The
gold miners’ stocks are lagging gold’s strong young upleg, their
gains falling behind. Their striking performance gap is undermining
gold-stock sentiment, leaving traders even warier of this sector.
While definitely vexing, this anomaly has only arisen over the past
couple weeks. Gold stocks’ precedent during past major gold uplegs
implies this will unwind soon, with miners surging fast to catch up
with their metal.
Gold
has been blasting higher on balance for a month now, confirming a
new major upleg is underway. While the sparking catalyst was
certainly geopolitical, gold’s upside since has been fueled by the
normal sequential buying pattern driving all major uplegs. That’s
stage-one gold-futures short-covering buying, then larger stage-two
gold-futures long buying, then ultimately vast stage-three
investment buying returning.
These growing capital-inflow stages are telescoping, ignited by
preceding stages. Those drive gold high enough for long enough to
convince more traders to return, and their buying accelerates gold
uplegs. Gold’s sharp spike gains so far have mostly been driven by
gold-futures short covering, but long buying has just started
ramping up. I wrote a whole essay last week analyzing
gold’s new major
upleg in depth.
The
gold miners’ stocks amplify gold’s gains due to their inherent
profits leverage. Their mining costs are largely fixed, so
higher gold prices directly translate into higher earnings. This
sector’s benchmark is the GDX gold-stock ETF, which includes the
world’s biggest gold miners. While their Q3 earnings season is
underway, it won’t be finished until mid-November. So Q2’23 results
are still the most current we have now.
The
top 25 GDX gold
miners averaged all-in sustaining costs of $1,380 per ounce in
Q2. At $1,820 gold in early October as the last correction
bottomed, that yields $440 in unit profits. But at late October’s
$2,005, those soar 42.0% to $625 per ounce! That is 4.1x
gold’s 10.2% gains at best so far in this young upleg. Higher gold
prices drive
fatter mining profits, so gold stocks are bid higher reflecting
better fundamentals.
Despite this current real-world example, GDX’s major gold stocks
tend to amplify material gold moves by 2x to 3x. I’ve done
extensive research on gold-stock performance for decades, and that
range is where it usually shakes out. Gold’s last major upleg
peaked up 26.3% in early May, and GDX powered up 63.2% in that exact
7.2-month span. That made for 2.4x upside leverage, right in line
with historical precedent.
Candidly if gold stocks can’t significantly leverage gold, they
aren’t worth owning! Gold mining adds all kinds of risks on top of
the underlying commodity’s price trends. Those run the gamut from
geological to operational to geopolitical. So much can go wrong in
gold mining, and traders need to be compensated for those additional
risks. If gold stocks only pace and match gold’s gains, sticking to
gold is way safer for traders.
GDX’s upside leverage to gold was normal in the first couple
weeks of this new upleg. Starting just before the Islamic
Resistance Movement invaded Israel to slaughter and kidnap Jews,
gold blasted 5.6% higher over eight trading days. GDX shot up 12.2%
in that span, for 2.2x leverage. But the major gold stocks had
bottomed one day before gold. Include that, and GDX’s
nine-trading-day surge grows to 14.0% for 2.5x.
That’s perfectly normal, especially early in uplegs. Naturally herd
sentiment keeps improving the longer they run, with greed mounting
as gains grow. So gold-stock outperformance tends to peak later
in major gold uplegs when universal bullishness reigns. The major
gold miners are more likely to double gold’s gains early on while
bearishness and skepticism linger, then gradually improve to triple
later on as traders believe.
Yet
from mid-October to gold’s latest interim high of $2,005 last
Friday, gold stocks looked terrible. The yellow metal surged
another 4.3% in that span as Israel prepared to invade Gaza to root
out the Hamas terrorists and rescue their hostages. Yet
unbelievably GDX slumped 1.1% in that span, leaving miserable
-0.3x leverage in its wake! Traders would’ve been far better off in
gold over those next eight trading days.
That
underperformance was so bad that it crushed GDX’s leverage ratio for
this entire young gold upleg. Again gold was up 10.2% at best so
far over several weeks, but GDX’s gains even starting at its
day-earlier low were only 12.7%. That 1.2x leverage has been way
too low, making gold stocks not worth owning in that span. Their
young parallel upleg with gold has proven very underwhelming
technically too.
When
gold started mean reverting sharply higher on that massive terrorist
attack, GDX quickly recovered to regain its uptrend’s lower
support. But major gold stocks slumped since, failing at that key
technical line. GDX remains well under its important 200-day moving
average, while gold has blasted way above its own. At best recently
GDX recovered to just 0.966x its 200dma, while gold shot up to
1.038x its 200dma.
There’s nothing good to say about this latest very-disappointing
gold-stock action. With the miners failing to mirror and amplify
the metal’s gains, bearish sentiment has soared. Incredibly the
gold-stock apathy and skepticism today may rival that of early
October before gold surged! Traders are now faced with two pressing
questions, why is this happening and how long is it likely to last?
I’ve sure been wrestling with them.
Surprisingly the root cause of gold stocks’ underperformance may be
the nature of gold’s young upleg. Normally major gold uplegs are
birthed out of major lows by some market-based catalyst, like
surprises in major US economic data that are Fed-dovish. Examples
are cooler-than-expected headline inflation or worse-than-expected
US jobs growth, leaving the Fed less likely to hike rates which
drives US dollar selling.
The
gold-futures speculators look to the dollar’s fortunes for their
primary trading cues, and then do the opposite. Both gold’s
enormous 20.9% selloff in mid-2022 and latest 11.3% correction in
mid-2023 were driven by
massive US Dollar
Index rallies. Those in turn were fueled by aggressive Fed rate
hikes and prospects for higher rates for longer. Had this latest
gold upleg started normally, it would be more accepted.
Overshadowed by the Middle East crisis, gold’s upleg technically
started the day before Hamas shocked the world with its
barbarism. On Friday October 6th, gold actually bounced a sizable
0.5% despite a Fed-hawkish way-better-than-expected monthly US jobs
report that morning. Wall Street was looking for 170k jobs added in
September, but the Biden Administration claimed the actual doubled
that at a huge +336k!
Gold
should’ve plunged on that kind of beat, but speculators’
gold-futures positioning was already so extremely bearish that their
capital firepower available for selling was exhausted. Total spec
shorts were nearing major secular highs, while total spec longs
threatened major secular lows. Those were the very conditions
that birthed past major gold uplegs, so a new one was overdue
even if Israel hadn’t exploded.
The
next morning the Islamic atrocities against the Jews shocked the
world, and gold blasted 1.8% higher on Monday the 9th. So what
would’ve been a normal gold upleg was turned into a geopolitical
spike. That was further confirmed on Friday the 13th, when gold
rocketed up 3.2% on indications Israel would soon invade Gaza to
destroy Hamas. Geopolitical spikes can be fragile, dependent on
newsflow that fades.
The
last big one came in late February and early March 2022 after Russia
invaded Ukraine. In just eight trading days, gold blasted 7.9%
higher to $2,051! But like many geopolitical spikes, gold
symmetrically collapsed as traders came to accept that war as the
new norm. Fully 9/10ths of those gains were lost in just five
trading days. I’ve never been a fan of gold geopolitical spikes
since they are often quickly reversed.
But
this Israel-Gaza one has a far-superior setup than that
Russia-Ukraine one, due to radically-different spec gold-futures
positioning. As
discussed in my
essay last week, spec longs generally trade within a range
between 240k to 413k contracts. The lower they are, the more room
specs have to keep buying so the more bullish gold looks. In late
February 2022, total spec longs at 399.2k were challenging
resistance.
So
speculators didn’t have much more room to keep adding gold futures
no matter what happened. They surged to 420.6k by early March, and
specs’ capital firepower was spent. Gold’s geopolitical spike then
fizzled because it happened near the end of a
well-established gold upleg. Had this Israel-Gaza one erupted back
in early May 2023 as gold’s last major upleg topped, it would be
just as bearish for gold’s outlook.
Spec
shorts have their own range between about 95k to 175k contracts, and
the higher they are the more bullish gold’s near-term outlook. Once
specs have shorted about all the futures they have the capacity to
do, symmetrical covering buying soon comes to normalize their
bearish bets. Back when Russia invaded Ukraine, total spec shorts
were running 129.5k. Translating these into comparable percentages
is useful.
In
late February 2022, total spec shorts were 57% up into their secular
range while total spec longs were 92% up into their own. The
most-bullish-possible near-term setup for gold is 100% shorts and
0% longs, indicating selling exhaustion necessitating big
mean-reversion buying. It’s also important to realize that spec
longs outnumber shorts by about 2.5x on average, making them
proportionally more important for gold.
Fast-forward to early October 2023, and specs’ gold-futures
positioning couldn’t have been more different just after Hamas
invaded Israel. Total spec shorts were way up at 174.4k contracts,
while total spec longs were way down at 264.8k. In trading-range
terms, that was a whopping 99% shorts and only 14% longs! So
specs had vast room for both stage-one gold-futures short covering
and stage-two long buying.
When
Russia invaded Ukraine, specs had room to do 57% of likely short
covering and just 8% of long buying. When Hamas invaded Israel,
specs had room to do a massive 99% of probable short covering and
86% of the much-larger long buying! Birthed in
radically-different spec-gold-futures-positioning and
gold-upleg-correction-cycle environments, these two gold
geopolitical spikes are very different beasts.
That
earlier spike collapsed as that little bit of remaining gold-futures
buying was quickly spent by early March 2022. But today specs have
such huge capital firepower available for buying that it can be
sustained for months. Just after Hamas invaded Israel, specs
had room to buy a stupendous 227.6k gold-futures contracts of both
longs and shorts! Per the latest-available data, 152.1k remain
despite gold surging.
So
fully 2/3rds of likely gold-futures mean-reversion
normalization buying remains even after gold shot up 10.2% in
several weeks! That argues that this gold upleg is the real deal,
just starting to power higher despite its geopolitical-shock birth.
And if gold continues climbing on balance, bullishness will mount
until gold stocks surge and catch up with their metal. GDX’s upside
leverage should near the 3x high side of its range.
In
addition to geopolitical-spike skepticism, the sharp selloff in
the US stock markets in the last couple weeks also contributed
to gold stocks’ dreadful performance. While miners usually follow
gold, they are also stocks trading in the stock markets. So
particularly-intense stock-market sentiment can bully them around,
temporarily decoupling them from gold. Gold stocks can get sucked
into material stock-market selloffs.
During this young gold upleg’s first eight trading days where gold
and GDX surged 5.6% and 12.2%, the flagship US S&P 500 stock index
climbed 2.7%. So gold stocks didn’t face any general-stock selling
pressure. But during the next eight trading days where gold rallied
another 4.3% but GDX shed 1.1%, the S&P 500 plunged a serious
5.8%! That big selloff into correction territory really tainted
sentiment for all stocks.
In
my line of work as a speculator and financial-newsletter guy, I’m
blessed to watch and study markets all day everyday. On material
S&P 500 down days, gold stocks tend to split the difference between
gold and the stock markets. October 18th is a recent example, a day
with minimal geopolitical news. Gold still surged 1.4% on
gold-futures momentum buying, while the S&P 500 fell 1.3% on soaring
US Treasury yields.
Ideally GDX would’ve amplified gold’s big gains by 2x to 3x, surging
2.8% to 4.2% that day. Instead the general-stock bearishness
dragged down gold stocks, and GDX slipped 0.3% roughly halfway
between where gold and stock markets ended up. While major gold
stocks tend to amplify gold uplegs by 2x to 3x across their entire
spans, within them that leverage is lumpy. And big stock-market
selloffs can retard it.
Gold
stocks have lagged gold in recent weeks because of
gold-geopolitical-spike skepticism and plunging stock markets
sucking them in. The former is unfounded due to speculators’
exceedingly-bearish gold-futures positioning when Hamas invaded
Israel. And the latter should be over for now with the S&P 500
bouncing sharply within its correction downtrend. So odds are gold
stocks will soon resume leveraging gold.
As
that huge gold-futures mean-reversion buying continues on normal
market news like surprises in key US economic reports, gold will
power higher even as Israel fades from financial headlines. That
will fuel mounting bullishness, which will lead to parallel
gold-stock buying. The longer and higher GDX rallies, the more
traders will want to deploy in high-potential gold stocks. They
will quickly catch up with gold’s gains.
And
again as analyzed in last week’s essay on
gold’s new major
upleg, this one has exceptional upside potential. Gold is
already within spitting distance of new nominal all-time highs,
which are only 4.3% above mid-week levels! Once gold challenges and
exceeds August 2020’s record close of $2,062, the financial-media
gold coverage will explode. That will dramatically ramp bullishness
and greed in this sector.
Traders love chasing winners, and will flock back to gold and its
miners’ stocks to ride their gains. This powerful dynamic soon
becomes self-feeding. The more traders buy, the higher gold and GDX
surge. The bigger their gains grow, the more excited other traders
get to jump in. The last time this happened as gold forged into
nominal record territory was summer 2020. The gold stocks fared
pretty darned well then.
GDX
skyrocketed 134.1% higher in just 4.8 months, amplifying
gold’s underlying monster 40.0% upleg by an awesome 3.4x! Today’s
gold upleg merely has to grow to +13.3% before gold gets back into
record territory, unleashing this potent positive feedback loop.
Gold’s new major upleg should easily hit 25% gains, and probably
40%, before giving up its ghost. Gold stocks will soar again with
gold hitting records.
Interestingly the fundamentally-superior smaller
mid-tier and
junior miners tend to enjoy gold-upleg gains well outpacing
the majors. The smaller gold stocks are better able to
consistently grow their production, and their lower market
capitalizations make them much easier to bid higher. So we’ve long
specialized in them, and our newsletter trading books are currently
full of great smaller gold miners ready to soar with gold.
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The
bottom line is gold stocks have really lagged gold in recent weeks.
That vexing underperformance has really damaged sentiment.
Skepticism on the staying power of gold’s latest geopolitical spike
is a major factor. But speculators’ gold-futures positioning was
exceedingly bearish leading into it, and despite gold’s surge they
still have vast room to continue big mean-reversion buying driving
gold higher.
A
sharp stock-market selloff sucking in gold stocks also contributed
to their recent slump, tainting overall market sentiment. But as
gold resumes climbing on balance, traders will return to its miners’
stocks. They should quickly catch up with gold as their
accelerating gains attract in more capital, reestablishing normal
upside leverage. Gold entering record territory soon will greatly
boost sector bullishness and greed. |