The gold miners’
stocks are suffering from universal and overwhelming bearishness
today, with nearly everyone expecting further selling. That’s the
natural reaction following this sector’s recent massive correction,
which climaxed in one of its biggest daily plummets ever witnessed.
But within bull markets, there’s no better time to buy aggressively
than deep in a major selloff that’s riddled with great doubt and
fear.
The core mission
of speculation and investment is so simple even children can easily
grasp it, buy low sell high. The great challenges arise not
from understanding, but execution. Actually buying low then selling
high in real markets is exceedingly unnatural and uncomfortable. It
requires traders to overcome their own greed and fear to do the
exact opposite of everything their own instincts are screaming
to do.
The only times
speculators and investors want to buy aggressively is when it feels
great to do so. That only happens late in powerful rallies, when
everyone can clearly see how strong a sector’s performance has
been. Traders then commit one of trading’s cardinal sins,
extrapolating recent performance out into the indefinite future.
They assume a red-hot sector will keep on rising, and eagerly rush
to buy high after a rally.
That’s exactly
what happened in gold stocks this past summer. This battered sector
finally skyrocketed higher in 2016 after hard years of neglect. By
early August, the flagship HUI NYSE Arca Gold BUGS Index had blasted
an incredible 182.2% higher in just 6.5 months! Who wouldn’t love a
sector that had nearly tripled in just over a half-year?
Epic performance like that dwarfs everything else in all the stock
markets.
So excited traders
greedily threw capital at the gold stocks, succumbing to herd
groupthink to believe this sector was on the verge of soaring even
though it already had. That wasn’t buying low, but buying high.
I warned in early July as gold stocks were starting to peak that
a major
correction was inevitable after such a radical surge higher.
While it tarried for a few more weeks, it eventually arrived with a
vengeance.
Buying high into
widespread greed after a powerful rally is very foolish, as markets
always experience sharp reversals soon after popular emotional
extremes. The only traders who rode gold stocks’ mighty new bull to
multiply their wealth were the smart contrarians who bought in low
early in 2016. That was when gold stocks were universally despised,
languishing at
fundamentally-absurd price levels relative to gold.
Traders only want
to buy when it feels good, when they’re excited like everyone else,
after a sector has already rallied dramatically. But buying high
almost always ends in major losses and many tears. This whole game
demands buying low, which means when it feels bad. Any
sector including gold stocks is only relatively cheap after a major
selloff when most traders have already fled due to exceeding popular
bearishness.
This demands
contrarianism, a tough discipline of actively suppressing and
fighting your own emotions that can only come from hard years of
experience. Instead of doing what you want to do in the markets,
you have to do the exact opposite. You buy stocks when it feels
very uncomfortable, after a major selloff everyone is convinced will
keep spiraling lower. Buying stocks low is always riddled with
internal conflict.
The forging of
battle-hardened contrarians able to multiply wealth in the markets
by actually buying low and selling high is a difficult and demanding
road. I’ve been trudging along it for decades now, and it truly
never gets easy. For the past 17 years I’ve been sharing my own
extensive market research and real-world trades through our
financial newsletters, helping others overcome their own greed and
fear.
One of the
greatest challenges of this business is the great majority of
speculators and investors still get excited about or ignore a
particular sector at exactly the wrong times. They didn’t
want anything to do with gold stocks back in January near 13.5-year
secular lows, totally ignoring my contrarian pleas then
to buy
aggressively. Instead they foolishly stuck their heads in the
sand, missing an epic buying opportunity.
The same thing is
happening again today to a lesser degree. Gold stocks are
screaming buys right now after a massive correction within their
powerful young bull market. Yet traders are so wrapped up in their
own fear, so influenced by groupthink herd fear, that they are blind
to this incredible opportunity. While they refuse to buy low now,
they will foolishly again eagerly rush to buy high after gold stocks
double from here.
I’ve found the
best thing to combat internal and prevailing fear is perspective.
The gold-stock technicals indeed look rotten over the past couple
weeks and months, and that’s what traders are extrapolating forward
which is breeding today’s excessive bearishness. But within broader
context, the technical and fundamental situations in the gold
miners’ stocks today are amazingly bullish. Now is the time to buy
Buy BUY!
Last week this
leading benchmark
HUI gold-stock index plummeted 10.1% in a single trading day! That
was the result of cascading selling driven by gold-stock
stop-loss orders being triggered, which itself was driven by the
same thing happening in gold futures. Last week I explained this
running of the
stops in gold and its miners’ stocks in depth if you need to get
up to speed. It was a supremely-disheartening event.
This extreme
selling anomaly that has decimated gold-stock sentiment truly
erupted out of the blue with zero warning. The gold stocks had
already corrected sharply in August, plunging 22.0% in just under a
month per the HUI. Then they spent all of September grinding higher
on balance along support of their strong bull-market uptrend. An
entire month of higher lows confirmed technically their
correction was over.
So last Tuesday’s
brutal 10.1% plummet knifing through that late-August low like
nothing was a big and ugly surprise. Such extreme down days in gold
stocks are exceedingly rare, and therefore impossible to predict.
Since 2001, the entire modern era, there have been 3976 trading
days. And that was a volatile span for gold stocks, seeing them
skyrocket 1664% higher at best in a mighty secular bull running 10.8
years!
Then after their
September 2011 peak, the gold stocks spent the next 4.4 years
plummeting a staggering 84.1% in a brutal bear. So volatility is no
stranger to this sector. Yet since 2001, the HUI only suffered
worse daily plunges than last Tuesday on 10 other trading days!
That works out to a minuscule one-quarter-of-one-percent chance
of a down day of that extreme magnitude. That’s wildly too seldom
to be predictable.
On top of that, 7
of those top-10 HUI down days since 2001 came in the fourth quarter
of 2008 during that first stock panic in a century. So excluding
that exceedingly-anomalous epic maelstrom of fear, the HUI’s
11th-worst down day of the modern era last Tuesday is more like
the 4th worst seen in non-panic normal market conditions.
Something that radically abnormal and rare defies any attempt to
model it.
When gold stocks
plummet 10%+ in a single trading day, pretty much everyone prudently
running stop-loss orders is going to be forced to sell. This
spawns a gold-stock-downside feedback loop that quickly snowballs.
The more gold stocks are driven to stop-loss levels leading to
automatic selling, the farther they drop triggering still more
stops. While very rare, cascading stop-loss selling is a downside
juggernaut.
That extreme down
day last Tuesday catapulted gold stocks’ total correction to 28.4%,
while some minor follow-on selling pushed it to 30.9% over 2.2
months by this week! Naturally this has spawned universal fear and
bearishness. In the general stock markets, a 20% drop is considered
a new bear market. How can gold stocks hope to salvage their
battered young bull if they’ve just lost nearly a third of
their value?
The gold-stock
sector is kind of like Texas, everything is outsized. Gold stocks
enjoy massive uplegs that often grow radically larger than those
seen in every other sector, and subsequently suffer proportionally
massive
corrections. All healthy bull markets see corrections arise
periodically to rebalance sentiment, which keeps bulls healthy. The
selling bleeds away the excessive greed seen at the preceding
tops.
This paves the way
for the next major upleg to start powering higher. Provocatively,
massive corrections above 20% are par for the course in gold-stock
bulls. Between 2001 and 2011, the
average gold-stock
correction in that epic secular bull was 26.1% excluding
late-2008’s extreme stock-panic plunge. And a third of the dozen
major corrections in that span even exceeded 30%, with the
non-panic peak at a whopping 35.7%!
After gold stocks
nearly tripled in just over a half-year, an extraordinary feat,
correcting by a third isn’t out of line at all. The bigger the
bull-market uplegs, the bigger the necessary corrections to keep
popular greed in check. Greed naturally morphs into fear throughout
corrections’ lifespans, and they ultimately bottom once nearly
everyone has given up and written off the bull market for dead.
That sound familiar?
Gold stocks are
feared, hated, and despised today. You can hardly find any analysts
or commentators who are not calling for and warning of more
imminent selling. No one wants to touch this damaged sector
with a ten-foot pole. Yet even at this week’s deep correction low
following that anomalous plunge last week, the HUI was still up an
astounding 76.5% year-to-date! Gold stocks still command 2016’s
performance crown.
Despite all the
wailing and gnashing of teeth these days, the gold miners’ young
bull market remains very impressive technically. While the
bull-market uptrend rendered above was shattered by the HUI’s
precipitous stop-running plunge, it’s perfectly normal for bull
uptrends to redraw themselves. They tend to steepen during
uplegs before flattening in corrections, yet the bull itself keeps
marching higher on balance.
The gold stocks
bottomed right near their 200-day moving average, which is the
strongest support
zone seen in bull markets universally. Considering the gold
stocks had stretched a whopping 74%, 70%, and 63% beyond the HUI’s
200dma in late April, early July, and early August, a 200dma
approach is actually quite healthy for the ultimate longevity of
this young gold-stock bull. Such convergences are strong buy
signals.
In addition, all
the gold stocks’ latest massive correction did was push them back to
mid-April levels well into their new bull market. How many of the
speculators and investors who were buying high during the summer
upleg topping would have loved to have bought back in April
instead? The gold stocks were poised to soon head another 47%
higher then, and their upside from these same levels today is much
larger.
Throughout bull
markets, each subsequent upleg blasts gold stocks to new higher
highs. There’s little doubt gold stocks’ next major upleg will
catapult them to a new bull high way above their recent
early-August peak. And bigger corrections make for more upside
potential between their lows and the next uplegs their very selling
births. Traders should be scrambling to buy gold stocks today after
such a huge selloff.
While gold stocks’
miserable sentiment and exceedingly-bullish technicals are
super-compelling, their fundamentals are even much more so. Gold
stocks are ultimately just
leveraged plays
on gold, because gold-mining profits and thus ultimately stock
prices greatly amplify gains in their primary driver. While gold’s
own futures stop running pounded it last week, gold-mining operating
profitability is still heading far higher.
Gold averaged
$1185 in the first quarter of 2016 and $1259 in Q2. That 6.3%
quarter-on-quarter gain in average gold prices led to enormous
surges in operating profitability of the elite gold miners.
They are represented by the leading gold-stock ETFs, the GDX VanEck
Vectors Gold Miners ETF for the majors and its sister GDXJ VanEck
Vectors Junior Gold Miners ETF for the juniors. Their component
stocks are excellent.
Each quarter I
analyze the operating performances of the individual gold stocks
included in these top ETFs. Their cash flows generated from
operations are a great proxy for their current profitability. In
Q2’16 on that 6.3% average-gold-price increase, the top 34 component
companies of GDX
saw their operating cash flows surge 32.3% higher
quarter-on-quarter. And
GDXJ’s
skyrocketed an incredible 51.1% QoQ!
The gold miners’
latest quarterly results for Q3 are gradually coming out over the
next month or so. And last quarter the average gold price climbed
another 6.0% QoQ from Q2 to $1334. So those elite gold miners of
GDX and GDXJ are very likely to soon report another major surge
in operating profitability. It wouldn’t surprise me to again see
big gains approaching Q2’s, which would spark great trader interest.
The more
gold-mining profitability grows, the more undervalued the gold
miners look fundamentally. Given the dismal gold-stock sentiment
out there today, I suspect most speculators and investors will be
surprised by the gold miners’ strong Q3 results coming out soon.
That’s a major buying catalyst just right around the corner, and an
important fundamental reason to be aggressively buying gold stocks
today.
Provocatively even
at today’s gold-futures-stop-running-spawned low gold prices in the
$1250s, gold stocks remain radically undervalued relative to
this metal that drives their profits. This next chart looks at a
proxy for that critical relationship in the form of the HUI/Gold
Ratio. This simple construct shows when gold stocks are
underperforming or outperforming gold, and how low or high they
happen to be relative to it.
It was this very
chart back in
mid-January that convinced me to aggressively buy and recommend
gold stocks when no one else wanted them. This hardcore contrarian
buying into extreme bearishness led to realized gains for our
subscribers running as high as 467% this year! While gold stocks
are now well off their all-time lows relative to gold seen in
mid-January, they remain way too cheap compared to the metal they
mine.
Despite their
immense gains this year, gold stocks have still only just begun the
inevitable process of mean reverting out of their anomalous
extreme undervaluations of late 2015 and early 2016. As of gold
stocks’ latest massive-correction low this week, the HGR was merely
running 0.157x. As revealed by this wildly-bullish chart, that’s
still among the lowest levels ever witnessed. Gold stocks are still
far too low!
The last normal
years between 2008’s first stock panic in a century and the dawn
of the Fed’s
extreme market distortions in early 2013 were 2009 to 2012.
During that post-panic span, the HGR averaged 0.346x. And that
itself was pretty low, considering the pre-panic 5-year-average HGR
of 0.511x. But for conservatism’s sake, let’s consider that
post-panic-average 0.346x the mean-reversion upside target for gold
stocks.
Even if gold does
nothing and continues languishing in the $1250s, the gold stocks
still need to surge another 121% higher from here merely to
regain average pricing relative to gold! But this fundamental
upside target is wildly too modest. Gold itself is due to head much
higher as 2016’s heavy investment demand resumes. And market mean
reversions out of extremes tend to overshoot proportionally, not
just normalize.
Gold’s powerful
young bull market fueling this year’s amazing gold-stock bull was
overwhelmingly the result of American stock investors
flooding into GLD
gold-stock-ETF shares in response to the early-year cracking of
the Fed’s stock-market levitation. As soon as today’s
ridiculously-fake near-record US stock markets roll over again,
investment demand for gold which moves counter to stocks will
come roaring back.
Gold should easily
regain 2012’s average levels of $1669 prior to the Fed’s extreme
distortions from its unprecedented open-ended
QE3
debt-monetization campaign. At that post-panic-average HGR
level of 0.346x, that would yield a HUI upside target of 578 which
is 194% higher from this week’s levels! I don’t know why any
speculator or investor would forgo upside like that, no matter how
scared they happen to be.
And if that HGR
mean reversion overshoots proportionally to the opposite
extreme above that average, it could briefly go as high as 0.599x.
At 2012’s average gold levels of $1669, that implies a HUI target of
1000! While such an extreme would likely be short-lived in a
greed-drenched peak, it leaves room for a quintuple from here.
Traders should be buying today’s massive-correction gold-stock lows
with reckless abandon.
The vast
gold-stock upside coming as this young bull matures in the years
ahead can certainly be played with those popular GDX and GDXJ ETFs.
But since these ETFs hold so many gold stocks, their ultimate
bull-market gains can merely pace the HUI at best. A
carefully-handpicked portfolio of elite individual stocks with
superior fundamentals will really amplify sector gains, dwarfing the
ETFs’ performances.
At Zeal we’ve
spent literally tens of thousands of hours researching
individual gold stocks and markets, so we can better decide what to
trade and when. This has resulted in 851 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 +24.1% as of the recent end of Q3! Why not put our
expertise to work for you?
We’ve been
super-aggressively adding gold-stock and silver-stock trades since
last week’s anomalous plummet, taking advantage of this incredible
buying op. These new trades are already detailed in our popular
weekly
newsletter, and coming in our
monthly. Both
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.
Subscribe today!
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like a contrarian.
The bottom line is
gold stocks are a screaming buy today. Their powerful young bull
already suffered a massive correction before being wracked by an
exceedingly-anomalous stop-running-fueled plummet. That reignited
and ballooned the healthy mid-bull selloff, naturally leading to
extreme bearishness on this sector. But the gold miners’ technicals
and underlying fundamentals still remain exceedingly bullish.
As gold’s own bull
starts powering higher again as investment demand resumes when these
lofty Fed-levitated stock markets inevitably roll over, the gold
stocks are going to soar again. But as usual the only traders who
will reap the coming massive gains are the prudent contrarians who
can fight their own fear to buy low in this massive correction.
Psychological discomfort is a small price to pay for multiplying
your wealth. |