The
gold miners’ stocks surged back this week, blasting higher out of
early-year weakness. Those big-and-fast gains were fueled by gold’s
own, which shot up without any news catalyst. Seeing battered gold
stocks showing signs of life has piqued traders’ interest, starting
to shift sector sentiment back towards bullish. These leveraged
plays on gold have a long ways to run, as they remain
technically-low and oversold.
Gold-stock trends are totally dependent on gold’s fortunes. The
miners’ earnings are highly levered to the yellow metal’s price
changes, really amplifying its gains and losses. That deep
fundamental intertwining helps make gold-stock prices mirror and
amplify gold’s own. There’s a major psychological component to
this infrangible link too, with traders most interested in buying
the miners’ stocks when gold itself is rallying.
The
leading sector benchmark is the GDX VanEck Gold Miners ETF, which
includes the world’s major gold miners. Their stocks and thus GDX
tend to leverage material gold moves by 2x to 3x. But they
fared far better this Wednesday, with GDX soaring 7.2% on a
comparatively-smaller 1.5% gold up day. That made for massive 4.9x
upside amplification, really outsized! Leverage is also running a
big 3.7x year-to-date.
This
week’s surge extended young uplegs in this metal and its miners’
stocks that have been running since late September, largely
in stealth-mode. Gold climbed 6.7% in that span, which GDX
amplified by 2.0x with a parallel 13.4% gain. But with the
precious-metals complex remaining low technically and generating
little momentum-driven excitement, these mounting uptrends have been
mostly overlooked.
Since gold is the key to gold-stock performance, I’ve written
a lot about it over the past six weeks. In mid-December I analyzed
the apathy
plaguing gold investment demand, starving this leading
alternative asset of the capital inflows it needs to power higher.
But gold was still holding its own,
weathering that
month’s uber-hawkish Federal Open Market Committee meeting
suffering virtually no technical damage.
The
Fed not only doubled the pace of its quantitative-easing tapering,
but top Fed officials tripled their rate-hike outlook to
fully six federal-funds-rate increases in 2022 and 2023! Hawkish
dots have sunk gold in the past, unleashing furious hyper-leveraged
gold-futures selling
like back in
mid-June. Defying the naysayers, gold actually surged 3.3% out
of that FOMC into year-end. That drove GDX 6.4% higher, 2.0x.
In
early January I discussed gold’s
big breakout
nearing. For the past year-and-a-half or so, the yellow metal
was squeezed into a giant pennant technical formation. That
was nearing a forced breakout as its descending upper-resistance and
climbing lower-support lines converged. Such continuation patterns
usually resolve in the direction they were entered, which was
strongly up in the case of gold’s mid-2020 flagpole.
Interestingly I got a lot of flak on that gold-upside-breakout
analysis, as the metal was slammed that week when the minutes from
that uber-hawkish mid-December FOMC meeting discussed starting
quantitative-tightening monetized-bond runoffs early in the
threatened imminent next Fed-rate-hike cycle. But after a
sharp-yet-short-lived hit, gold resumed grinding higher. It is now
right on the verge of that huge breakout!
Then
last week I analyzed
gold lagging
inflation in a popular essay. Because the Fed more than doubled
its balance sheet since March 2020’s stock panic, conjuring up
$4,630b of new money out of thin air, US inflation metrics are
soaring to multi-decade highs! Gold, the ultimate inflation
hedge for millennia, hasn’t responded to that yet. But it soon
will, as gold’s epic 1970s multiplyings in the last huge inflation
spikes proved.
These recent gold developments are really-bullish, but gold-stock
investors and speculators alike largely weren’t paying attention.
With bearish herd sentiment festering since gold’s sharp
futures-driven selloff in late November, traders were
mentally-checked-out for the holidays. So this week’s big GDX surge
was a real wake-up call. The left-for-dead gold stocks still have
explosive upside potential in gold’s next upleg!
I’ve
been professionally speculating in this small contrarian sector for
over a couple decades now. And the gold-stock setup today is
certainly one of the most-bullish I’ve ever seen. Sooner or
later traders will catch on, and flood back into this neglected
sector with a vengeance. Establishing positions in excellent
fundamentally-superior gold miners’ stocks before the herd figures
this out will lead to fortunes being won.
With
even heavily-lowballed headline US Consumer Price Index inflation
now running up a super-hot 7.0% year-over-year, real returns in
general stocks and bonds are deeply negative. Despite that
crazy 39.5-year inflation high driven by the Fed’s
radically-unprecedented extreme money printing, American stock
investors have virtually zero gold exposure. They will ramp that
dramatically as stock markets roll over.
Exiting 2021, the combined holdings of the leading-and-dominant GLD
and IAU gold ETFs were worth less than 0.2% of the total market
capitalization of the elite S&P 500 stocks! After years of extreme
Fed quantitative easing artificially levitating these stock markets,
prudent diversification with counter-moving gold has withered
away to nothing. For centuries 5%-to-10% gold allocations have
been recommended.
And
the Fed mushrooming its balance sheet by an insane 111.3% in just
22.6 months has forced stock-market valuations way into dangerous
bubble territory. Those S&P 500 stocks’ trailing-twelve-month
price-to-earnings ratios entering January were averaging 33.6x
earnings! These wildly-overvalued stock markets will crumble as the
FOMC launches its imminent threatened rate-hike cycle and QT bond
runoffs.
Gold
is essential for all investment portfolios because it tends to rally
when stock markets weaken, acting like portfolio insurance.
As of mid-week, the S&P 500 had dropped a sharp 5.5% from its latest
all-time-record high on 2022’s first trading day. In that same
span, despite that FOMC-minutes-QT selloff, gold still climbed a
strong 2.2%. GDX leveraged gold’s gains by a solid 2.3x, surging
4.9% during that time.
On
Tuesday and Wednesday this week alone, the S&P 500 plunged 2.8% as
bond yields blasted higher on looming Fed rate hikes. Gold
countered that with a 1.3% gain, which GDX amplified to 5.9% making
for outsized 4.4x upside leverage! As treacherous as this brittle
Fed-levitated stock-market environment is, investors should be
running 20% gold allocations along with an additional similar
fraction in great gold stocks!
The
gold miners’ allure today isn’t just riding gold’s coming massive
upleg fueled by the worst inflation since at least the early 1980s.
They are also deeply-undervalued fundamentally, earning money
hand over fist with these relatively-high prevailing gold prices.
After every quarterly earnings season I dig into the
latest results
reported by the GDX gold miners. Those remain Q3’21’s, as Q4
reporting hasn’t started yet.
Even
with gold racked by periodic bouts of heavy-to-extreme gold-futures
selling on Fed-tightening fears during that quarter, the GDX gold
miners were earning massive profits of $704 per ounce! That was the
difference between prevailing gold prices and miners’ average all-in
sustaining costs. Those sector earnings were still the
sixth-highest on record, after the five preceding quarters.
Gold mining is very lucrative.
In
conventional TTM P/E terms, most of the GDX gold miners were
averaging cheap multiples of 19.8x. Eight of GDX’s 25-largest
component stocks traded in the teens, while another five were
dirt-cheap languishing at single-digit P/Es! That strong
profitability is going to continue into Q4’21’s coming results.
Despite the silly Chicken-Little sentiment, gold’s $1,796 average
close in Q4 was slightly better than Q3’s $1,789.
Even
after GDX’s spectacular 7.2% daily surge midweek, the gold stocks
remain really-low technically still in oversold territory. This
chart superimposes GDX and its key technicals over an
overboughtness-and-oversoldness gauge called the Relative GDX or
rGDX. I created the underlying
Relativity
Trading system nearly two decades ago, which recasts prices as
comparable multiples of their key 200-day moving averages.
These 200dmas prove ideal technical baselines, moving slowly enough
to gradually reflect changing prevailing price levels. Over time
prices divided by their 200dmas tend to form horizontal trading
ranges. Here GDX’s 200dma is flattened to 1.0x, while rGDX
multiples meander around that in red. The gold stocks have been
mostly oversold for about a year now, forming a giant technical base
for a massive upleg.
Relativity trading ranges are defined based on the last five
calendar years of multiple data. In GDX’s case, that is currently
running between 0.80x to 1.35x. Gold stocks are oversold when GDX
is bludgeoned near or under 0.80x its 200dma, and overbought when
they surge around 1.35x above it. Gold stocks haven’t been
extremely-overbought since way back in August 2020, after GDX’s last
enormous upleg.
Over
4.8 months out of that March 2020 pandemic-lockdown stock panic, GDX
skyrocketed 134.1% higher! Those huge gains were fueled by gold’s
parallel massive 40.0% upleg in that span, making for big 3.4x
upside leverage to gold. Such colossal and fast gains naturally
spawned universal greed and euphoria, so a healthy correction was
necessary to rebalance sentiment. That indeed happened into
March 2021.
After that rebalancing gold started powering higher again in a solid
young 13.5% upleg by June, which GDX was starting to leverage with a
28.4% gain or 2.1x. But that gold upleg was prematurely truncated
mid-month when gold-futures speculators freaked out about Fed
officials predicting maybe two rate hikes way out into year-end
2023! Fearing that Fed-rate-hike cycles will hammer gold makes
no sense historically.
Since 1971 the FOMC has executed
fully twelve
rate-hike cycles, three or more consecutive increases in its
federal-funds rate. Gold’s average absolute gains across the exact
spans of all dozen were +26.1%. In the seven where gold rallied,
its average gains were an awesome +54.7! In the other five
where gold slumped, its average losses were an asymmetrically-small
13.9%. Two key factors drove gold’s performances.
Gold
fared best during Fed-rate-hike cycles when it entered them
relatively-low technically and they were gradual. Both
conditions are true today. Gold has largely consolidated
sideways since mid-2020, and is back down near its 200dma. And the
FOMC can’t risk hiking more than a quarter-point per
regularly-scheduled meeting in the coming thirteenth modern hiking
cycle without tanking bubble-valued stock markets.
The
rGDX plunged into extremely-oversold territory twice in this past
year, starting with 0.825x climaxing gold stocks’ last normal
bull-market correction in early March. Then in late September when
gold-futures speculators’ supremely-irrational Fed-tightening
hysteria peaked, GDX was again battered back down to just 0.838x its
200dma. After being mostly oversold for about a year, gold
stocks have big room to soar higher.
They
remain relatively-low technically today, which explains the recent
bearish sentiment plaguing this high-potential sector. GDX has been
trading near mid-2019 levels despite much-higher prevailing gold
prices. From June to September 2019, gold and GDX averaged closes
of $1,447 and $27.00. From September to December 2021, these
averages climbed 23.8% and just 17.5% to $1,791 and $31.71.
Remember GDX tends to amplify prevailing gold trends by 2x to 3x,
implying GDX should have been running between roughly $40 to $46
per share in recent months! That’s where this leading major
gold miners’ ETF needs to mean revert back up to. Those are big
gains from midweek $33ish levels. To hit that extremely-overbought
warning at 1.35x its depressed 200dma, GDX would have to soar back
over $45.
Including mid-2021’s FOMC-stunted dwarf upleg, GDX’s five uplegs so
far during this secular gold bull have averaged massive 85.0%
gains! To merely do that again out of late-September’s latest
major interim low, GDX would have to power all the way above $53!
So despite gold stocks’ strong surge this week, their upside
potential remains enormous. This young upleg has a long ways to run
yet before it matures.
And
GDX is certainly not the best gold stocks have to offer. The
smaller mid-tier
and junior gold miners are generally fundamentally-superior to
the majors, achieving much-bigger gains during gold uplegs.
Not only are their much-lower market capitalizations way easier for
capital inflows to drive higher, but they are able to achieve
much-better production growth off smaller bases. Their upleg gains
usually trounce those of GDX.
So
the battered gold stocks have a super-bullish setup today on
multiple fronts. While traders noticed GDX’s powerful 7.2% up day
this week, they aren’t yet convinced and thus haven’t yet started
redeploying en masse. But as gold continues powering higher on
balance on this intractable monetary and inflation disaster
the profligate Fed has spawned, the gold miners’ stocks will
increasingly return to favor and soar.
The
biggest beneficiaries of much-higher gold prices ahead are those
fundamentally-superior mid-tier and junior gold stocks. They
rallied sharply with gold into mid-November, but were dragged back
down to their stop losses by another bout of heavy gold-futures
selling. Our stoppings averaged out to neutral, fully recovering
our capital. So we’ve been aggressively redeploying buying back
in low in our newsletters.
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The
bottom line is gold stocks surging back again confirms a young upleg
underway. This long-overdue next bull run higher has big potential
to grow enormous. Gold-stock sentiment has been
overwhelmingly-bearish in recent months, fueled by this sector’s
battered technicals. Yet the gold miners are still earning money
hand over fist with relatively-high prevailing gold prices, and
generally trading at cheap valuations.
Gold-stock prices have fallen well behind gold’s despite one of this
metal’s most-bullish setups ever. Gold prices have yet to respond
to the raging inflation unleashed by the Fed’s epic money printing.
The last time inflation ran this hot in the 1970s, gold skyrocketed
by multiples in response. Gold stocks will soar in the coming
powerful gold upleg driven by inflation-fear-fueled
portfolio-diversification capital inflows. |