The
gold miners’ stocks are soaring again, just blasting to new upleg
highs this week! They are following their metal higher and
amplifying its gains like usual. Yet despite their dramatic surges
in recent weeks, both gold and gold stocks have lots of room to keep
running. Sentiment is improving on this accelerating upside
momentum, attracting in more capital. And normal gold-upleg-fueling
buying is far from tapped out.
Gold
stocks are ultimately leveraged plays on gold, because their
earnings multiply material gold moves. A miner producing the yellow
metal for $1,225 per ounce earns $375 per ounce at $1,600 gold. But
as gold rallies 25% to $2,000, those all-in sustaining costs
generally don’t change much. So mining profits just explode to
$775, more than doubling at a 107% gain! That fuels gold stocks’
big upside leverage to gold.
These numbers aren’t hypothetical either. Gold carved a major
secular bottom way down at $1,623 in late September 2022. That
birthed a strong new upleg, which has soared as high as $2,020 on
close as of the middle of this holiday-shortened week. And the
famed GDXJ gold-stock ETF’s top 25 mid-tier gold miners excluding
three extreme outliers
averaged $1,223
AISCs in Q4’22. Thus miners’ earnings are soaring!
And
so are their stock prices. The leading sector benchmark is GDXJ’s
big-brother GDX VanEck Gold Miners ETF, which tracks larger major
gold miners. It was slammed with gold last summer to deep 2.5-year
lows in late September paralleling gold’s. Those left-for-dead
gold-stock prices were literally stock-panic levels, not seen
since the dark heart of March 2020’s brutal pandemic-lockdown stock
panic.
The
trading day before GDX bottomed in late September 2022, I published
an essay explaining why that was a
false gold-stock
panic. Gold had been crushed by an extreme US dollar parabolic
moonshot to extreme multi-decade highs on the Fed’s most-extreme
tightening cycle ever. That’s a lot of extremes, and none are ever
sustainable! That was an incredible contrarian buying opportunity,
as I argued then.
Indeed both gold and its miners’ stocks have soared since, as the
factors driving mid-2022’s extremely-anomalous gold plunge unwound.
After four monster 75-basis-point rate hikes in a row, the Fed’s
ability to shock
the dollar and gold was ending. An early November essay
analyzed that in depth, concluding “The battered gold stocks will
soar with gold, winning fortunes for contrarian traders.” And
that’s what happened.
Between late September 2022 to early February 2023, gold blasted
20.2% higher to $1,951 reentering formal bull-market territory after
last year’s anomalous drubbing. GDX rocketed 52.1% higher in that
4.0-month span, amplifying gold’s young upleg by 2.6x. Normally the
major gold stocks dominating GDX leverage material gold moves by 2x
to 3x. So everything was looking good, with gold-stock prices
soaring.
Price action fuels herd sentiment, and that was really starting to
improve with higher gold and gold-stock levels. But then gold
suffered a sharp
pullback catalyzed by a European Central Bank dovish surprise,
and a record-seasonal-adjustment-driven eight-standard-deviation
headline beat in monthly US jobs! So in February gold plunged 7.2%
in several weeks, ultimately hammering GDX 19.8% lower for 2.8x
leverage.
Like
many of gold’s larger short-term swings, all that was driven by
leveraged gold-futures trading. In February, those speculators
expended much of
their capital firepower available for selling. That left gold
ready to mean revert swiftly higher, which accelerating dramatically
during March’s banking crisis. Thus as of mid-week, gold has
V-bounced 11.5% higher to that $2,020 close. GDX naturally
amplified that surge.
This
leading gold-stock sector benchmark blasted 28.1% higher in a
similar span to $34.17 this week, a new upleg high! That made for
healthy 2.4x upside leverage. Since gold remained far from falling
into bear territory in late February, technically all this is one
upleg between late September to early April. Gold’s total gains
have grown to 24.5%, while GDX’s extended to 56.2% in that span
amplifying gold by 2.3x.
These 25% and 56% surges in just 6.2 months should be celebrated,
trouncing the flagship S&P 500’s mere 12% gain. But neither are
large yet by major gold and gold-stock upleg standards. In 2020 for
example, two mighty gold uplegs soared 42.7% and 40.0% higher
fueling massive parallel GDX gains of 76.7% and 134.1%! Sector
uplegs grow huge when upside momentum and bullish sentiment
become self-feeding.
Today’s young gold and gold-stock uplegs have lots of potential to
grow much larger before they give up their ghosts. As this chart
shows, GDX remains relatively low by recent years’ standards,
still rebounding out of last year’s extreme-Fed-rate-hike-driven
anomaly. Just to recover to mid-April-2022 levels near $41 before
all that, GDX would have to rally another 19.6% catapulting its
total upleg to hefty 86.9% gains!
Despite their powerful surge since late September’s extreme lows,
the major gold stocks per GDX have only just returned to normal
levels over the past couple years. They aren’t particularly
overbought, they generally remain quite undervalued relative to
their underlying earnings, and sector sentiment is still far from
euphoric. So there are no technical or sentimental signs that this
mounting upleg has largely run its course.
Gold
stocks’ fortunes depend on gold’s, so their stock prices will
dutifully leverage whatever their metal does next. And gold’s
upleg still looking young is the most-bullish argument for this
gold-stock upleg ultimately powering much higher. In the last
couple months I’ve written
five separate essays
analyzing gold’s performance and drivers from various key angles.
Gold stocks can only be understood through gold.
Major gold uplegs are fueled by three sequential stages, with the
first two igniting the subsequent two. Uplegs are born in deep lows
as speculators rush to buy to cover gold-futures short contracts.
That burns out fast, lasting a couple months at best. But that
legally-required buying forces gold high enough for long enough to
attract back other long-side gold-futures speculators. Their
voluntary buying is much larger.
On
average over the past year, total spec longs have exceeded total
spec shorts by 2.3x. Thus they are proportionally more important
for fueling major gold uplegs. Stage-one gold-futures short
covering soon gives way to stage-two gold-futures long buying, which
can run three to six months. That drives gold higher still, soon
attracting back investors with their vast pools of capital dwarfing
gold-futures specs’.
Eventually all that stage-one gold-futures short covering and
stage-two gold-futures long buying drives gold high enough for long
enough to ignite far-bigger stage-three investment buying. That
lags major gold bottomings, because investors love chasing upside
momentum and wait until uplegs are well-established before piling
in. In today’s gold upleg, stage one has been spent but most of
stage two and three still remain.
I
dug into the first couple stages’ leveraged gold-futures trading in
depth a couple weeks ago on
gold’s upleg
rocketing back. Speculators’ gold-futures buying and selling
bullies around gold prices because of the extreme leverage
inherent in it. This week each 100-ounce contract controlled
$202k worth of gold. Yet traders are only required to keep $8k cash
margins in their accounts for each contract they are trading.
That
yields extreme maximum leverage of 25.3x! Each dollar deployed in
gold futures at those limits has 25x the price impact on gold
as a dollar invested outright. So these speculators punch way above
their weights in driving short-term gold trends. It was mostly
their stage-one short-covering buying and bigger stage-two long
buying that propelled gold 24.5% higher over the past 6.2 months,
fueling its young upleg.
While spec gold-futures trading is complex, there’s a quick proxy I
use in our subscription newsletters to distill it all down into a
couple numbers. It simply looks at where speculators’ total
gold-futures long and short contracts are within their past-year
trading ranges. The most-bullish near-term setup for gold is 0%
longs and 100% shorts, indicating specs have exhausted their likely
capital firepower available for selling.
That
screaming buy signal heralding major gold uplegs was last seen in
late September 2022 right when today’s upleg was born! I analyzed
mid-2022’s
gold-futures puking stalling back then. Conversely the
most-bearish near-term setup for gold is the opposite 100% longs and
0% shorts, revealing specs have done all their probable buying.
These handy metrics can be used to estimate stage-one and stage-two
progress.
As
of the latest weekly Commitments of Traders report current to
Tuesday March 28th when gold closed at $1,973, total spec longs and
shorts were running 33% and 0% up into their past-year trading
ranges. That implies this gold upleg’s initial stage-one
gold-futures short-covering buying is probably finished, but only a
third of its stage-two gold-futures long buying is done. That means
fully two-thirds of that remains!
Major gold uplegs don’t often fail until total spec longs challenge
100%, but the highest they have been during this entire young upleg
is just that latest 33%. That makes for a high degree of
confidence that this gold upleg has a long ways higher to run yet.
And the higher gold goes, not only will gold stocks amplify it but
their gains will accelerate as sector sentiment grows more greedy.
This dynamic is building steam.
But
it’s not just speculators’ positioning in gold futures that remains
very bullish for gold and its miners’ stocks. The far-larger
stage-three gold investment buying dwarfing the first two stages’
gold-futures buying has barely even started. Investors
command vastly more capital than that hyper-risky gold-futures
realm, but without any leverage they’re in no hurry to shift it into
gold. Gold has to first win their respect.
That
is accomplished by sustained upside momentum, as investors
love to chase gains. The longer and higher gold runs, the more
investment capital is allocated to it. That big buying is necessary
to fuel the largest uplegs like 2020’s back-to-back 40%+ monsters.
While comprehensive global gold investment demand is only published
quarterly, there is a great daily high-resolution proxy that tends
to closely track it.
That’s the combined holdings of the dominant GLD and IAU gold ETFs,
which are the best indication of
stage-three gold
investment buying. Rising holdings in these mighty gold ETFs
reveal American stock-market capital flowing into gold, bidding up
its price. This stage-three dynamic fueled those huge 42.7% and
40.0% gold uplegs back in 2020, with GLD+IAU holdings soaring
dramatically during both of them.
During the first GLD and IAU enjoyed a huge 314.2 metric-ton or
30.4% holdings build, while the second saw an even-bigger 460.5t or
35.3% surge! This essential stage-three investment buying in
today’s gold upleg is virtually nonexistent, arguing that it remains
young. Measured over this upleg’s entire lifespan like those
previous major ones, GLD+IAU holdings actually remain down 54.7t
or 3.8% since late September!
Considered another way, at worst during today’s gold upleg GLD+IAU
holdings slumped to a stock-panic-grade 3.0-year secular low in
mid-March. Investors capitulated after gold’s sharp February
selloff. From those extreme unsustainable lows, as of midweek the
physical gold bullion held by these dominant ETFs is only up
34.0t or 2.5%. So this upleg’s identifiable stage-three
investment buying has barely even started!
And
there are certainly big fundamental reasons why investors should
want to up their meager portfolio allocations to gold, upside
momentum aside. American stock investors’ percentage of capital
deployed in gold can be inferred by looking at the value of GLD+IAU
holdings relative to the total market capitalization of all 500
stocks in the S&P 500. Exiting March, that remained vanishingly
small only running a trivial 0.24%!
So
gold investment is virtually zero with a bear market in stocks
underway. When these awaken from bubble valuations above 28x
earnings, they tend to at least cut stock prices in half
before hibernating. At worst in mid-October, the S&P 500 had only
fallen 25.4%. And with its elite stocks’ average
trailing-twelve-month price-to-earnings ratios still running 27.1x
leaving that month, this bear had much work left to do.
They
were even higher at 27.8x as this month dawned, still just shy of
bubble territory! Major bear markets usually maul valuations under
historical fair value at 14x, and sometimes down to half that at
7x! Gold is the ultimate portfolio diversifier, tending to
rally on capital inflows as general stock markets weaken. An
even-bigger argument for a renaissance of gold investment is the
ongoing high inflation still raging.
From
just before March 2020’s pandemic-lockdown stock panic to mid-April
2022, the Fed ballooned its balance sheet an astounding 115.6% or
$4,807b in just 25.5 months! That essentially doubled the US
money supply in just a couple years. As of the latest weekly
Fed-balance-sheet data, only 1/20th of that extreme money printing
has been reversed. So we are suffering the biggest inflation
super-spike since the 1970s.
Even
though the Fed has hiked interest rates an exceedingly-extreme 475
basis points off zero over the past year ending mid-March, headline
monthly US Consumer Price Index inflation over that span has still
averaged red-hot 7.8% year-over-year surges! Rate hikes aren’t
slaying inflation fueled by a still-existing doubling of the US
money supply. As investors increasingly realize that, they will
likely flock back to gold.
During those last
two inflation super-spikes of the 1970s, monthly-average gold
prices from trough-to-peak CPI-inflation months just skyrocketed.
They nearly tripled with 196.6% gains over 30 months during the
first, then more than quadrupled during the second soaring
322.4% over 40 months! So a doubling seems reasonable this time
with the US money supply still doubled, and other major currencies
also way inflated.
The
bigger gold’s upleg and larger bull grow and the longer they run,
the more investors will shift capital back into gold. And the
higher gold ultimately goes to reflect vastly-larger fiat money
supplies around the world, the more gold stocks will soar. Again
the major gold stocks of GDX tend to amplify material gold moves by
2x to 3x. But the smaller fundamentally-superior mid-tier and
junior miners really outperform that.
Trading those is the realm we’ve specialized in for a
quarter-century now at Zeal. Our trading books are currently full
of great smaller gold and silver miners really starting to soar.
This week the unrealized gains in recent trades are already
running as high as +101%! Achieving that requires being
contrarian, staying informed about the markets even when sectors are
deeply out of favor like gold and gold stocks recently.
While the fantastic opportunities to buy really low that I pounded
the table about since late last summer have passed, the gold stocks
still have lots of rallying left to do. So it isn’t too late to
carve out some decent portfolio allocations to gold and gold
stocks. The GDX gains in today’s young upleg could double from here
if gold’s own upleg grows really large. And all signs are pointing
to that being increasingly likely.
If
you regularly enjoy my essays, please support our hard work! For
decades we’ve published popular
weekly and
monthly
newsletters focused on contrarian speculation and investment. These
essays wouldn’t exist without that revenue. Our newsletters draw on
my 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.
That
holistic integrated contrarian approach has proven very successful,
yielding massive realized gains during gold uplegs like this
underway next major one. We extensively research gold and silver
miners to find cheap fundamentally-superior mid-tiers and juniors
with outsized upside potential as gold powers higher. Our trading
books are full of them already soaring.
Subscribe today
and get smarter and richer!
The
bottom line is gold stocks are soaring again, powering higher with
gold. Despite February’s sharp selloff, their young upleg is alive
and well after just surging to new highs this week. Since gold
miners’ earnings amplify gold price trends, gold stocks are
ultimately leveraged plays on gold. And the yellow metal’s own
driving upleg looks to still have a long ways to run yet, with most
of the usual buying still coming.
Speculators’ initial gold-futures short covering is mostly done, but
their larger secondary long buying is only about a third finished.
And the ultimate far-bigger investment buying necessary to fuel
major gold uplegs has barely even started. With a stock bear and
inflation super-spike underway, investors have great fundamental
reasons to up their portfolio allocations to gold. That ought to
propel gold stocks way higher. |