Gold stocks are on
fire this year, powering higher in market-dominating performance.
This is a massive reversal from their dark fourth quarter, with
6/7ths of those losses already erased. But this strong new upleg
still remains young and small by historical standards. Gold stocks’
recent rally is only the vanguard of another major bull-market
upleg. This sector’s bullish technicals reveal vast upside
potential from here.
The gold miners
are a small contrarian stock-market sector that isn’t widely
followed. Hearing about how the gold stocks are faring in the
mainstream financial media is pretty rare. So this sector generally
flies under the radars of the great majority of speculators and
investors. That’s rather unfortunate, because the gold stocks have
enjoyed some of the greatest gains in all the stock markets in this
young century.
The flagship
gold-stock index is the NYSE Arca Gold BUGS Index, which trades
under the symbol HUI. BUGS stands for Basket of Unhedged Gold
Stocks, as major gold miners can’t be included in the HUI unless
their gold production is not hedged beyond 1.5 years. Running all
the way back to June 1996, and having no management fees like ETFs,
the HUI offers the definitive read on gold-stock performance.
Today’s leading
gold-stock trading vehicle, the GDX VanEck Vectors Gold
Miners ETF,
closely mirrors the HUI’s price action. Since there aren’t that
many major gold miners, GDX’s composition is similar to the HUI’s by
necessity. But because GDX charges a 0.52% annual management fee,
and its managers change around its components and their weightings
so much, the HUI remains the gold-stock metric of choice.
All speculators
and investors should pay attention to gold stocks because their bull
markets and uplegs multiply wealth like no other sector. Their last
secular bull ran between November 2000 and September 2011. During
that 10.8-year span, the HUI skyrocketed 1664% higher while
the broad-market S&P 500 slipped 14% lower! Secular bull markets in
gold stocks truly create life-changing dynasty-building wealth.
Last year another
major gold-stock bull market was stealthily born, that has great
potential to go secular and get huge. Despite their rotten fourth
quarter, the gold stocks as measured by the HUI still blasted a
market-leading 64.0% higher in 2016! That compares to a mere 9.5%
gain in the S&P 500. So with the HUI already up 21.5% year-to-date
in young 2017, speculators and investors alike really need to take
notice.
All this
gold-stock behavior over the past year or so has been textbook
early-secular-bull stuff. And if a new secular bull is indeed
underway, the gains in gold stocks in the coming years are going to
radically dwarf those seen since early 2016. This first chart looks
at this young gold-stock bull in HUI terms since last January. This
sector’s technicals have turned really favorable again following the
fourth-quarter anomalies.
![](http://www.24hgold.com/24hpmdata/articles/img/Adam Hamilton-Gold Stocks Strong New Upleg-2017-02-10-001.gif)
Just over a year
ago in mid-January 2016, the gold miners’ stocks had been left for
dead. Traders had abandoned them to such an extreme degree that the
HUI slumped to a
fundamentally-absurd 13.5-year secular low. Gold-stock
prices had collapsed back to July 2002 levels, when gold was trading
near $305 and had yet to exceed $329 in its young secular bull! But
last January gold was 3.6x higher at $1087 at worst.
Just like the rest
of the stock markets, gold-mining stock prices must ultimately
reflect some reasonable multiple of underlying corporate profits.
Back in Q4’15 as traders fled gold stocks, the average gold price
was $1105 which was the worst quarter since Q4’09. Yet the elite
gold miners of GDX still reported average all-in sustaining costs of
just $836 per
ounce. They remained very profitable even in gold’s trough
quarter.
So a major new
bull market was born for fundamental reasons right at the peak of
extreme bearishness. Within just 6.5 months, the HUI had rocketed
182.2% higher to a 3.2-year high! Contrarian speculators and
investors smart enough and tough enough to buy gold stocks when they
were loathed nearly tripled their capital in a half-year.
Incredibly 2017 has the potential to see another similar mighty
gold-stock upleg.
Gold-stock
enthusiasm was getting too rampant last summer, so
a major
correction was inevitable. Such selloffs are essential to
keeping bull markets healthy, bleeding off excessive greed to
restore balance to sentiment. Indeed this red-hot sector fell
sharply in August before starting to grind higher off a lower base
in September. The gold stocks were looking bullish again after
plunging 22.0% in less than a month.
But unfortunately
Q4’16 proved full of weird market anomalies. Gold stocks
were hammered even lower in three separate mass-stopping events.
These are normally very rare, so suffering a few of them in a single
quarter is phenomenally unlucky. But one hard lesson all traders
must learn is how essential it is to just roll with the punches.
When markets decouple from reality on sentiment, keep your eyes on
fundamentals.
In early October
the HUI plunged another 13.0% in three trading days as cascading
stop-loss selling was triggered by gold. As gold slipped through
major support at $1300, gold-futures speculators’ own stop losses
started tripping on their hyper-leveraged positions. The resulting
mass stopping
was devastating to gold-stock sentiment, as it erupted from
correction lows after gold stocks had already sold off considerably.
But the oversold
gold stocks soon bottomed and started rallying higher along their
key 200-day-moving-average support in October. This fast recovery
proved that extreme early-October selling was just an anomaly
with no fundamental justification. The gold stocks rallied on
balance along their bull-market uptrend’s support line until early
November. Then Trump’s surprise election win sparked great market
upheavals.
For months leading
into that election, all market indications were that stock markets
would sell off while gold rallied if Trump somehow pulled off
a victory in defiance of the polls. As the early results came in on
Election Day’s evening, gold rocketed 4.8% higher from that day’s
close in futures trading. The big gold stocks trading live in
Australia were up 15%+! Stock markets were plunging, with the S&P
500 down 5%.
But after Clinton
apparently conceded early the next morning, big buyers started to
flood into stock-index futures. As stock markets turned around and
then started to surge in their incredible Trumphoria rally, gold
lost its luster. Gold is the anti-stock trade that tends to
move counter to stock markets. So when the stock markets appear to
do nothing but rally, gold investment demand all but collapses thus
gold prices fall.
So a couple days
after the election as euphoric stock traders
dumped gold
positions, the HUI plummeted another 15.2% in just two trading
days! That was another snowballing mass stopping, an anomaly driven
by an exceedingly-unlikely event. Not only did Trump the underdog
win, but contrary to months leading in stock traders suddenly
decided capricious Trump was fantastic for stocks. That’s a
once-in-a-lifetime surprise.
Yet again the
anomalous, sentiment-driven nature of gold stocks’ plunge
soon became apparent. This sector immediately stabilized and
started drifting sideways near lows despite ongoing heavy gold
selling by stock investors. The HUI ground sideways until
mid-December, when a third mass stopping in Q4 was triggered by the
Fed proving more
hawkish than expected by predicting three more rate hikes in
2017.
That took the
HUI’s total loss to an extreme 42.5% in just 4.4 months! In Q4
alone this leading gold-stock index had plunged 21.1%. That left
speculators and investors alike super-bearish on this sector,
totally deluded by groupthink sentiment and blinded to the actual
fundamentals. That was a serious mistake. The traders smart enough
to get rich in the markets know extreme fear is irrational,
fleeting, and marks major bottoms.
Despite stock
investors’ heavy selling of gold via GLD gold-ETF shares in Q4, gold
still averaged $1218 last quarter. Yet in the preceding Q3’16,
which is the latest data available, the major gold miners of GDX
averaged all-in sustaining costs of just
$855 per ounce.
That meant this sector was still running hefty operating profits
around $363 per ounce! Thus it was ludicrous for gold stocks to
be priced for profits collapsing.
So back in late
December soon after that hawkish Fed surprise we made one of our
most-aggressive gold-stock and silver-stock deployments ever. We
bought and recommended a bunch of great precious-metals miners
trading at ridiculously-low prices relative to their underlying
earnings. That contrarian bet has already proven wildly profitable
in the form of massive unrealized gains over the past 7 weeks
or so.
While the gold
miners’ Q4 operating results generally aren’t out yet, this
industry’s all-in sustaining costs are likely to remain largely in
line with the couple preceding quarters’ $886 and $855. That will
prove gold mining remained very profitable last quarter even while
that improbable series of anomalous mass stoppings fueled
hyper-bearish sentiment. Gold stocks’ strong upleg since is
absolutely fundamentally justified!
As of the middle
of this week, the HUI has already surged 35.5% higher out of its
deep mid-December low. That once again trounces the S&P 500’s
meager 1.4% gain over that span. Yet all the gold stocks have done
so far in their strong new upleg is reverse those anomalous
post-election losses. This sector has merely mean reverted back up
to its 200-day moving average, where it was trading before Trump
won.
This 200dma
challenge is crucial, as an upside breakout will convince a lot of
speculators and investors on the sidelines that this new upleg is
the real deal. A year ago in early February, buyers started to
flood into this sector once the HUI blasted back over its 200dma.
This particular long moving average is often the most-important
support line in any bull market. A decisive 200dma breakout
should ignite big upside momentum.
Even on a
short-term basis only considering this past year’s young gold-stock
bull, this sector has lots of room to run higher from here. The HUI
needs to rally another 28% just to regain its August 2016 high, and
that was still really low in the grand scheme. The upper resistance
line of this young bull market’s uptrend is even higher, up around
305 or so. The gold-stock technicals still look very bullish
from here.
But a mere
single-year perspective is myopic considering what gold stocks have
been through, really failing to do justice to their vast upside
potential. This next chart zooms out to the preceding bear
market between late 2011 to late 2015. Despite already nearly
tripling in the first half of last year, this battered sector’s
young bull remains quite small. Gold-stock price levels are still
very low by historical precedent.
![](http://www.24hgold.com/24hpmdata/articles/img/Adam Hamilton-Gold Stocks Strong New Upleg-2017-02-10-002.gif)
If market history
proves one thing, it’s that markets are forever cyclical.
Bulls are invariably followed by bears, and they tend to be
proportional. This critical core truth has been forgotten by stock
traders today, as they are all caught up in the extreme Trumphoria.
Big bulls always yield to big bears and vice versa, as nothing rises
or falls forever. The gold stocks are early-on in a new bull
destined to grow to great size.
Following their
last secular bull where they skyrocketed 1664% higher in a little
over a decade ending in September 2011, this sector collapsed into a
brutal 84.1% bear market that ran 4.4 years. That too was an
anomaly, the result of wildly-unprecedented extreme Fed easing.
Back in late 2012 the Fed ramped up its new third
quantitative-easing campaign to full steam. QE3 was a very
different beast from QE1 and QE2.
Unlike its
predecessors, QE3 was open-ended with no predetermined size
or end date. This worked to ignite an incredible and dangerous
stock-market
levitation. Whenever the stock markets started to sell off in a
healthy and overdue correction, Fed officials would rush to assure
traders that they were ready to expand QE3’s bond monetizations if
necessary. This extreme dovishness quickly truncated nascent
selloffs.
Thus stock traders
came to believe that the Fed was effectively backstopping the
stock markets. So they abandoned prudent portfolio
diversification, which counter-moving gold is the cornerstone of.
Heavy
differential GLD-share selling persisted for years as investors
shunned gold to move even more capital into their
already-stock-dominated portfolios. The gold stocks suffered
relentless extreme selling as gold fell.
Since gold
investment demand and therefore gold prices are so dependent on
stock-market fortunes, gold’s performance between 2013 to 2015 was
largely the mirror image of the S&P 500’s. And the gold stocks,
with earnings almost totally dependent on the gold price, leveraged
gold’s losses. But the bear market in gold stocks couldn’t last
forever any more than this bull market in general stocks can, as
2016 proved.
Out of that
extreme fundamentally-absurd 13.5-year secular low, gold stocks
started powering higher in early 2016 as heavy gold buying
returned. That was in response to the
first real
stock-market corrections seen in almost 4 years thanks to the
Fed actively suppressing stock-market selling through aggressive
dovish jawboning. Those falling stock markets rekindled
major gold investment demand for the first time in years.
The gold stocks
naturally followed gold, which overwhelmingly drives their profits,
higher. They soon broke out from a short-term resistance line and
then major secular resistance. But despite their huge upleg in the
first half of 2016, the HUI still merely regained mid-2013 levels.
Those were still really low in historical context, the result
of gold’s extremely-anomalous plunge as the Fed jawboned stock
markets higher.
At this week’s HUI
levels near 220, this leading gold-stock index remains not far from
deep bear-market lows. This sector is trading at late-2014 levels,
which were super-depressed by excessive bearishness. So the gold
stocks continue to have vast upside potential as they mean
revert out of an extreme bear that was fundamentally unjustified
into a proportional subsequent bull. Consider a couple of recent
ranges.
Back in 2012 which
was the last year before the Fed’s extreme QE3 distortions sent
markets haywire all over the world, the HUI averaged 465. In order
to regain those levels, the gold stocks as a sector would have to
rally another 110% from this week’s levels! Is there any other
sector in all the stock markets with easy potential to double
from here given the lofty stock prices and accompanying
euphoria? Not a chance.
In 2011 when gold
investment was a lot more normal, the HUI averaged 551. That’s
about 150% above current levels. Since bear markets are usually
followed by proportional bulls, this young gold-stock bull is very
likely to prove secular and fully regain 2011 levels. Of course
such a huge mean reversion will require higher gold prices.
Nothing gets traders more excited about buying gold stocks than
higher gold.
Gold itself has
embarked on its own mean reversion higher out of its deep 6.1-year
secular low of late 2015. Today gold is poised for big new buying
from its two primary drivers, American stock investors and American
futures speculators. The stock investors buy gold through GLD
gold-ETF shares. Since they dumped gold so aggressively on that
Trumphoria stock-market rally, they are
radically
underinvested now.
So they will have
to do big gold
buying in the coming months and years to try and re-diversify
their stock-heavy portfolios. Provocatively that just got underway
this month, with GLD shares enjoying strong differential
buying pressure for the first time since the election! That will
accelerate dramatically as these overvalued, euphoric stock markets
inevitably start rolling over into their
long-overdue next
bear market.
And the futures
speculators’ long positions, their upside bets on gold,
are still very
low. Thus these traders have tons of room to buy and really bid
gold higher as they reestablish normal long levels. In addition to
higher gold prices, another major driver of that futures buying will
be the lofty US
dollar continuing to fade from its recent 14.0-year secular
high. Trump’s people will talk down the dollar to boost US exports.
As gold itself
continues mean reverting higher out of recent years’ bearish
extremes, the gold miners’ stocks will amplify its gains like usual.
Gold-mining profits
are highly
leveraged to gold prices, so higher gold prices quickly
translate into much-greater earnings. This critical fundamental
underpinning of this young gold-stock bull and its strong new upleg
will help the former grow to massive secular proportions.
While speculators
and investors alike can certainly play gold stocks’ big coming gains
with the major ETFs like GDX, the best gains by far will be won in
individual gold stocks with superior fundamentals. Their upside
will trounce the ETFs’, which are burdened by over-diversification
and underperforming gold stocks. A carefully-handpicked portfolio
of elite gold and silver miners will generate much-greater wealth
creation.
At Zeal we’ve
literally spent tens of thousands of hours researching
individual gold stocks and markets, so we can better decide what to
trade and when. As of the end of Q4, this has resulted in 906 stock
trades recommended in real-time to our newsletter subscribers since
2001. Fighting the crowd to buy low and sell high is very
profitable, as all these trades averaged stellar annualized realized
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Our many new
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informed all the time and be contrarian. An easy way to stay
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The bottom line is
gold stocks’ strong new upleg is only just starting. Despite
enjoying market-leading 2017 performance, all this sector has done
so far is reverse the anomalous extreme post-election losses. Gold
mining almost certainly remained very profitable even in dark Q4,
which means the gold stocks are way undervalued fundamentally
relative to their current earnings power. And that will soar as
gold rises.
Gold itself is
poised to see big buying from stock investors and futures
speculators returning after fleeing en masse last quarter. Higher
gold prices will lead to much-higher gold-mining profits,
strengthening the fundamental foundation of gold stocks’ young new
bull and upleg. And with gold stocks remaining so low historically,
this bull has excellent potential to grow to secular proportions
greatly multiplying wealth. |