Gold stocks have
suffered a terrible month, plunging in a serious selloff. The
resulting carnage has left investors and speculators shaken,
wondering if this red-hot sector’s blistering new bull this year has
already run out of steam. These fears are misplaced, as massive
corrections are common in major gold-stock bulls. They create
bulls’ best buying opportunities in sentimental, technical, and
fundamental terms.
It’s easy to
understand why gold-stock sentiment is so bearish today, as this
sector has been trashed since early August. In less than a month
the gold miners went from 2016’s overwhelmingly-dominant
top-performing sector to bear-market-grade losses! Falling from
heroes to zeroes in such a short span of time is enough to test the
resolve of even the most-hardened contrarians. It’s a tough turn of
events to weather.
The leading
gold-stock
benchmark is the NYSE Arca Gold BUGS Index, better known by its
symbol HUI. Its performance is nearly identical to that of the
flagship GDX VanEck Vectors Gold Miners ETF, which is the
most-popular gold-stock investment vehicle by far. Comprised of
many of the same elite gold miners, both benchmarks suffered
enormous losses over the past month. This year’s HUI chart tells
the sordid tale.
Just a month ago
in early August, the HUI had been enjoying an epic year as gold
stocks grew more popular with investors and speculators. This
leading gold-stock index closed at a 3.2-year high of 284.1 on
August 4th, and the gold miners were increasingly lauded even in the
mainstream financial media including CNBC. Back in early July I’d
warned about a
coming correction, but this sector had defied the odds.
Gold stocks indeed
suffered a sizable pullback in mid-July, retreating 8.6% at worst.
Remember that in conventional stock-market terms, a selloff under
10% in a bull trend is considered a pullback. But these
selloffs can balloon into full-blown corrections, total
retreats of 10% to 20% on a closing basis. Once the 20% threshold
is crossed, the selloff is considered a new bear market.
Gold stocks merely pulled back.
In late July that
pullback was quickly aborted as gold itself surged higher in the
wake of the newest Fed policy meeting. In the FOMC’s statement
released the afternoon of July 27th, no hints were made about a rate
hike imminent at the Fed’s next meeting coming September 21st.
Traders considered this quite dovish, so gold surged 1.6% right
after that FOMC statement which blasted the HUI 4.7% higher in
sympathy.
Remember that the
Fed’s first rate hike in 9.5 years came last December. And in the
FOMC statement from the meeting immediately preceding that one, late
October’s, the Fed had directly warned of a likely rate hike at
its next meeting. So the fact the Fed didn’t even allude to a
coming hike almost certainly meant one wasn’t likely at all in late
September. Gold-futures speculators, who
irrationally fear
rate hikes, rejoiced.
That late-summer
rally was able to push the HUI marginally higher into early August.
But the inevitable selling was still due, and it began rather
innocuously. While the gold stocks drifted back down to their
early-July levels in the middle couple weeks of August, there was
only one significant down day. But that started changing in late
August, ignited by the 19th’s sizable 0.9% gold selloff despite no
relevant news.
The HUI lost 2.2%
that Friday, extended by another 2.2% the following Monday, and then
2.0% more on the subsequent Tuesday. This series of sizable down
days really weighed on the psychology of gold-stock traders,
especially the recent buyers. They had chased
gold stocks’
record summer rally, which I warned at the time wasn’t prudent.
Healthy corrections in bull markets are necessary and unavoidable.
The next day on
Wednesday the 24th, the excrement really hit the whirling metal
blades. Gold itself got slammed early on by a massive futures sell
order of 10k+ contracts in a single minute! That was a short
attack, a blatantly-manipulative trade designed and executed to try
and force cascading selling by running the stop losses of the
legions of long speculators. While gold
weathered it
relatively well, the gold stocks didn’t.
Nerves already
frayed from 3 consecutive trading days of substantial selling, the
weak-handed newer gold-stock investors and speculators panicked.
While gold only fell 1.0% that day, pretty modest in light of that
big and fast short attack, the HUI plummeted 7.8%! Weak-handed
traders were fleeing in terror, dumping everything in their scramble
for the exits. This was extreme capitulation-grade
gold-stock selling.
In less than 3
weeks the gold stocks as measured by the benchmark HUI had plunged
16.5% to a mere 2.6% gold drop. Since the gold price drives
gold-mining
profits, miners’ stocks naturally leverage its moves. Usually
that’s on the order of 2x to 3x, the HUI doubling or tripling gold
rallies or selloffs. But during that mid-August span, the downside
leverage of gold stocks to gold had soared to an anomalously-high
6.3x!
So the odds really
favored that gold-stock correction being over on that serious
capitulation down day, which was the HUI’s worst by far since late
in its last correction in May. But unfortunately the sellers
weren’t done yet, with more weak hands nervously biding their time.
While there was a few-trading-day respite, gold’s next material
daily selloff arrived on August 30th. Gold fell 0.9% that day to
$1311, a new 9-week low.
That was more than
some of the already-frazzled gold-stock traders could bear, so they
again scrambled to get out of Dodge just 4 trading days after that
capitulation. This pummeled the HUI lower by another 5.6%! And
that selling persisted into the next trading day, August’s last, as
the HUI lost 2.2% more. The resulting carnage was breathtaking. In
just 19 trading days, less than a month, the HUI had plunged 22.0%!
Remember in the
general stock markets, a 20%+ fall from a bull’s recent high is not
a correction but a new bear market. So the gold stocks had
formally collapsed right back into bear-market territory! That
naturally led to a deluge of hyper-bearish commentary on this
wounded sector. As usual after a sharp fall, most analysts jumped
on the momentum bandwagon and called for more gold-stock selling to
come.
Not me though. As
a battle-hardened contrarian who has spent decades actively trading
this sector, I’ve learned a hundred times over that sharp selloffs
in strong bull markets are great buying opportunities. The bigger
the selloff, the better the buys! So I explained much of the stuff
in the rest of this essay to our newsletter subscribers, and
aggressively added new gold-stock and silver-stock trades on those
lows.
In our weekly
newsletter published on August 30th, which was gold stocks’
second big capitulation day, I recommended 4 new gold-stock and
silver-stock trades. That was on top of 6 others added earlier in
August as gold stocks’ selloff accelerated. The very next day in
our monthly newsletter, I recommended 5 new stock trades for our
subscribers. We also added new gold-stock-ETF call options to
leverage the next upleg.
Buying low is
never easy. When selloffs snowball to major levels, there’s always
a chance they will cascade even lower. So it’s very challenging
psychologically to fight the thundering herd and buy when
everyone else is selling. It feels terrible buying into
capitulation selloffs, almost nauseating. The only way to build the
fortitude necessary to do it is to stay exceptionally informed,
which helps frame selloffs in context.
Yes, the gold
stocks have just plunged into a bear-market-grade drop. But that
was immediately after the HUI had skyrocketed 182.2% higher in just
6.5 months! From those
fundamentally-absurd 13.5-year secular lows of mid-January that
I warned at the time were an epic buying opportunity, the gold-stock
sector had nearly tripled by early August. The bigger a bull
upleg, the bigger the subsequent correction necessary.
Bull-market
corrections exist for one reason, to rebalance sentiment.
After strong uplegs, greed grows excessive with everyone far too
euphoric about a sector. They rush to buy high, betting the strong
upside momentum will persist. But soon the soaring popular greed
sucks in all the available near-term buyers. That leaves nothing
but sellers, so that overheated sector soon corrects hard. Like
gold stocks in August.
Big and fast
corrections frighten away the weak-handed investors and speculators
who bought in late and high in the preceding upleg. Corrections
rapidly ramp fear, which eradicates greed and leads to more and more
selling. By the time the correction has run its course, all traders
susceptible to being scared into selling relatively low have already
exited. That leaves only buyers, so the next bull-market upleg is
born.
There’s no doubt
gold-stock sentiment was getting too frothy in early August, as
evidenced by even CNBC commentators gushing over gold stocks’
near-term upside. But that enthusiasm was soon turned into
universal worry as gold stocks corrected hard. By late August, no
one in the mainstream world and even few contrarians wanted anything
to do with gold stocks. They were damaged goods psychologically.
Yet technically,
the massive correction last month didn’t wreak havoc at all. While
the HUI broke below its uptrend’s support line, that’s not uncommon
in sharp corrections. Merely battered back down to late-April
levels again, the gold stocks’ mighty young bull market was
overwhelmingly intact. About a third of its progress had been
temporarily erased at the recent correction low, leaving a
commanding 2/3rds still standing.
While August’s
correction was very large, it wasn’t even this bull’s first
correction. Traders have already forgotten that back in May the HUI
plunged 14.8% in less than a month. But far from being a warning of
a failing bull market, those fearful correction lows heralded
another imminent upleg that would push this sector 42.9% higher
despite its weak
summer season. Corrections are bull markets’
best buying opportunities!
And despite gold
stocks nearly tripling in just over a half-year leading into this
latest massive correction, they were still quite low in the grand
scheme. This next chart zooms out to the past 9 years or so to put
this year’s bull in proper context. There’s virtually no threat of
a young new bull giving up its ghost until it has run for years and
major new record highs are reached. That certainly wasn’t the case
in early August.
This year’s
near-tripling in gold stocks merely left them at mid-2013 levels at
best. That’s just a 3.2-year high, nothing to write home about.
Gold stocks’ gains have seemed so extreme, growing so large so fast
this year, simply because the levels that birthed their new bull
were so extreme. All we’ve witnessed so far is a
still-relatively-minor mean reversion out of January’s
fundamentally-absurd 13.5-year secular low.
And even ignoring
that, gold stocks’ current bull is way too young and way too small
to be at risk of rolling over into a new bear market. The last
gold-stock bull emerging out of also-fundamentally-absurd but
far-less-extreme secular lows from 2008’s wild stock panic powered
319.0% higher over 2.9 years in HUI terms. Gold stocks more than
quadrupled out of those last extreme lows, boosting the HUI
to record highs!
Our current anemic
little bull has only run 182.2% higher at best in 6.5 months, which
truly remains in the infant stage by past gold-stock-bull
standards. If gold stocks had nearly tripled in a half-year leading
into new record highs after a multi-year bull, the risks of a major
new bear emerging would indeed be high and ominous. But that same
performance out of extreme lows leaving gold stocks still low
is nothing to fear.
Nevertheless,
August’s serious 20%+ bear-market-grade massive correction has given
many gold-stock investors and speculators serious pause. Can a
gold-stock bull market even hope to keep on powering higher after
suffering such a sentiment-damaging selloff? Provocatively 20%+
corrections are actually par for the course in the
super-volatile gold miners’ realm! This next chart zooms into their
last bull market.
While 20%+
selloffs from bull markets in major broad-market stock indexes like
the S&P 500 are definitely bear markets, gold stocks are a very
different beast. On their way to more than quadruple out of late
2008’s extreme stock-panic lows, the gold stocks suffered no fewer
than two 20%+ corrections! A 21.4% one over 1.2 months in mid-2009
was followed by a huge 27.6% specimen over 2.1 months leading into
2010.
So early in gold
stocks’ last mighty bull market, 20%+ corrections were seen as
well! Realize the gold miners are a small sector compared to the
general stock markets. So when capital floods back in as investors
return after major secular lows, gold stocks launch violently
higher. These enormous early-bull uplegs necessitate
proportionally-large subsequent corrections to bleed off the
excessive greed spawned.
Thus in the
gold-stock realm, that conventional 20%-selloff bear-market
threshold isn’t valid. So I call 20%+ bull selloffs in the
HUI or GDX “massive corrections”. They are very unlikely to be new
bears until a bull market has run for years and propelled gold
stocks to new record highs. And provocatively, these massive
corrections within ongoing gold-stock bulls are far more common than
most traders would imagine.
That last cyclical
gold-stock bull that more than quadrupled gold-stock prices between
October 2008 and September 2011 was actually the final component of
a much-larger secular gold-stock bull. During the 10.8 years
between November 2000 and September 2011, the HUI skyrocketed an
epic 1664.4% higher! That radically dwarfed the S&P 500’s 14.2%
loss over this span, greatly multiplying
the wealth of smart contrarians.
Back in January
2012 soon after that secular bull ended, I did an analysis of the
gold-stock upleg
cycles throughout its entire span. Excluding that extreme
anomaly in 2008 driven by the first stock panic in a century, the
average major gold-stock correction in HUI terms during this mighty
secular bull ran way up at 26.1%! 4 of those 12 major corrections
actually exceeded 30%, running as high as a staggering 35.7%.
So if you’re not
psychologically prepared to weather 30%+ massive corrections in gold
stocks, there’s little chance you’ll be able to ride gold stocks’
next secular bull higher. And after a brutal 4.4-year secular bear
market exacerbated by the Fed’s
extreme market
distortions of recent years, I suspect a new secular bull
is exactly what’s beginning. It’s hard to imagine 13.5-year secular
lows spawning a mere cyclical bull.
All these
sentimental and technical arguments for why gold stocks’ young bull
market remains alive and well and ready to surge higher again are
joined by strong fundamental ones. While gold stocks were
correcting hard in August, I spent long weeks wading through the
latest quarterly results from the elite miners of that GDX ETF and
the elite juniors of its GDXJ VanEck Vectors Junior Gold Miners ETF
cohort.
Gold-stock bull
markets don’t fail until the miners’ fundamentals really start to
deteriorate, and just the opposite is true now. In 2016’s second
quarter, the
elite gold miners of GDX reported excellent average all-in
sustaining costs of just $886 per ounce. That makes today’s
prevailing $1300s gold levels already very profitable. This fueled
a huge 32.3% quarter-on-quarter surge in these miners’ operating
cash flows in Q2’16.
And the
elite junior gold
miners of GDXJ fared even better per this leading metric of
current operating profitability. Their operating cash flows soared
an incredible 51.1% higher quarter-on-quarter in Q2’16 on a mere
6.5% gain in the average gold price! They are already really
profitable as well, thanks to low average all-in sustaining costs of
$887 per ounce. The gold-mining sector is
already thriving fundamentally!
And these
operating profits will only soar as gold keeps mean reverting higher
in its own young bull market. Gold stocks’ next major upleg is
going to be fueled by
investment
capital surging back into gold, driving it higher. As today’s
artificial and totally-fake Fed-levitated stock markets inevitably
roll over, gold investment demand for prudent portfolio
diversification will soar. That will amplify gold’s
autumn strong
season.
As gold’s own new
bull accelerates again in its next major upleg, the profitability of
mining this metal will again really leverage gold’s own gains. And
much-higher gold-mining profits will naturally translate into
much-higher gold-stock prices. Far from being a threat, the massive
correction the gold stocks suffered in August is a major buying
opportunity. Corrections offer the best entry points seen
within ongoing bulls!
While you can
certainly ride the next gold-stock upleg in GDX and GDXJ, the gains
in these ETFs will be trounced by those of the best individual
miners with superior fundamentals. While many of these elite gold
miners are included in the dominant ETFs, those also hold many
inferior companies’ stocks that will retard overall ETF gains. As
always, the greatest bull-market gains will come from the best
individual stocks.
That’s our
specialty at Zeal. We’ve spent literally tens of thousands of
hours researching gold stocks and markets, so we can better
decide what to trade and when. This hard work has resulted in 844
stock trades recommended in real-time for our newsletter subscribers
since 2001. Their average annualized realized gains including all
losers are running way up at a stellar +23.4%! Why not put us to
work for you?
We’ve long
published acclaimed
weekly and
monthly newsletters that discuss our trades and market timing.
They draw on our vast experience, knowledge, wisdom, and ongoing
research to explain what’s going on in the markets, why, and how to
trade them with specific stocks. Now is a fantastic time to get
onboard, as we have a major new gold-stock and silver-stock
deployment well underway to ride the next upleg. Staying
well-informed is critical to enjoying wealth-multiplying success
in the markets.
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The bottom line is
gold stocks’ sharp August selloff is an incredible mid-bull buying
opportunity. The gold stocks are a volatile sector, with enormous
uplegs leading to oversized selloffs. This often results in massive
corrections so big they’d be considered bear markets in other
sectors. But such major selloffs are healthy and necessary for
gold-stock bulls, rebalancing sentiment to pave the way for
subsequent uplegs.
These big
corrections batter gold stocks technically and shred sentiment,
flaming widespread fears for further selling. Yet they actually
improve fundamentals, forcing stock prices lower relative to
underlying gold-miner operating profitability. So if you can fight
the thundering herd to buy low when few others will, you’ll enjoy
the best buying opportunities ever seen within ongoing bull
markets. Corrections are a boon!
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