The
get-no-respect gold-stock sector is in a strong young bull market.
Past gold-stock bulls have grown to utterly-massive proportions
before giving up their ghosts, greatly multiplying the wealth of
contrarian investors and speculators. Today’s gold-stock bull is
very likely to grow vastly larger before fully running its course.
Fundamental gold-stock-bull upside targets reveal the lion’s share
of gains are still yet to come.
A
little over a year ago in January 2016, a monstrous gold-stock bear
finally climaxed. The gold miners’ stocks fell to
fundamentally-absurd 13.5-year secular lows as measured
by their leading index, the HUI NYSE Arca Gold BUGS Index. Out of
those dark depths of despair, a new gold-stock bull was stealthily
born. And it soon started flexing its muscle, rocketing 182.2%
higher in just 6.5 months by early August!
Nearly tripling your capital in a half-year is one heck of a ride,
leaving gold stocks
really overbought.
So they naturally corrected. But that selling was soon greatly
exacerbated by a series of low-probability events including a
gold-futures-driven
mass stopping
and the post-election Trumphoria stock rally
hammering gold.
So the HUI’s normal and healthy correction ballooned into a huge
42.5% rout over 4.4 months.
That
understandably fueled excessively-bearish psychology that still
persists. But this extreme sector pessimism is really distorting
the big picture, blinding traders to vast opportunities. Despite
that outsized correction, the HUI still blasted 64.0% higher in
2016! That’s certainly the best-performing sector in all the stock
markets. And the gold stocks are no slouch in 2017 either, up 17.0%
year-to-date as of this week.
In
less than 15 months, the gold-mining stocks as measured by the HUI
have soared 111.8% higher! In any other sector, such huge gains
would be widely celebrated. But not in gold stocks, which remain
too contrarian to warrant a second glance from Wall Street. Yet
despite this young bull’s already-impressive magnitude, it still
remains a baby in gold-stock-bull terms. A doubling for gold stocks
is just getting started.
The
gold stocks’ last secular bull ran between November 2000 and
September 2011. During that 10.8-year span, the HUI skyrocketed an
epic 1664.4% higher! While gold-stock investors enjoyed
multiplying their capital by 17.6x, the leading stock-market
benchmark S&P 500 slipped 14.2% over that exact span. And the gold
stocks leveraged gold’s 602.9% bull-market gain during that
timeframe by an excellent 2.8x.
So a
near-tripling or doubling in gold stocks so far in their young new
bull is nothing. This bull is still a calf, just learning to walk.
It will continue to grow and strengthen, eventually maturing into
yet another raging monster. Only the future will reveal how large
today’s gold-stock bull will ultimately get, but its gains so far
remain tiny. Still, some gold-stock-bull upside targets illuminate
the great potential from here.
Speculating on upside targets is fraught with peril. As no mere
mortal can predict the future, no forecast will ever prove precisely
correct. So don’t make the mistake of reading too much into bull
upside targets. Their purpose isn’t to luckily guess an uncertain
future outcome, but to help investors and speculators understand
that this gold-stock bull’s best gains are still yet to come.
It’s not too late to amass large positions.
While many analysts use pure technical analysis to extrapolate
trends, a stronger case for the coming gold-stock upside can be made
fundamentally. The gold miners’ stocks are heading much
higher not because of mere trend lines on price charts, but because
higher gold prices are going to fuel explosive profits growth.
Gold-mining earnings amplify gold-price gains, and this core
relationship is way beyond linear.
A
month ago, I looked at
the actual Q4’16
results of the elite gold miners of the leading GDX VanEck
Vectors Gold Miners ETF. Since its birth nearly 11 years ago, GDX
has grown into the world’s dominant gold-stock trading vehicle. As
GDX’s component list contains the same major gold miners as the HUI,
this ETF’s price action
closely mirrors
that older index’s. GDX and the HUI are functionally
interchangeable.
Since the gold miners haven’t yet reported their Q1’17 results, Q4’s
are the newest available. During that quarter, the elite major gold
miners of GDX averaged all-in sustaining costs of $875 per
ounce. This AISC measure reveals true operating profitability,
showing the per-ounce costs for miners to maintain and replenish
operations at current levels. This real-world average AISC can
illustrate profits leverage to gold.
In
just-completed Q1, gold averaged $1220 per ounce. That means the
major gold miners likely earned profits of $345 per ounce based on
$875 AISC. Gold-mining costs are essentially fixed, mostly
locked in during mine-planning stages when engineers decide which
ore bodies to dig up and how to extract the gold from that rock. So
higher gold prices generally don’t lead to higher operating costs,
they are pure profit.
If
gold rallies 10% to $1342, flat AISC of $875 imply profits of $467
per ounce. That’s big 35% growth on a mere 10% gold rally. If gold
climbs 25% to $1525, gold-mining profits would soar 88% to $650 per
ounce! Gold stocks are so attractive and fantastically-lucrative in
rising-gold-price environments mainly because their core fundamental
foundation of profitability soars so dramatically. This justifies
big stock-price gains.
This
ironclad relationship between gold-mining profitability and gold
prices can be modeled in depth for individual gold stocks, and then
combined for complex sector models. But similar results are yielded
by a simple approximation. The HUI/Gold Ratio looks at the
relationship between gold-stock price levels and gold prices over
time. It reveals when gold stocks are overvalued or undervalued
relative to gold.
While there are many ways to project gold-stock-bull upside targets,
this HGR approach is my favorite. It’s easy to execute, without
extensive individual-miner historical data to crunch. It’s easy to
understand, with no complex math or accounting knowledge required.
And most important of all, it is fundamentally-based. Gold
price levels drive gold-mining earnings, and those profits
ultimately drive gold-stock price levels.
Like
any indicator, absolute HGR levels don’t mean much in isolation.
The HGR’s value is derived from its current position relative to
historical context. And as this blue line shows, the HGR remains
really low today. Over this chart’s long secular 14.3-year
span, the HGR has only been lower than today’s levels for a few
months over one year. Only 2015 and surrounding months saw gold
stocks lower relative to gold.
That
brutal gold-stock bear that ultimately birthed today’s young bull
was climaxing in late 2015. Back in late September that year, the
HGR fell to an extreme new all-time low of 0.093x. That exact-same
level was briefly seen again in January 2016, the very day gold
stocks fell to a 13.5-year secular low per the HUI. Gold stocks
had never been cheaper compared to prevailing gold prices, which
drive their profits!
That
very week gold stocks decisively bottomed, I used this very chart to
argue a major new gold-stock bull was imminent. Those gold-stock
prices were truly
fundamentally-absurd compared to where gold was trading, so a
mean reversion higher from those extreme gold-stock lows was a
certainty. And of course that’s exactly what’s happened since,
this young gold-stock bull beginning that inevitable normalization.
At
best in early August 2016 when gold stocks last peaked, the HUI/Gold
Ratio had recovered to 0.209x. And at worst in mid-December, it
collapsed back to 0.145x in that anomalous massive correction.
Today the HGR is a little higher at 0.166x. But despite this young
bull’s newest upleg starting to gather steam, gold stocks remain
extremely undervalued relative to gold by all historical standards.
This disconnect can’t last.
One
of the key questions for defining gold-stock-bull upside targets is
what a normal HGR level is. Over the entire span of this chart, the
HGR average is 0.350x. Before the first stock-market panic in just
over a century in late 2008, the HGR averaged 0.511x for a 5-year
secular span. After that panic’s extreme anomalies passed, the HGR
averaged 0.346x in the relatively-normal post-panic years between
2009 and 2012.
So
regardless of what secular span through which the HGR is considered,
it remains exceedingly low today. Gold stocks generally
meander around some fair-value level relative to gold prices, where
their profitability fundamentally supports their stock prices. But
gold-stock prices overshoot this mean when investors get greedy and
bid them too high, and then undershoot it when fear reigns and
investors flee.
Visualize a straight line as the fundamentally-righteous HGR. The
actual HGR is like a sine wave that oscillates around that, getting
too high or too low to be sustainable late in bulls or bears. So
once an extreme in either direction is hit, a subsequent mean
reversion back to normal is guaranteed. And those don’t just
stop at the average, but overshoot proportionally in the opposite
direction from the preceding extreme.
A
strong case can be made for the post-panic-average HGR of 0.346x
between 2009 to 2012 being fully sustainable over the long term.
Those years occurred between that wildly-anomalous stock panic in
late 2008 and also-extreme gold-market distortions starting in early
2013. That’s when the Fed ramped its unprecedented open-ended
third quantitative-easing campaign to full speed,
levitating the
stock markets.
Since gold is a unique asset that tends to move counter to stocks,
investment demand wanes if stock complacency is high. Every time
the stock markets looked to be rolling over into a healthy selloff
from late 2012 to late 2014, top Fed officials rushed to assure
traders that they were ready to expand the QE3 bond monetizations if
necessary. That looked like a Fed Put on the stock markets, so dips
were quickly bought.
As
the stock markets surged higher from 2013 to 2015 in unnatural calm
generated by the Fed,
investors fled
gold at dizzying rates. Gold is effectively the anti-stock
trade, the ultimate portfolio diversifier. So when stock
markets apparently do nothing but rally on balance indefinitely,
investors feel no need to offset some of their heavy stock exposure
with gold. Thus gold spiraled lower, dragging the gold stocks down.
So
2009 to 2012 was really the last time the markets functioned
reasonably normally before the extreme and radically-unprecedented
Fed distortions since. There is no doubt the HGR will eventually
return to its 0.346x average levels from that span in its current
bull. At $1275 gold, that implies a HUI level way up at 441.
That’s a whopping 107% higher from this week’s levels. Think about
this incredible revelation.
Even
if gold does nothing, gold stocks remain so undervalued relative to
their profits driven by prevailing gold prices that they still need
to more than double from here! There is no other sector in
all the stock markets with such amazing upside potential, with
pretty much everything else
greatly
overvalued from the post-election Trumphoria stock surge. The
near-term upside potential in gold stocks is unrivaled anywhere.
But
remember market mean reversions out of major extremes never just
stop at averages. Instead they first fully mean revert and then
that resulting momentum keeps carrying them on to proportional
overshoots. With that post-panic average of 0.346x and the
all-time-low HGR last seen in January 2016 of 0.093x, that shows a
massive 0.253x downside anomaly. So a temporary overshoot could hit
mean plus 0.253x.
That
yields a mean-reversion-overshoot HGR target of 0.599x. That
wouldn’t last long and would likely mark the peak of a secular bull,
when gold-stock psychology waxed exceedingly greedy nearing mania
territory. Yet 0.599x isn’t unprecedented. Such levels were hit
multiple times over several different years in the mid-2000s before
2008’s stock panic knocked the markets way off kilter, where they’ve
been stuck since.
At
today’s $1275 gold prices and a full 0.599x mean-reversion
overshoot, that implies a gold-stock-bull upside target of 764 in
HUI terms. That’s another 258% higher from today’s levels,
incredibly enticing gains. And even that would still make for a
relatively-small total gold-stock bull of 658%, merely 4/10ths the
size of that last secular gold-stock bull that peaked in mid-2011.
Gold-stock upside from here is vast.
But
gold-stock bulls can’t grow in a vacuum, they need rising gold
prices to fuel them. Not only does higher gold drive
much-higher profitability which fundamentally supports much-higher
stock prices, but higher gold is necessary to shift gold-stock
sentiment back to bullish. Investors aren’t interested in owning
gold stocks until gold has rallied far enough for long enough to
convince them its own bull is sustainable.
Gold
too is in a new bull market, born in mid-December 2015 after the
Fed’s first rate
hike in nearly a decade. Gold fell to a deep 6.1-year
secular low the very next day, climaxing a major bear. Then
over the next 6.7 months leading into early July 2016, gold powered
29.9% higher. That easily exceeded the 20%+ threshold necessary to
declare a new bull. But 30% is nothing for a gold bull, it too
remains a mere calf.
Gold’s last secular bull in the 10.4 years between April 2001 and
August 2011 soared 638.2% higher. It’s hard to imagine a
gold bull seeing a gain of less than 100% no matter what, which
would ultimately take gold to $2102. That’s not much higher than
gold’s $1894 peak in mid-2011. We’ll get to that, but let’s first
consider far-more-conservative gold levels. In 2012, the last year
before full QE3, gold averaged $1669.
To
get back there would require a total gold bull of just 59%,
laughably small by historical standards. Yet $1669 gold at that
post-panic-average 0.346x HGR implies a HUI at 577 or 171% higher
from here. And at the proportional-overshoot bull-topping 0.599x
level, that yields a magnificently-round gold-stock-bull upside
target of 1000 in HUI terms! The gold stocks would need to
rally another 369% from this week’s levels.
And
HUI 1000 really isn’t much of a stretch at all. That would make for
a total secular bull of 893% from January 2016’s extreme secular
low. That is a little over half the size of gold stocks’
last bull during the 2000s! Investors and speculators alike need to
realize that enormous life-changing gold-stock gains are likely even
with quite-anemic gold and gold-stock bulls by historical
standards. Exceptional bulls aren’t necessary.
Finally consider gold’s bull merely ultimately doubling to $2102,
which would make for one of the worst gold bulls ever. At that
post-panic-average HGR, the HUI’s bull upside target is 727 which is
241% over this week’s levels. And at that proportional-overshoot
HGR, this gold-stock-bull upside target rockets to an extraordinary
1259! That’s another 490% above current levels. But you don’t have
to get that wild and crazy.
To
see gold stocks double again from here is utterly trivial,
nothing by historical standards. And if you think another doubling
is probable, you should be heavily invested in this forgotten
contrarian sector. Sadly even most contrarians continue to drag
their feet. By the time gold stocks get exciting enough to garner
real enthusiasm, the easy gains will have already been won. You
want to buy before most others.
As
January 2017 dawned, I wrote an essay explaining why
gold stocks
would shine again this year. I used this same HGR chart to
illustrate why. Then in early March as gold stocks corrected hard
to new-year lows, I pointed out their
usual major
spring rally would be starting in a couple weeks. That was a
great time to buy low, so we aggressively bought and recommended
superior gold-mining stocks in our newsletters.
Just
last week, I explained how
major gold-stock
breakouts were nearing due to this sector’s sentiment and
technicals. They indeed happened this week. If you’ve been
ignoring this gold-stock bull’s newest upleg, or procrastinating, or
too scared to buy, you’re really missing out! The markets will
never give you an engraved invitation. You have to take the
initiative to invest before trends mature and big gains are
already won.
The
gold stocks are really heating up, so it’s imperative to start
following this sector now. It wouldn’t surprise me one bit to see
the HUI’s 2017 gains approach or exceed its big 64% surge last
year. The earlier you get informed and get deployed, the greater
your odds of enjoying wealth-multiplying gains in this sector that
can give your family a brighter future. You gotta be in it to win
it, fortune favors the bold.
A
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The
bottom line is this gold-stock bull’s upside targets remain
radically higher than today’s levels. Even if these young gold and
gold-stock bulls prove exceptionally small and anemic by historical
standards, the gold-mining stocks are still heading hundreds of
percent higher from here. Another double in this sector is all but
certain, something that can’t be said for any other sector in these
overvalued stock markets.
As
gold itself continues mean reverting higher in its own bull,
investor interest in owning gold stocks will only grow. As
gold-mining profits amplify gold’s gains, much-higher gold-stock
prices are fully justified fundamentally. And as usual in any bull
market, the earlier investors buy in the bigger their ultimate gains
will prove. Both this young gold-stock bull and its newest upleg
are the real deal, any doubts are past. |