The
gold miners’ stocks just entered the autumn market busy season on
the wrong foot, selling off as traders returned from summer’s last
long weekend. That has fortified the bearish sentiment this sector
suffered in recent months. With football on the mind, gold stocks’
back-and-forth action reminds me of plenty of big games. While a
key drive to new upleg highs was fumbled, gold stocks are still in
the game.
For
many Americans, autumn is synonymous with football season which has
been a major focus for my household lately. Our seventh-grade son
is thriving in a tough competitive football league, getting lots of
tackles as a defensive end. His team plays every Saturday evening,
and the games have been really intense and exciting. Practices run
two hours three days a week, down from six days in the preseason!
Sports commitments are nothing new for my family, both our kids have
competed in high-level competitive basketball for years including
championship games. But the passion surrounding football is
something else, bringing back lots of memories for me playing in
high school. We live outside of Denver as well, and the excitement
over the Broncos this season with a new experienced winning head
coach is just electric!
I
also went to college at the University of Colorado Boulder back in
the mid-1990s when the Buffaloes were great. They haven’t been for
a long time, but that may be changing with Deion Sanders at the
helm. This past Saturday’s incredible upset victory Coach Prime and
his quarterback son engineered against TCU was epic! The Buffs’
potential this season looks awesome, and people here are proudly
flying CU’s colors.
Gold
stocks are kind of like a stumbling home team for contrarians.
They’ve greatly multiplied our capital with many past victories, but
they’ve been sucking wind this past summer. The dominant GDX
gold-stock ETF rallied 63.9% higher in 6.5 months into mid-April, a
powerful upleg. But following such a strong offensive drive, the
gold miners switched to defense. They needed a healthy pullback to
rebalance sentiment.
That
ran 18.9% over the next 2.8 months into early July, which eradicated
the excessive herd greed seen at that upleg interim high. The gold
stocks were ready to take the ball again, blasting up 12.3% in less
than a couple weeks into mid-July! The momentum behind that drive
was strong, with GDX achieving a major technical breakout
above its 50-day moving average that all but guaranteed it was
heading much higher.
In
football, turnovers are some of the most thrilling or crushing
events. A fumble or interception at the right or wrong time can
really change a game’s momentum. I played as a defensive tackle,
and was blessed with some key fumble recoveries. My son the
defensive end is really gunning for interceptions on short passes,
which he prizes more than sacking quarterbacks. Possession changes
really alter psychology.
Gold
stocks are ultimately leveraged plays on the metal they mine, as its
price trends greatly impact their profitability. Gold surged into
mid-July as well, then consolidated high near $1,975 even as
the Fed hiked rates for the eleventh time in this monster cycle.
But after closing at $1,974 that day with GDX still near $31.75, a
freak turnover happened the next morning. The football was stripped
right out of gold’s hands!
On
July 27th, the initial read on US Q2 GDP proved a shocking upside
surprise. Expected to come in at 1.8% annualized growth, the US
government claimed the actual was +2.4%! Unlike monthly US jobs,
the GDP reports usually don’t deviate much from expectations. So
that extraordinary beat was Fed-hawkish, implying the US economy may
be overheating so the Fed will have to hold interest rates higher
for longer.
That
GDP-surprise forced fumble slammed gold 1.5% lower, crushing
sentiment so violently that GDX plunged an ugly 4.1%! That unlikely
turnover when gold and its miners’ stocks were early in a strong
drive to new upleg highs really altered psychology. Nascent
bullishness and confidence for more upside quickly reversed into
widespread bearishness and resignation. That felt kind of
big-turnover football-like too.
That
one outlying GDP report led traders in currencies, gold futures, and
the stock markets to interpret the subsequent weeks’ economic data
more-Fed-hawkishly. Remarkably mostly in the first half of
August, gold suffered an exceedingly-unusual stretch where 13 of 14
trading days clocked in at losses! The gold stocks just wilted on
that, fueling serious selling which prematurely truncated this
sector’s next surge higher.
When
a football team’s drive is killed by a fumble or interception,
sometimes the players start giving up mentally. Like traders, they
extrapolate that misfortune extending into the immediate future.
Their hopes for victory quickly collapse to surrender to losing.
One of the most-important jobs for coaches during games is to keep
up players’ spirits after setbacks. Putting that broken play
into perspective is a big part of that.
After GDX’s 50dma
breakout in mid-July technically confirmed this sector’s
powerful upleg had resumed, I sure wasn’t expecting it to quickly
fail. It was like a defensive lineman stripping the football from a
running back, stopping cold a good drive. But despite that and the
selling since that was ignited by the resulting bearish psychology,
gold stocks are still in the game. They are behind like CU against
TCU, but not out.
This
first chart looks at gold stocks’ summer price action during all
modern gold-bull years. Each of these is individually indexed to
the older HUI gold-stock index’s final May close leading into market
summers. I explained the methodology behind this seasonal chart in
much more depth in my early-June essay on
gold’s summer
doldrums. Gold and therefore gold stocks tend to drift
sideways on balance during summers.
The
miners usually meander in a summer range running 10% either way from
May’s close, and that’s exactly what happened recently. Despite
that suspect Q2 GDP beat stripping away gold’s football, the gold
stocks still mostly stayed in their normal center-mass-drift
summer trend. At best in mid-July before that key turnover, GDX was
up a solid 5.6% summer-to-date. And it exited August down 5.4% on
the summer.
That’s not great, well behind where gold stocks should be with their
seasonal autumn
rally that amplifies gold’s own gathering steam in August.
On average during these modern gold-bull years of 2001 to 2012 and
2016 to 2022, the major gold stocks of both the HUI and GDX left
August climbing 3.9% across the whole summer. This week that
underperformance widened, leaving gold stocks about 13.5% behind
their mean.
That’s considerable, but not worth totally capitulating on this
sector for. Like football, gold stocks move fast. This volatile
sector can easily soar 15%+ in just a week or two when gold
decisively bounces. In merely a couple drives, gold stocks could
blast back up above their autumn-rally seasonal-average gains this
time of year. That’s just a touchdown or two behind where the gold
stocks would’ve been without that fumble.
Ever
since our son was old enough to throw balls, he has loved sports.
So he has played football and basketball for the majority of his
young life. While I haven’t coached his teams, I’ve volunteered in
other roles to stay close to the action. With kids there’s nothing
more devastating for morale mid-game than a pick six, when a
defender intercepts your quarterback’s pass then runs it straight
back for a touchdown!
The
kids leave the field stunned and dejected after giving up six or
seven points in one broken play. You can see the frustration and
defeat on their faces, convinced the game is over. The coaches
always try to encourage them with essential perspective,
pointing out that is only one play and one touchdown in a long
game. A six-or-seven-point deficit can be easily overcome, it is
way too little to give up and stop playing hard.
The
unusual gold and gold-stock pullbacks since mid-July igniting on
that Q2 GDP pick six have sure damaged sector psychology.
Contrarians went from excited this upleg’s next surge higher was
underway to dejected that gold stocks just can’t win. But like
being behind by a touchdown or two, the gold-stock technicals
actually still look good. With perspective, this recent setback
in gold-stock fortunes is pretty minor.
Interestingly that should probably start with the revelation late
July’s huge Q2-GDP beat was fake news! The US government
reports GDP quarterly, but each quarter has three separate reports
released a month apart. That late-July read on Q2 was its initial
print, but last Wednesday August 30th saw its first revision
released. Instead of coming in at that original blistering 2.4%
annualized growth, that was revised sharply lower.
Usually GDP revisions are small, around 0.1% off the original
number. But Q2’s growth collapsed by GDP standards falling 0.3% to
just +2.1%! Had that 2.1% been the original headline back in late
July, it likely wouldn’t have been a big-enough upside
surprise to really bully around Fed rate expectations, the US Dollar
Index, and gold. Gold’s reanimated pullback probably would never
have ignited in that scenario.
This
is part of a troubling trend I analyzed again in our latest
Zeal Speculator weekly
newsletter. You can buy a single issue for just $19, probably
cheaper than a burger at an NFL game this season! The Biden
Administration’s bureaucrats in charge of key economic data are
releasing overstated numbers initially to make the US economy
look better than it really is. Then these big beats are later
quietly revised away.
Economic data involves estimates, and if statisticians were making
them honestly subsequent revisions would be roughly equally divided
between better and worse. But this year’s all-important monthly US
jobs reports for example have all been subsequently revised much
lower! Every single one was overstated on its initial release,
making this Administration’s policies look better. Partisan
politics have tainted economic data.
These endless better-than-expected releases have fueled the US
dollar’s blistering surge unleashing tons of gold-futures selling in
recent months. My essay last week digs into how the resulting huge
gold-futures
shorting spike is very bullish for gold. While unusual,
gold’s latest stripped-football pullback was fairly mild. The
yellow metal lost 4.5% from mid-July to mid-August, extending its
total selloff since early May to 7.9%.
That
was in line with February’s mid-upleg pullback of 7.2%, after which
spec shorts grew so excessive that gold bounced fast on
short-covering buying. During the next 2.3 months into early May,
gold blasted up 13.2% to new upleg highs. That pullback too was
driven by this same dynamic of fake Fed-hawkish data fueling big
US-dollar buying and gold-futures selling. GDX soared 34.4% in 1.2
months as gold rebounded!
Similar big mean-reversion bounces are probable again given specs’
massive gold-futures shorts. They legally have to be covered soon,
which means big proportional buying catapulting gold and gold
stocks higher. Gold and GDX need to best $2,050 and $35.85 to
achieve new upleg highs, which would greatly improve sector
sentiment. That would be like a football team responding to a pick
six with a touchdown drive.
But
like an interception run back into the end zone, gold stocks’
reanimated selloff is fairly minor in the grand scheme of this
upleg. This next chart looks at GDX’s technicals in recent years.
While there was certainly some damage done, gold stocks’ powerful
upleg remains intact. It won’t take much rallying for them to
return to the game, they aren’t behind by much. Traders are foolish
to give up after such a minor setback.
When
GDX’s original healthy mid-upleg pullback bottomed in early July,
that was ideal technically. The major gold stocks found major
support at both the lower end of their upleg’s uptrend channel and
GDX’s important 200-day moving average. It was great to see that
uptrend channel intact, which was confirmed when GDX bounced sharply
then broke out above its 50dma before that Q2 GDP report stripped
gold’s football.
GDX
decisively broke down below that key 200dma support line in early
August. It would’ve been nice if it hadn’t, but temporary breakouts
from major-upleg trends aren’t uncommon. As uplegs advance, their
uptrend channels have to periodically be redrawn as ascent
slopes change. Uptrends are defined as a series of higher lows and
higher highs. And despite gold stocks’ setback, that still holds
true for them today.
GDX’s first sharp mid-upleg selloff of 19.8% over 1.4 months into
early March bottomed at $26.68. That really damaged psychology at
the time, with traders walking off the field throwing their helmets
down in defeat. Yet GDX soared dramatically with gold out of that
healthy pullback, again powering 34.4% higher in just 1.2 months!
Who would risk missing a great comeback drive like that? Not
quitting was really rewarded.
GDX’s second healthy mid-upleg selloff originally ran 18.9% over 2.8
months into early July, when this leading gold-stock ETF bottomed at
$29.07. That should’ve held, and probably would’ve if gold hadn’t
been slammed by that fake overstated GDP data. The resulting heavy
gold and gold-stock selling extended GDX’s selloff losses to 23.4%
over 4.2 months into mid-August, when GDX started bouncing at
$27.45.
This
recent unusual reanimated-gold-pullback low remains well above
early March’s, keeping that higher-low upleg uptrend intact! As
long as GDX holds over $26.75 or so, that will remain true. That
may lower the slope of this upleg’s uptrend, which isn’t a big
deal. Those tend to moderate anyway as uplegs march on, since the
original blistering V-bounce pace out of major secular lows simply
can’t be sustained for long.
But
plenty of upleg uptrends also see temporary forays outside of trend
channels that soon return. GDX’s mid-April and early-May
highs as this upleg surged are great examples. While they shot
above its upper resistance line, GDX soon dropped back in. The
overdue sharp gold V-bounce on frenzied gold-futures short covering
could quickly catapult GDX back up above both its uptrend’s lower
support line and 200dma.
So
gold stocks are very much still in the game, this upleg isn’t dead!
Like I tell my son with his intense competitive basketball and
football games where leads often change and outcomes aren’t known
until the very ends, persevere. Never give up, never defeat
yourself mentally, never stop playing hard! Life is full of
setbacks, like pick sixes in football or breakdowns in uplegs. But
they have to be kept in proper perspective.
Even
Jesus Christ himself warned his followers “In this world you will
have trouble.” I’ve got plenty of my own troubles, and everyone I
know close enough to confide in me has lots of theirs too!
Struggles are just par for the course. But relatively-minor gold
and gold-stock selloffs freaking out traders again? Come on, that’s
nothing in the grand scheme. As I’ve analyzed
in multiple essays
during this gold upleg, it should grow big.
Ever
since it was born late last September at a major secular low of
$1,623, I’ve expected it to ultimately best 40% due to
multiple factors. That would imply gold challenging $2,275 before
this upleg finally gives up its ghost, deep into new nominal
all-time-record-high territory! That would radically improve
sentiment in gold and gold stocks, attracting in much new capital.
GDX generally amplifies material gold moves by 2x to 3x.
That
suggests 80%-to-120% gains for major gold stocks, and GDX was only
up 64% at best in mid-April and is only up 30% mid-week. 80% upleg
gains would drive up GDX from $28.50 today near $39.50, and 120%
would catapult it up over $48.00! And once gold achieves new
record highs over $2,062, interest in gold stocks should really
snowball fueling bigger-than-usual gains. Gold stocks’ upside
potential remains vast.
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The
bottom line is gold stocks are still in the game. That’s despite
just suffering a reanimated selloff with gold that prematurely
truncated another run higher. Triggered by overstated US-GDP-growth
data that was quickly revised lower, gold stocks did roll over into
technical breakdowns. But though they fell under both uptrend
support and GDX’s 200dma, their powerful upleg that launched a year
ago remains intact.
The
major gold stocks of GDX continue to carve higher lows and higher
highs on balance. Maybe their uptrend channel is moderating and
will have to be redrawn, but gold stocks are still marching higher
overall. They are poised for massive gains soon as gold mean
reverts sharply higher on big gold-futures short-covering buying.
Traders mentally-tough-enough to persevere through this setback
ought to win big. |