the S&P 500’s mere 9.5%
gain. Gold stocks stealthily remain one of the top-performing
sectors in all the stock markets.
Their operating fundamentals are still strong and their usual
big spring rally
is already underway, which will likely yield big gains for
contrarians. Yet virtually no one cares! With general-stock
euphoria running rampant, there’s little investment demand for
gold. This unique asset is an anti-stock trade tending to
move counter to stock markets. Few investors seek prudent portfolio
diversification when complacency is stellar.
Given the gold-mining stocks’ blistering gains in the past, the
current total lack of interest even among contrarians is stunning.
But the record-shattering post-election Trumphoria stock-market
rally has been exceedingly distracting. It’s literally
unprecedented on many fronts, bewitching investors into forgetting
stock markets rise and fall. The resulting
stocks-to-the-moon psychology has withered contrarian trading.
So
gold-stock sentiment is absolutely dismal today, exceedingly
bearish. I’ve been intensely studying and actively trading this
sector for decades. That includes the last 17 years in the
financial-newsletter business, where I’m blessed with tons of
sentiment feedback via both e-mails and hard newsletter sales.
Gold-stock psychology is so rotten today that it feels much like
what I’ve witnessed at past major secular lows.
That’s crazy, as this week the HUI is still 103.6% higher from its
last major secular low in January 2016. If any other sector in all
the stock markets had doubled in less than 15 months, it would be
celebrated and popular. Not gold stocks! While sentiment is
ethereal and impossible to directly measure, there are all kinds of
indicators implying how bad it is. One example is capital volume in
the leading gold-stock ETF.
The
world’s most-popular gold-stock trading vehicle is the GDX VanEck
Vectors Gold Miners ETF. As of this week, its net assets were
running 52.6x larger than its next-largest 1x-long
major-gold-miners-ETF competitor. So when investors and speculators
are interested in gold stocks, that’s naturally reflected in GDX
trading activity. And it has just collapsed this year,
reflecting waning interest in this contrarian sector.
At
best last year, GDX skyrocketed 151.2% higher in just 6.4 months!
Such a volatile price range leaves normal raw daily trading volume
much less comparable over time. So I prefer to use a simple
construct called capital volume. It multiplies the number of
shares traded each day by that day’s share price. This effectively
normalizes volume in price terms, revealing how much capital is
moving in gold stocks via GDX.
This
chart looks at GDX capital volume over the past year and a quarter,
which encompasses the mighty new bull market in gold stocks. GDX’s
share price in blue is superimposed over raw daily capital volume in
red, which can vary wildly from day to day. So capital volume’s
21-day moving average is included in yellow to smooth out this
erratic data. Calendar months average 21 trading days, so it’s a
one-month smoothing.
A
year ago in January, the gold stocks slumped to a
fundamentally-absurd 13.5-year secular low in HUI terms. From
those depths of despair, a major new gold-stock bull was
born. While gold-stock sentiment isn’t quite as epically bearish
today as it was at that deep low, it’s surprisingly not a whole heck
of a lot better! As usual soon after prevailing sentiment waxes too
bearish, gold stocks exploded higher in early 2016.
Note
above those massive gains evident in GDX were fueled by a massive
surge in this leading sector ETF’s capital volume. It nearly
tripled from a practically-nonexistent $0.7b per day to $2.0b in
21dma terms, and then established a new high trading range. For the
rest of 2016 after that, GDX’s capital volume settled into that new
bull trading range of $1.5b to $2.2b when smoothed using that
one-month average.
This
consistently-high capital volume reflected growing investor
and speculator interest in this red-hot gold-stock sector. Capital
generally migrates to where it is treated well, and the gold-mining
stocks were providing fantastic stock-market-dominating returns.
There were naturally healthy sharp selloffs from time to time to
rebalance sentiment, which spiked volume. But even ex-selloffs,
capital volume stayed high.
This
strong new gold-stock bull was looking great all the way into late
September. There was a major correction in late August, but gold
stocks had subsequently been grinding higher for nearly 5 weeks.
Sentiment remained fairly bullish after such an amazing early-bull
run, until an unfortunate series of three low-probability selloffs
totally changed how traders perceived gold stocks. Budding love
turned to hate.
Back
in early October, the gold miners’ stocks plummeted in a brutal and
rare mass-stopping
event that was driven by gold-futures stops being run. The gold
stocks recovered sharply after that, but were yet again
improbably slammed after Trump won the election. Before that
election, gold had caught a bid every time Trump seemed to climb in
the polls! But the resulting Trumphoria
killed gold
investment demand.
Then
finally in mid-December gold stocks plunged yet again on a
more-hawkish-than-expected Fed outlook for rate hikes in 2017. As
this sector’s strong recoveries after its major late-summer
correction and that early-October mass stopping proved, traders’
sentiment could weather a couple of heavy punches. But three in a
row, four if that summer correction is counted, was too much to bear
resulting in a knockout.
So
gold-stock interest increasingly waned on this exceedingly-unlikely
and absurdly-unlucky series of improbable selling events. That was
evident in the relentlessly-declining GDX capital volume. By
late December at a major gold-stock low after GDX had cratered 39.4%
in just over 4 months, this key ETF’s capital volume had retreated
all the way back to bull-trading-range support. That was merely
$1.5b per day.
As
gold stocks rallied sharply out of those mid-December-2016 lows to
begin a major new upleg, traders’ interest should’ve recovered
rapidly given this sector’s market-leading performance last year.
But after a couple weeks of capital volume mean reverting higher, it
started slipping again. Even as the gold stocks kept rallying on
balance between mid-January and early-February 2017, GDX capital
volume collapsed.
Despite GDX soaring 34.6% in less than 2 months, which was far
better than other sectors buoyed by all the Trumphoria, capital
volume fell under its bull-market support. By late February it had
crumbled below $1.3b on a 21dma basis! Those were the worst
levels in a year, since the early weeks of gold stocks’ young
new bull when it still remained unproven. This week GDX capital
volume slumped back near $1.3b.
Investors and speculators simply aren’t interested in gold stocks.
This trend began in that crazy series of major selloffs since last
summer, which is understandable. But to see it intensify despite
a sharp gold-stock rally in early 2017 is unbelievable.
Normally capital volume surges to drive a young new upleg like we
saw in early 2016. But early this year capital volume continued to
wane despite a strong new sector upleg.
Again there’s little doubt the Trumphoria is to blame. As the stock
markets surged after the election on big-tax-cuts-soon hopes that
look increasingly Pollyannaish, gold demand cratered.
Stock investors
and gold-futures
speculators alike dumped gold at dizzying rates, hammering it
and its miners’ stocks way lower. With general stock markets
hitting record after record and drenched in euphoria, no one wanted
gold.
The
resulting anomalously-bearish psychology has created an incredible
opportunity. Sooner or later, these lofty stock markets will
inevitably roll over into their
long-overdue bear.
That will quickly shock traders out of their zombified
stocks-to-the-moon stupor. Once investors finally realize that
this time isn’t different despite the Trumphoria, gold
investment demand for prudent portfolio diversification will surge
again.
That
will entice back the missing-in-action gold-stock investors. As
capital floods back into this starved sector, gold-stock prices will
explode higher again. Always throughout all markets,
excessively-bearish sentiment is a very-bullish omen. It
indicates the sellers have already sold, leaving only buyers eager
to return on the right catalyst. Bearish sentiment both births and
fuels major new uplegs yielding massive gains.
And
gold stocks’ technicals very much back this bullish outlook based on
abnormally-bearish sentiment. This next chart shifts back to that
flagship HUI gold-stock index, which is
closely mirrored
by GDX. The gold stocks are on the verge of a few major
breakouts that will likely unleash serious buying. And that of
course will quickly turn sentiment around, attracting in more
traders which will accelerate this sector’s gains.
Because the HUI has far less component stocks than GDX, this sector
index’s moves are bigger than that ETF’s. In HUI terms the gold
stocks nearly tripled in the first half of last year with a
182.2% gain! After such a rousing performance for a new bull’s
first upleg, traders should love this wealth-multiplying sector.
But they largely gave up on it after that unfortunate series of
improbable selloffs late last year.
Those ultimately pummeled the HUI 42.5% lower in just over 4
months. Provocatively the gold stocks bottomed in mid-December the
day after the Fed’s second rate hike in 10.5 years. That simply
mirrored and amplified gold’s action, since gold’s price is the
overwhelmingly-dominant driver of gold-mining profits.
Unfortunately gold’s and thus gold-stocks’ fortunes are heavily
intertwined with Fed actions today.
Gold-futures speculators, who wield outsized influence on gold
prices, fervently believe higher interest rates spell doom for
gold. This notion is supremely irrational though, as history proves
gold thrives in
Fed-rate-hike cycles! This metal’s average gains during the
exact spans of all 11 Fed-rate-hike cycles between 1971 and late
2015 ran 26.9%! That’s an order of magnitude greater than the S&P
500’s 2.8%.
So
it shouldn’t be surprising the second upleg of gold stocks’ young
bull was born immediately after a hawkish Fed meeting in
mid-December. The gold stocks surged dramatically into early
February, albeit on abnormally-low volume. Then this sector
corrected sharply into early March. That correction was largely
driven by fears of an imminent Fed rate hike, as
futures-implied Fed-rate-hike odds were soaring.
The
Fed won’t risk surprising the markets with a rate hike and sparking
major selloffs in both bonds and stocks. So it won’t hike unless
federal-funds futures imply 70%+ odds of a hike at any given
meeting. Back in early February when the HUI hit upleg highs near
222, those odds for a mid-March hike were just 4%. But by the day
the HUI bottomed in early March, those same odds had skyrocketed to
a certain 91%!
While gold stocks’ 18.1% correction in a month was sharp, it wasn’t
unusual for this volatile sector. After that the gold stocks
drifted near lows into the Fed’s mid-March meeting. The Fed took
advantage of the high rate-hike expectations to indeed hike. That
finally confirmed a new rate-hike cycle is underway since
December 2015, the 12th since 1971. Despite that
irrationally-feared hike, gold and gold stocks surged.
The
Fed officials’ outlook for total rate hikes in 2017 stayed unchanged
at three, contrary to expectations among traders it would climb to
four. So gold blasted 1.9% higher on Fed-rate-hike day, which
motivated traders to aggressively buy gold stocks. That catapulted
the HUI up 7.8%, and confirmed a new uptrend channel for this bull’s
second upleg. Realize this entire gold-stock bull has happened
within a rate-hike cycle!
From
the day before its first rate hike in December 2015 to its third
rate hike in March 2017, the HUI had soared 80.6% higher in just 15
months! That was driven by a parallel 15.1% gold rally over that
same span. So this universal belief today that Fed rate hikes are
bad news for gold and gold stocks is totally baseless.
History, and even this current rate-hike cycle, prove the opposite.
So don’t fear Fed rate hikes!
Since the gold stocks were jumpstarted on Fed Day a few weeks ago,
they have mostly lingered around their key 50-day moving average.
That’s proven strong upper resistance for several weeks now. But
just this week, the gold stocks as represented by the HUI finally
managed to claw above this level. So it’s not going to take
much more rallying to drive a decisive 50dma breakout, which should
ignite lots more buying.
Love
or hate technical analysis, countless big traders including hedge
funds carefully watch technicals as part of a holistic trading
approach. So breakouts above key resistance levels usually lead to
new buying and strengthening upside momentum. This imminent 50dma
breakout is likely to easily carry the HUI up to its next major
resistance at its 200dma. That had halted the gold stocks’ advance
twice in February.
200-day moving averages are probably the most important in all of
technical analysis. Stocks or sectors above their 200dmas are often
considered to be in bulls, where buying begets more buying. So once
the HUI decisively breaks above its 200dma again, even bigger funds
are going to start chasing gold stocks. These professional traders
will remember this sector’s huge gains in 2016, and position for
more this year.
All
this will drive one more major breakout that will really help shift
gold-stock psychology back to bullish again. Within a month or two
after that 200dma breakout depending on how fast gold stocks rally,
they will drag the HUI’s 50dma back above its 200dma. That’s known
as a Golden Cross, which is one of the most powerful indicators in
technical analysis. Traders see them as signs major new bull
markets are underway.
So
in addition to suffering exceedingly-bearish sentiment today which
is actually super-bullish for this sector’s near-term outlook, the
gold stocks are on the verge of a series of major upside breakouts
on the technical front. These two factors alone support
aggressively buying gold stocks today ahead of this bull’s
second major upleg accelerating dramatically. But a couple more
factors really amplify this bullishness.
Gold
and gold stocks have long enjoyed
strong spring
rallies, heavy seasonal buying between roughly mid-March to
early June. The potency of these seasonal tailwinds is much greater
when sentiment and technicals are also bullish. This is really an
exceptional setup for a major spring rally this year. Last year,
the HUI blasted 34.9% higher in this spring-rally span! Similar
outsized gains this year wouldn’t be surprising.
The
gold miners remain strong fundamentally too, fully justifying
big fund buying in the coming months. In Q4’16, the
elite gold miners
of GDX reported average all-in sustaining costs of $875 per
ounce. That was far below prevailing average gold prices of $1218,
yielding healthy profits. In Q1’17, gold’s average price modestly
started mean reverting higher to $1220. So gold-mining
profitability is still strong and growing.
Thus
the sentimental, technical, seasonal, and fundamental gold-stock
stars are all aligned for a major acceleration of this young
bull’s second major upleg in the coming months. The smart investors
and speculators are already positioned or buying now, before
everyone else figures this out. By the time the gold stocks are
much higher and excitement is mounting again, you’ll be wishing you
had bought in way earlier.
While investors
and speculators alike can certainly play gold stocks’ accelerating
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 trounce the ETFs’, which are burdened by
over-diversification and underperforming gold stocks. A
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The key to this
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The
bottom line is gold stocks are on the verge of major technical
breakouts. The HUI is finally clawing over its 50dma after
challenging it for weeks, with its 200dma now in its sights. Both
breakouts should unleash big buying by technically-oriented funds.
That coupled with abnormally-bearish sentiment as evidenced by
very-low capital volume is exceptionally bullish for gold stocks
over the coming months.
Mix
in spring’s seasonal tailwinds and gold miners’ continuing strong
operating fundamentals, and we have real potential for one heck of a
bull-market upleg. Gold investment demand, and therefore capital
flowing into gold stocks, will only grow as Trumphoria inevitably
fades. As stock traders realize big tax cuts aren’t coming soon,
these euphoric stock markets will roll over rekindling interest in
gold and its miners. |