Gold stocks’ new
bull market this year has already proven breathtaking. This obscure
sector has nearly tripled within a matter of months, yielding
immense profits for the smart contrarians who bought in low. But
after such a blistering surge, what’s going to fuel gold stocks’
next upleg? Heavy gold investment buying driving its price much
higher will greatly boost gold-mining profitability, attracting in
far more capital.
Gold stocks’ new
bull run in recent months has been massive. Their leading benchmark
HUI gold-stock
index skyrocketed 182.2% higher in just 6.5 months between
mid-January and early August! No other sector in all the markets is
even remotely close to challenging this commanding performance. Yet
this mighty gold-stock bull still remains young and small, with the
great majority of its gains still left to come.
Back in
mid-January when all this began, the gold miners were universally
hated. So their stocks were battered to fundamentally-absurd
13.5-year secular lows. They were trading as if gold had
cratered to just $305 per ounce, but its actual price was
3.6x higher near $1087! So gold stocks were a screaming buy, as I
argued
aggressively the very week of those secular lows. This whole
sector was radically undervalued.
Since today’s bull
launched from such extreme lows, it will almost certainly prove
bigger and longer than normal. Mean reversions out of extremes
usually overshoot proportionally towards the opposite extreme. And
the standard for gold-stock bulls is already huge. The last one
powered higher between November 2000 and September 2011, a 10.8-year
secular span that saw the HUI rocket up a staggering 1664.4%!
So nearly a triple
in merely a half-year is nothing, practically baby steps in the
context of gold-stock bull markets. While great gains have already
been won by early contrarians, they are likely only the tip of the
iceberg. Gold stocks remain quite low relative to today’s
prevailing gold prices, let alone where gold is heading in its own
new bull. Gold is naturally the overwhelmingly-dominant driver of
gold-stock prices.
Stock prices are
ultimately driven by underlying corporate profits. And the gold
miners’ earnings amplify changes in the gold price,
exhibiting great
profits leverage to the metal they mine. Higher gold prices
lead to much-higher gold-mining profits, attracting more and more
investors to this sector. These include professional fund managers
controlling large pools of capital, and all this buying bids up
gold-stock prices.
Gold stocks’ next
upleg is going to be fueled by a rising gold price, just like the
last one and all before it. While gold investment demand has been
very strong this year,
overall
portfolio exposure to gold remains really low. Several factors
are converging which should greatly increase investors’ desire to
diversify into gold in the coming months. Gold’s bullish
outlook is easiest to understand through the lens of GLD.
The SPDR Gold
Shares are the world’s leading and dominant gold exchange-traded
fund. Nearing its 12th birthday, GLD has become the gold investment
vehicle of choice for large stock investors. It is an efficient and
easy way to add portfolio gold exposure. GLD’s managers are very
transparent, publishing a comprehensive detailed report to the
individual gold-bar level every day on their gold held in
trust for shareholders.
GLD’s holdings are
the best daily proxy available for whether investment capital
is flowing into or out of gold. The mechanics of a tracking ETF
like GLD require its managers to shunt any excess supply or demand
for its shares directly into physical gold bullion. That equalizes
differential buying and selling pressure between this ETF and its
underlying metal, which is the only way GLD can continue to mirror
gold.
This first chart
shows GLD’s daily physical-gold-bullion holdings superimposed over
gold’s price during the past 4 years or so. For each calendar
quarter, the builds and draws in GLD’s holdings are noted in both
percentage and absolute-tonnage terms. Gold’s price change for each
quarter is also shown. The situation in GLD’s holdings today
combined with some major events underway or coming argues for big
buying.
Gold cratered in
early 2013 due to an epic record mass exodus from GLD shares by
stock investors. In response to
stock markets
levitated by the Fed’s unprecedented open-ended third
quantitative-easing campaign, capital fled alternative investments.
Why own anything but stocks when they do nothing but rally thanks to
extreme central-bank easing? The resulting extreme GLD-share
selling crushed gold.
GLD’s mission is
to track the gold price, but its shares have their own unique supply
and demand that is independent from gold’s. So when stock traders
sell GLD shares faster than gold is being sold, this ETF’s price
threatens to decouple to the downside. GLD’s managers have to buy
back enough GLD shares to sop up the excess supply. They raise the
funds to do this by selling off some of this ETF’s underlying gold
bullion.
The
stock-levitation-fueled GLD liquidation finally climaxed in
mid-December 2015, the day after the Fed’s first rate hike in 9.5
years. Stock investors and futures speculators alike had come to
believe that Fed rate hikes were gold’s ultimate nemesis, despite
the fact history proves that
gold thrives
in Fed-rate-hike cycles! So GLD’s holdings were battered to an
extreme 7.3-year secular low of just 630.2 metric tons.
With gold itself
falling to a 6.1-year secular low that very day, bearish calls
abounded for gold to keep on spiraling lower indefinitely. But the
combination of gold not collapsing in the face of rate hikes despite
the script, and stock markets suffering their worst selloff in 4.4
years in early 2016, led investors to return to gold. So they
started migrating capital back into forsaken gold, primarily through
buying GLD shares.
The differential
demand for GLD’s shares was so great during Q1’16 that its holdings
surged by 27.5% or 176.9t! That raw tonnage number is important
because it once again reveals GLD’s overwhelming influence on
gold prices. The World Gold Council’s definitive research on global
supply and demand showed overall world gold demand rose 219.4t in
Q1. So GLD buying alone accounted for 80.6% of that!
That
massive gold
investment buying continued in Q2, where intense differential
demand for GLD shares drove another major 130.8t build. According
to the WGC’s latest Gold Demand Trends report on Q2’16 just released
yesterday, total global gold demand climbed 139.8t year-over-year.
Thus the GLD gold-bullion buying alone from differential share
demand was responsible for a whopping 93.6% of Q2’s total!
Love GLD
or hate it,
this single American gold ETF has been the overwhelmingly-dominant
driver of gold’s new bull. Stock-market capital flowing into GLD
shares certainly hasn’t been the only source of gold investment
demand, but so far it’s been the only one that really matters.
Global physical bar-and-coin demand per the WGC only rose 1.7t YoY
in Q1 and 2.5t in Q2. GLD is the whole gold game this year!
Gold stocks’
powerful young bull market was fueled by gold’s own new bull, which
in turn was driven by heavy differential demand for GLD shares by
American stock investors. And that trend is continuing in Q3,
despite it straddling the
summer doldrums
which are gold’s weakest time of the year seasonally. As of this
week, GLD’s holdings are already up 22.6t quarter-to-date in Q3.
That’s strong for the summer.
And I suspect that
investment demand for gold via GLD is on the verge of accelerating
markedly again. If stock-market capital resumes flowing into GLD
shares, gold is going to be driven higher. When GLD sees outsized
demand for its shares beyond gold’s own, they threaten to decouple
to the upside. So GLD’s managers have to offset this excess demand
by issuing new shares. The proceeds buy physical gold bullion.
Naturally higher
gold prices will be amplified by much-higher gold-mining
profitability, enticing investors into gold stocks as well. So if
stock-market capital indeed starts chasing GLD again in a major way
like the massive buying witnessed earlier this year, gold stocks’
next major upleg will really accelerate higher. Several factors are
converging now that ought to fuel surging GLD demand in the coming
months.
The key to it all
remains today’s lofty Fed-levitated stock markets. The flagship S&P
500 stock index just hit a series of new all-time record highs in
the past month, leading to epic complacency. But with all 500
component stocks trading at an extreme near-bubble
simple-average trailing-twelve-month price-to-earnings ratio of
27.2x, these stock markets are an accident waiting to happen. A
major selloff
is long overdue!
When these
super-overvalued hyper-complacent stock markets inevitably roll
over, gold is going to catch a major bid again just like it did in
early 2016. Gold is the ultimate portfolio-diversifying asset since
it tends to move counter to stock markets. When stock
markets start falling, investors flock to gold because its gains
help offset the losses in the rest of their portfolios. Weaker
stocks ignite gold investment demand.
This coming
stock-market selloff dovetails into another key factor that should
contribute to strong gold demand for the rest of this year. Because
these central-bank-levitated stock markets have radically
disconnected from underlying economic reality, most hedge funds
are really underperforming so far in 2016. They need to earn some
big gains before year-end to catch back up and keep their investors
happy.
Professional money
managers search for fast gains where they’re already happening,
attempting to ride the momentum. And this new gold bull is
momentum’s epicenter this year! As of the middle of this week, gold
and that leading HUI gold-stock index are up 27.0% and 153.3%
year-to-date compared to a mere 6.4% YTD gain in the S&P 500! Gold
is exceedingly attractive for underperforming fund managers.
The guys running
these hedge funds are super-smart, and have extensive knowledges of
market cycles and history. Thus they know that both gold and gold
stocks are now entering their seasonally-strongest times of
the year, where
mighty autumn rallies power higher. Late summer is the best
time of the year seasonally to buy gold, as it tends to enjoy big
gains between here and February during bull-market years.
Two more factors
on top of these could really supercharge this year’s usual outsized
autumn surge in gold investment demand. The first is waning
confidence in global central banks’ abilities to manipulate stock
markets higher indefinitely. Global zero-interest-rate policies are
giving way to negative-interest-rate policies, which have even
more-destructive side effects. Central banks are running out of
rate-cutting ammo.
While they can
conjure new money out of thin air to monetize bonds through
quantitative easing, they are running out of bonds to buy. Central
banks have had to extend their QE past the usual government bonds
into corporate bonds. And there is even growing talk of
helicopter money, the hyper-inflationary extreme where
freshly-created new money is given directly to citizens to spend!
Central banks’ end game nears.
If central banks
can’t keep convincing world stock traders that there is always more
easing coming, these global stock markets artificially levitated by
central-bank easing are in a world of hurt. And all this epic money
printing has created epic monetary inflation, which is super-bullish
for gold. In the US alone, the Fed’s broad MZM money supply has
soared 37.0% higher since gold’s last secular peak of $1894 in
August 2011!
The other unique
factor in 2016 is the great uncertainty this year’s presidential
election will spawn. At this point traders are convinced the
establishment’s Hillary Clinton will win, and maintain the status
quo of easy money. But when Trump inevitably starts rising again in
the polls in the coming months, there is going to be serious unease
about what this anti-establishment change agent will mean for the
markets.
Naturally market
anxiety is very bullish for gold investment demand, since this metal
thrives in times of uncertainty. So there’s plenty of reason to
expect this autumn’s gold buying to prove exceptional even after
this year’s powerful new bull market. And if gold indeed heads
higher as it certainly ought to, it is going to fuel further big
gains in gold-stock prices. Their young bull market is ready for
its next major upleg.
This final chart
looks at gold-stock price levels relative to the primary driver of
their profits and hence stock prices, gold. The HUI/Gold Ratio
distills down this crucial fundamental relationship into a
simple proxy. Dividing the daily close in the HUI gold-stock index
by the daily close in gold and charting the result over time shows
when gold-stock prices are relatively high or low compared to their
fundamental driver.
The HGR fell to an
all-time low back in mid-January, with gold stocks never
being cheaper relative to the metal which drives their profits!
This extreme anomaly was
fundamentally-absurd, the gold stocks could not trade as if gold
was in the low $300s when it was actually near $1100 forever. So
the very day of that insane low, I bought and recommended 6 new
gold-stock and silver-stock positions in our weekly newsletter.
As of this week,
they had unrealized gains running as high as +634%! Understanding
the relationship between gold prices and gold-stock price levels has
already proven immensely profitable in this young new bull. And
today’s HUI/Gold Ratio shows gold stocks still remain very low
relative to prevailing gold prices now, let alone where gold is
heading in its own major new bull. This is super-bullish for gold
stocks.
Before 2008’s
stock panic, the 5-year secular average HGR ran 0.511x. The HUI
close meandered in a tight trading range averaging around half of
where gold’s price was running. The epic fear maelstrom of that
first stock panic in a century in late 2008 shattered gold stocks’
strong relationship with gold, since they fell far faster than gold
as investors fled the markets in terror. The resulting 7.5-year HGR
low was short-lived.
Investors flooded
back into the super-undervalued gold stocks in a major way, so they
rocketed up out of their extreme stock-panic lows far faster than
gold did. In that panic’s aftermath, a new HGR range started to
form. Between 2009 and 2012, the HGR averaged 0.346x. That time
span is important, as it was the last normal years between
the panic and the Fed’s full QE3 ramp starting to levitate stocks in
early 2013.
Merely mean
reverting to that post-panic-average HGR at today’s $1350 gold price
would catapult the HUI up to 467! That’s another 66% above current
levels, showing the massive upside potential still remaining in gold
stocks despite their amazing gains so far this year. That alone
ought to be plenty of reason to expect a major new gold-stock
upleg. This devastated sector hasn’t even mean reverted to
normal yet.
But gold stocks’
bull-market potential from here is a heck of a lot higher than a
simple mean reversion suggests. Mean reversions out of extremes
usually overshoot proportionally to the opposite extreme
before they normalize, and gold itself is due to power much higher
on heavy investment demand. Plug these numbers into this HGR proxy,
and it’s clear investors should be rushing to deploy capital in gold
stocks.
Back in
mid-January at gold stocks’ fundamentally-absurd 13.5-year secular
low, the HGR fell to an all-time low of 0.093x. That extreme is a
gargantuan 0.253x away from the normal-year post-panic average of
0.346x. Since mean reversions tend to overshoot proportionally to
the opposite side out of extremes, we can add that deviation to the
HGR average to get an overshoot upside target. It’s an
equally-extreme 0.599x!
Such extreme HUI
levels would be short-lived, only coming late in a major bull where
extreme greed for gold stocks snowballed into a popular mania.
Nevertheless, that’s exactly how gold-stock bull markets typically
end. At today’s $1350 gold, a proportional-overshoot 0.599x HGR
implies a HUI of 809. That’s another 187% higher from this week’s
levels! And that HGR is still fairly conservative for a bull
climax.
Back in the
mid-2000s, the HGR traded above 0.599x multiple times even within a
normal bull market without a popular mania. And given the extreme
central-bank-levitated stock markets and vast money printing of
recent years, it wouldn’t be surprising at all to see gold stocks
reestablish their old pre-panic trading range with gold.
From there a proportional HGR overshoot to cap a new secular bull
would be far higher.
Gold’s own new
bull is far from over too, with massive new investment demand still
to come. The stock-market investors in particular, the guys who
choose to own gold via GLD shares, remain
radically-underinvested in gold. They have vast buying left to
do merely to get 1% gold exposure in their stock-heavy portfolios at
risk of a serious selloff, let alone the 5% to 20% that’s been
considered prudent for centuries.
Gold’s old
secular-bull peak near $1900 should easily be shattered in this new
bull, given the extremes in stock markets and money printing
courtesy of the easy central banks. But even in 2012 before the
Fed’s open-ended QE3
artificially
extended a long-in-the-tooth stock bull due to roll over back
then, the gold price still averaged a much-higher $1669. Regaining
pre-QE3 levels is a very-conservative gold target.
At $1669 gold and
that 0.346x post-panic-average HGR, that yields a HUI target of 577
which is another 105% higher from here. And at $1669 gold and a
proportional-overshoot 0.599x HGR, that actually soars to 1000 or
another 255% higher from here! I would be shocked if we don’t see
HUI 1000 before gold stocks’ young new bull market fully runs
its course. It has barely begun, with the best gains left to come.
As always
investors and speculators can play the coming gold-stock gains in
that leading GDX VanEck Vectors Gold Miners ETF, which closely
mirrors the HUI. But
GDX is
over-diversified so its ultimate gains will be dwarfed by those
of the individual gold miners’ stocks with superior fundamentals. A
carefully-handpicked portfolio of the best gold miners and explorers
will greatly outperform the gold-stock benchmarks.
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 833 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 +17.6%! And that’s not including the huge
unrealized gains on our books today.
They’re running as
high as 600%+ this week, with many doubles, triples, and quadruples
this year alone! We’re also starting a major new gold-stock and
silver-stock deployment to ride this coming upleg. You can read
about our new trades and market timing in our acclaimed
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The bottom line is
heavy gold investment buying is going to fuel gold stocks’ next
upleg. Gold is on the verge of seeing major new capital inflows
heading into its strong autumn buying season. There’s not only
radical underinvestment in this ultimate portfolio diversifier, but
lofty overvalued stock markets are overdue to roll over. That will
combine with this year’s waning faith in central banks and election
uncertainty.
Gold stocks are
ready to surge again as investment demand drives gold prices
higher. The gold miners’ inherent profits leverage really amplifies
gold’s gains, and higher profits entice in more investors leading to
higher stock prices. And despite their powerful new bull this year,
the gold stocks remain low and undervalued relative to gold even at
today’s prevailing levels. So their upside potential from here is
still vast.
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