The
gold miners’ stocks have fallen deeply out of favor a few weeks into
their usual summer doldrums. Even contrarian traders have mostly
lost interest in this high-potential sector. Their apathy is
causing gold-stock prices to languish, creating the best seasonal
buying opportunity of the year. Buying low before later selling
high requires deploying capital when few are willing, when sectors
are unpopular.
With
gold stocks really unloved these days, they are mostly forgotten.
The hottest most-favored stocks are the artificial-intelligence
market darlings, led by mighty high-performance-chip manufacturer
NVIDIA. I’ve been a big fan of its awesome graphics cards for
decades, which have revolutionized gaming. My kids and I enjoy some
of our spare time gaming together on several computers powered by
great NVIDIA GPUs.
When
our schedules allow around competitive sports, travel, summer camps,
and my work, we are having a blast in the amazing new Diablo IV
game. I played the first three Diablos extensively, which came out
way back in 1997, 2000, and 2012. The advances in computer graphics
during that long span have been mind-boggling, thanks to NVIDIA’s
phenomenal work. I can’t even count all the NVIDIA GPUs we’ve
bought.
The
incredible computational power necessary for rendering complex
high-resolution graphics at high frame rates is also ideal for
artificial-intelligence applications. That has helped catapult NVDA
stock a staggering 290.2% higher in just 10.7 months! Was it more
prudent to buy this stock near $112 in mid-October when it was out
of favor, or today near $438 trading at
224x trailing-twelve-month earnings?
I’d
sure rather buy a stock before it quadruples than after! Once a
sector like AI soars high enough for long enough that everyone loves
it, the vast majority of its gains are already won. Chasing
high fliers’ upside momentum is a very-risky game, as they can
collapse anytime. Between late November 2021 to mid-October 2022,
NVDA stock cratered a gut-wrenching 66.4%! Buying high often leads
to selling low.
While gold stocks will never be anywhere near as popular as
mega-cap-tech stocks, they are deeply out of favor now similar to
NVIDIA last autumn. That’s rather ironic considering they’ve been
no slouches on the performance front. Between late September to
mid-April, the leading GDX gold-stock benchmark powered 63.9%
higher on a parallel 25.7% gold upleg! The S&P 500 index merely
climbed 13.4% in that span.
The
major gold stocks dominating that GDX ETF have certainly weakened
since, down 16.2% as of mid-week. They are ultimately leveraged
plays on gold, and its own strong upleg had a healthy 5.2% pullback
in that timeframe. The big-swing market trends like uplegs never
unfold in nice straight lines, they take two steps forward then
suffer one step back. Those countertrend selloffs are essential to
rebalance sentiment.
Traders’ collective feelings about any stocks are directly driven by
their recent performances. NVIDIA has rocketed parabolic over the
past month or so, fueling extreme greed. Traders have
stampeded into it to chase its scorching upside momentum. But too
much buying too fast soon burns itself out, attracting in all the
available capital willing to pour into any stock. Once that is
exhausted, the euphoric stock price quickly collapses.
NVDA’s overboughtness has exploded to crazy-extreme levels, it was
trading at an unbelievable 2.05x its 200-day moving average
mid-week! We start ratcheting up our trailing-stop-loss percentages
in volatile gold stocks to prepare for selloffs when GDX merely
exceeds 1.35x its 200dma. In mid-April at that latest gold-stock
upleg high, that overboughtness metric stayed under 1.30x. And that
has all been bled off since.
This
Tuesday GDX plunged in a big 4.0% down day after a shocking upside
surprise in US housing-starts data hit gold. Since that
unbelievable eleven-standard-deviation beat had Fed-hawkish
implications, gold futures were dumped by speculators. That pounded
GDX back down to under 1.03x its 200dma, which was the least
overbought gold stocks as a sector have been since mid-March
when they were last out of favor.
That
naturally turned out to be a good buying opportunity, as GDX shot
about a third higher over the next month or so! The current
major seasonal lows in gold stocks are looking like another good
one. So we are starting to refill our newsletter trading books
after some of our trades were stopped out with some solid-to-great
gains in recent weeks. Gold stocks’ typical summer-doldrums
seasonal lull should be passing.
This
chart is updated from my latest gold and
gold-stocks
summer-seasonality-research essay from a couple weeks ago. It
reveals how the major gold stocks performed in perfectly-comparable
indexed terms in all modern gold-bull-year summers including 2001 to
2012 and 2016 to 2023. Because GDX isn’t old enough for this
multi-decade seasonality, the classic HUI gold-stock index which is
very similar is used instead.
While most traders have forgotten about gold stocks with the AI
bubble led by NVIDIA overpowering most of the market mindshare, some
contrarians are still paying attention. And they seem fairly
depressed as GDX’s latest pullback lingers on. But there’s nothing
unusual about the major gold stocks’ behavior so far in June, their
peak-summer-doldrums month. The red line is the indexed seasonal
average before 2023.
The
apathy and bearishness plaguing gold stocks today are blinding
traders to this good seasonal buying opportunity. On average in
these modern-gold-bull-year summers, the major gold stocks bottomed
down 1.8% in mid-June. Mid-week at their new pullback low, GDX was
only down a similar 2.8% summer-to-date. That’s right in
line with precedent, and certainly nowhere near bearish enough for
traders to ostrich over.
And
interestingly the major gold stocks spent most of June tracking
above their seasonal average, doing better than usual! It wasn’t
until this week’s plunge that they fell modestly below. The HUI’s
and GDX’s general summer trading range runs between 90% to 110% of
May’s final close. Even after Tuesday’s big plunge, that metric
still clocked in at 96.5%. So the recent gold-stock selling is
typical summer-doldrums stuff.
Market summers are June, July, and August proper, the vacation
season with kids out of school so traders can travel and disengage
from markets. That’s a key driver of the apathy this time of year
fueling gold’s summer doldrums. During these three months from 2001
to 2012 and 2016 to 2022, the major gold stocks averaged 0.6%, 0.7%,
and nice 2.7% gains. The summer doldrums are actually more the
June doldrums.
Gold
stocks typically bottom in mid-June, then grind sideways-to-higher
into mid-July. Then gold’s powerful autumn rally starts gathering
steam, accelerating gold-stock upside in August. There’s no reason
not to expect this long-established seasonal pattern to persist in
coming months. On the contrary, gold stocks have much better upside
potential than usual this summer. They could easily surge to
outsized gains.
Leveraging gold’s own upleg resuming is the main reason. Major gold
uplegs are driven higher by three sequential stages of
progressively-larger buying building on each other. Stage one is
gold-futures short covering, which is followed by stage-two
gold-futures long buying, then ultimately stage-three investment
buying. While this upleg’s initial short covering remains
exhausted, speculators have vast room to add longs.
I
analyzed this in depth in another essay last week on
gold bottoming
despite the Fed. On average over the past year, total spec
longs outnumbered shorts by 2.3x making them proportionally more
important. Today’s strong gold upleg has powered an impressive
26.3% higher at best so far in 7.2 months. It was born in late
September when spec longs only ran 247.5k contracts. They’ve now
retreated back to just 276.3k.
In
recent years the upper resistance zone of spec longs where gold
uplegs topped and rolled over into corrections ran near 413k
contracts. The trading range between there and this upleg’s birth
is a massive 165.5k. But thanks to gold’s recent pullback driven by
gold-futures selling, total spec longs are now just 17% up into that
trading range. That implies these traders
have fully 5/6ths of their stage-two long buying left!
That
equates to enormous gold-equivalent buying potential of 425.3 metric
tons! And the much-bigger and more-important stage-three investment
buying has only
just started. The best high-resolution proxy for global gold
investment demand is the combined holdings of the globally-dominant
American GLD and IAU gold ETFs. They’ve barely budged so far during
gold’s current upleg lifespan since late September!
At
best between mid-March to late May, these holdings have merely
climbed 4.3% or 58.2t. Investors have remained missing in action,
partially because they’ve been distracted by this extreme AI bubble
NVIDIA’s stock is leading. Gold’s last two major uplegs comparable
to today’s both crested in 2020, at huge 42.7% and 40.0% gains.
Big investment buying fueling them drove GLD+IAU holdings
dramatically higher.
They
soared a massive 30.4% or 314.2t during the first, then an
even-larger 35.3% or 460.5t in the second! So at best only about
1/6th of this gold upleg’s potential stage-three investment
buying has happened yet. There’s a good chance investors will
return during gold’s coming autumn rally, as they love chasing
upside momentum. Their buying will amplify gains initially fueled
by gold-futures speculators re-adding longs.
Despite this
raging inflation unleashed by the Fed more than doubling the
US monetary base after March 2020’s pandemic-lockdown stock
panic, gold’s performance has lagged over this past year. The
primary reason was the Fed’s ultra-hawkish extreme rate-hike cycle,
an incredible 500 basis points in just 13.6 months! But with top
Fed officials forecasting maybe another 50bp at most, that hiking
cycle is mostly over.
With
the Fed running out of room to keep hiking, hawkish Fedspeak will
wane. That will further weaken the US dollar, motivating
speculators to return to gold futures. The major gold stocks of GDX
tend to amplify material gold gains by 2x to 3x. To achieve another
40% upleg off late-September’s deep stock-panic-grade low, gold
would have to power up near $2,275. That’s another 18% higher from
this week’s low.
That
could easily drive additional major-gold-stock gains exceeding
50% from here, which is well worth fighting the herd to buy
these seasonal lows! And the smaller fundamentally-superior
mid-tier and
junior gold miners we’ve long specialized in should fare much
better. Those are the trades we are starting to reload in our
newsletters, getting fully deployed for this sector’s next surge
likely during coming months.
Gold’s potential upside could be boosted whenever this AI stock
bubble pops, dragging euphoric stock markets sharply lower. Then
investors will remember the timeless wisdom of prudently
diversifying their mega-cap-tech-heavy stock portfolios. Gold
stocks’ coming upside should be accelerated by what are likely to
prove excellent Q2’23 operational and financial results they
will report from mid-July to mid-August.
Gold-mining earnings are generally the difference between prevailing
gold prices and the all-in sustaining costs for producing that gold.
In Q2’22, gold averaged $1,872 on close. So far in this
almost-finished Q2’23, gold has averaged a record $1,986
despite its latest pullback! With average gold prices surging a
hefty 6.1% year-over-year, gold-mining revenues should climb
accordingly. That alone will really boost profits.
But
the major gold miners dominating GDX are also largely forecasting
higher outputs and lower costs as 2023 marches on. I analyzed
this in my recent essay on
the Q1’23 results
reported by GDX’s 25 largest component stocks. In Q2’22 their
average AISCs ran $1,281 per ounce. Based on their 2023 guidances,
it wouldn’t surprise me if they retreat 5% YoY this quarter. But
let’s be conservative and assume just 3%.
That
would yield major-gold-miner AISCs around $1,243. Subtract that
from $1,986 average gold prices and sector profits are tracking
near $743 per ounce. That would make for excellent 26% YoY unit
profits growth, really ramping bottom-line earnings and leaving
gold-stock valuations even cheaper! Plenty of great gold miners are
trading at sub-20 TTM P/E ratios, an order of magnitude cheaper than
NVIDIA’s 224x.
So
it sure looks like the largely-forgotten gold stocks have drifted
down to a good seasonal-low buying opportunity. Between gold’s
usual summer-doldrums apathy and the distractions of this latest AI
stock-market bubble, most traders aren’t paying attention. So like
NVIDIA back in October at just a quarter of its current levels,
they’ll miss buying now-unpopular gold stocks at prices way under
where they are heading.
Buying low before later selling high requires deploying capital in
unpopular sectors when we really don’t want to. The more out
of favor any sector, the worse it feels to buy in, the greater the
odds it is in the process of bottoming soon before a major rally.
Gold stocks certainly look that way today. Contrarians with the
experience and mental toughness to fight the bearish herd and deploy
capital should be richly rewarded.
Successful trading demands always staying informed on markets, to
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The
bottom line is gold stocks are looking like a good seasonal buy.
After suffering a pullback with gold since early May, they are
really out of favor today. Apathy and bearishness abound in this
peak-summer-doldrums month, despite gold-stock prices tracking June
seasonal norms. These latest strong gold and gold-stock uplegs are
likely to resume with a vengeance in coming months, powering up to
big new gains.
The
gold stocks will leverage gold like usual, which has massive
gold-futures long buying and investment buying remaining. The Fed
running out of room to keep hiking rates should ignite the former,
which will drive gold high enough for long enough to entice
investors to return. The gold miners’ fundamentals are also really
improving with higher prevailing gold prices and lower costs,
helping make for a very-bullish setup. |