Gold-Stock Bull Breakout!
Adam Hamilton April 24, 2020 2845 Words
The gold miners’ stocks surged to a major bull-market breakout this week! Powering decisively above their years-old secular resistance is a hugely-important technical event. It proves this gold-stock bull is alive and well, greatly improves sentiment, and puts this high-flying sector on countless more traders’ radars. New bull highs fuel self-feeding bullish psychology, as speculators and investors love chasing winners.
The gold miners’ stocks are essentially leveraged plays on gold, since its price overwhelmingly drives their earnings and thus ultimately stock prices. So gold-stock bulls and bears mirror and amplify gold’s own major market cycles. Today’s secular gold bull began marching in mid-December 2015, birthed from choking despair. Gold stocks’ parallel bull arose from the ashes about a month later in mid-January 2016.
The GDX VanEck Vectors Gold Miners ETF is this sector’s most-popular benchmark today. It plunged to a fundamentally-absurd all-time-record low of $12.47 at that terrible nadir. This major gold miners’ ETF had collapsed 81.3% during the previous 4.4 years in an exceedingly-brutal bear market! Left for dead, virtually everyone hated this small contrarian sector. But such shocking extremes forge new secular bulls.
This gold-stock bull’s maiden upleg proved massive, with GDX skyrocketing 151.2% higher in just 6.4 months! In early August 2016 this leading sector ETF peaked at $31.32. Naturally there was much gold-stock excitement after such an epic run, even though they had stretched to dangerously-overbought levels. That’s the time to be wary, as secular bulls are an alternating series of major uplegs then corrections.
GDX plunged 39.4% over the next 4.4 months, the gold stocks’ downside seriously exaggerated by gold’s odd behavior then. That November, Trump won the presidency while Republican lawmakers retained their majorities in both chambers of Congress. Traders were ecstatic Trump’s surprise victory greatly upped the odds for big tax cuts soon, so stock markets soared on those hopes. Investors fled gold to chase stocks.
Gold stocks’ resulting outsized correction seriously damaged sector psychology, ushering in a dark couple of years or so for this sector. GDX mostly ground sideways in a long consolidation between $21 to $25, way under its original $31 bull-market peak. So traders fled gold stocks in droves, there wasn’t much excitement to motivate them to deploy more capital. Apathy grew and choked out most sector interest.
Most traders entirely forgot about gold stocks, they were too busy chasing the surging US stock markets first on tax-cut hopes and later on the actual tax cuts themselves. This GDX chart shows how the major gold miners have fared throughout this entire secular bull. And from the late summer of 2016 to the early summer of 2019, only stalwart contrarians still believed in their potential. Everyone else was long gone.
Poor sentiment was galvanized into raging bearishness heading into autumn 2018, when gold stocks plummeted in a brutal forced capitulation as stop losses were sequentially tripped. But man, what a time to buy when conventional wisdom assumed the major gold miners were doomed to drift lower indefinitely! The gold stocks soon started recovering, but remained trapped in that vexing $21-to-$25 consolidation zone.
But late last June a major gold event finally catapulted GDX decisively above $25, breaking out from that long-oppressing sideways drift. Gold broke out to its first new bull-market highs in several years, lighting a fire under its miners’ stocks! So GDX blasted higher in another strong upleg last summer, which peaked at a hefty 76.2% gain over 11.8 months in early September 2019. This leading ETF crested at $30.95.
That was tantalizingly close to secular-bull-market breakout territory, challenging early August 2016’s $31.32. But after nearly rocketing vertically in the wake of gold’s major bull-market breakout, this sector was seriously overbought while gold itself faced an ominous record gold-futures-selling overhang. So the metal and its miners’ stocks started correcting, with the latter denied a years-in-the-making bull breakout.
That healthy sentiment-rebalancing correction was prematurely truncated early this year by shocking events. First the US and Iran plunged into military conflict, then a novel viral outbreak started ravaging China. Deep fear spread with COVID-19, which grew to global-pandemic proportions. That pushed GDX up to $31.05 by late February. But that third time wouldn’t prove the charm for new gold-stock bull-market highs.
In mid-February with GDX again nearing bull highs, I warned about the stalling gold stocks. The growing exuberance in this sector was misplaced, and I concluded “caution is wise given gold’s situation, with selling much more likely than buying. ... All that leaves gold and thus its miners’ stocks continuing to face risks for sizable selling. Wait until that runs its course to buy.” That generated a firestorm of flak and ridicule!
But the data is the data, as traders we can choose to suppress our emotions and bet on the most-likely outcome or succumb to greed and fear which leads to foolishly buying high then selling low. The gold stocks not only corrected, but plummeted during March’s extreme COVID-19-fear-fueled stock panic. In an epic blitzkrieg correction, GDX crashed 38.8% in just 0.6 months! The carnage was breathtaking.
I certainly didn’t expect a stock panic, which are exceedingly-rare and inherently-unpredictable. But we’d been all-out gold stocks in our newsletters for other reasons articulated in my February essays. Instead of only sitting in cash, we actively traded the likely downside through gold-stock-ETF put options and inverse-leveraged ETFs. Then GDX’s shocking crash fiercely expended all potential gold-stock selling pressure!
That left major gold stocks ludicrously oversold and ridiculously undervalued at mid-March’s extreme stock-panic lows, which was quickly confirmed by a violent V-bounce higher. We’d realized our big gains on bearish gold-stock bets earlier in the panic, and started redeploying aggressively in fundamentally-superior gold stocks right after that V-bounce started. Their unrealized gains have already grown big since.
But despite their massive post-stock-panic gains, many gold-stock skeptics and bears still believed this sector’s last bull failed in early August 2016. GDX’s initial bull-upleg peak of $31.32 on a closing basis then still hadn’t been eclipsed. Early September 2019’s $30.95 then late February 2020’s $31.05 challenged new-bull-high territory, but ultimately fizzled. After years of no new bull highs, sector enthusiasm fades.
All stock-market sectors have interested speculators and investors that closely follow their ups and downs no matter what. I’ve spent decades intensely studying and actively trading gold miners’ stocks, and all that experience fuels profitable trades regardless of prevailing trends. But in order for any sector to really get moving, to experience huge gains, its reach has to expand beyond the regulars to entice in way more traders.
Big gains require big capital inflows from the broadest-possible pool of speculators and investors. And nothing catapults a sector onto their collective radars faster or more thoroughly than major new secular highs. They drive much interest and coverage from the mainstream financial media, leaving traders that don’t frequent that particular sector intrigued. They start migrating in since everyone loves chasing winners.
Gold itself is a great case in point. During this secular bull’s maiden upleg in largely the first half of 2016, gold blasted 29.9% higher to $1365 in early July that year. But for fully several years after, gold couldn’t regain that initial peak. $1350 became a major resistance zone, a graveyard in the sky. Every time that gold neared $1350 excitement mounted, but each time it failed to break out more traders totally lost interest.
But once gold finally broke above $1365 in late June 2019, everything changed psychologically for this long-ignored metal! Capital flooded back in, despite near-record-high stock markets which usually retard gold investment demand. Yet major new secular highs motivated speculators and investors alike to buy gold. That bull-breakout winner-chasing upside momentum blasted gold 32.4% higher by early September.
So mostly in less than a few months, gold went from languishing in apathy to powering higher in the best upleg of its entire secular bull! Major new bull-market highs greatly expand interest among traders that don’t normally follow a particular sector. And their buying begets buying. The more capital they deploy, the higher that pushes prices. The more prices rally, the more traders want to buy to ride that upside.
Early last June, gold heading materially above $1350 was widely considered unthinkable. Yet thanks to that subsequent decisive bull-market breakout, by early September it was over $1550! By late February this year before the stock panic, gold had regained $1650. Bearish psychology nurtured over several years under $1350 radically changed within months after major new highs started enticing traders to return.
Nothing attracts momentum traders like major new secular highs, and nothing drives prices higher faster than deluges of new capital from traders who weren’t materially participating in that sector before. Thus there’s no reason to think a major bull-market breakout in gold stocks will prove any less bullish for them than it did for the metal they mine. That made this week one of gold miners’ most-exciting in a long time!
GDX’s post-stock-panic V-bounce mean-reversion surge had great potential to grow into something much larger, but only new bull highs could confirm that. Late last week GDX climbed to $30.92, but pulled back sharply right at that 3.7-year-old ironclad bull-market resistance near $31. The gold stocks tried again to break through this Monday, with GDX hitting $30.74. But they were still repelled that day right around $31.
But everything changed for gold stocks this Wednesday, which certainly wasn’t remarkable compared to the wild market swings and crazy news of the last couple months. After suffering a pullback, gold enjoyed a strong 2.0% rebound rally to surge back over $1700. That gold buying began overnight in Asia, gradually pushing gold higher which extended into the US trading day. There was no catalytic gold-moving news.
But seeing gold heading north again emboldened traders, who poured into major gold stocks. Again they are ultimately leveraged plays on gold, and GDX tends to amplify material gold moves by 2x to 3x. By the time the dust settled, GDX had blasted 6.4% higher to $32.51 on close! That was this gold-stock bull’s first new bull-market high in 3.7 years. And it was the best kind of major-bull-breakout day we could hope for.
Plenty of big gold-stock up days amplify big gold spikes driven by surprising news. That can come in the form of geopolitical flarings or Fed actions. But the problem with news-driven gold spikes is they tend to be fleeting. In this frenetic information age, surprising news seems to have a half-life of a few days at best. Traders quickly process new developments and move on, so news-driven gold spikes often soon fade.
I’ve carefully watched the gold markets all day everyday for decades. And there was nothing gold-moving on Wednesday. Gold simply rallied due to ongoing massive investment capital inflows, which I analyzed in depth a couple weeks ago. The leading GLD gold ETF’s holdings surged 0.9% higher that day on big differential-GLD-share demand. That was its 19th build day out of the last 22 trading days, a continuing trend.
Closing at $1717 that day, gold itself remained shy of the prior week’s 7.4-year secular high of $1728. So there was no new-high excitement in gold that day. Wednesday was a fairly-normal trading day for gold, with big investment-buying-driven gains on no news. So gold psychology wasn’t unduly enthusiastic contributing to GDX’s bull-market breakout. And that surge to new bull highs also proved incredibly strong.
GDX rocketing 6.4% higher that day was a powerful breakout on sizable volume. It was also decisive technically, meaning exceeding the old high by 1%+. GDX’s $32.51 close that day wasn’t just a new 7.0-year secular high, but it exceeded August 2016’s previous one by a whopping 3.8%! Bigger breakouts really attract in new traders, as half-hearted ones sneaking over old highs by pennies often prove false.
The leading and dominant gold-stock sector benchmark just surged powerfully to major new bull-market highs for the first time in 3.7 years! Just like a similar event did for gold last summer, this huge breakout is going to radically improve gold-stock psychology. Legions of speculators and investors who aren’t usually interested in gold stocks will see them breaking out. They will rush to buy in and chase this momentum.
And despite their blistering post-stock-panic V-bounce, gold stocks’ upside potential from here remains vast. As of Wednesday’s GDX-breakout close, this gold-stock bull had powered 160.7% higher over 4.3 years. While that sounds impressive absolutely, it is still nothing for this high-flying sector. The previous secular gold-stock bull wildly dwarfed this, and reveals why contrarian traders want to own gold stocks.
That prior mighty bull ran for 10.8 years from November 2000 to September 2011, straddling GDX’s birth in May 2006. So it can’t be measured in GDX terms, but by the older and comparable benchmark HUI NYSE Arca Gold BUGS Index. During that decade-plus span, the HUI skyrocketed 1664.4% higher! Riding the large majority of a secular gold-stock bull of that magnitude generates life-changing wealth for traders.
Gold stocks remain cheap absolutely too despite their violent V-bounce over the past 5 weeks or so. Back in mid-December I explained the core fundamental relationship between gold stocks and the metal which drives their earnings and hence stock prices. That can be expressed through ratios including with a construct called the GDX/GLD Ratio. It simply divides the daily GDX close by the GLD gold ETF’s one.
This Wednesday as GDX surged to that major bull-market breakout, that GGR was running 0.201x. In other words, a single share of this leading GDX gold-stock ETF was worth about 20.1% of a single share of that dominant GLD gold ETF. That gold-stock-to-gold ratio remains really low historically. During the four years after the last stock panic in late 2008 for example, this GGR averaged a much-higher 0.381x.
For the major gold stocks merely to mean revert back up to that last post-stock-panic secular mean at this week’s prevailing gold prices, GDX would have to soar to $61.62! That’s another 89.5% higher than its breakout close on Wednesday, and certainly not an unreasonable level. It is still well below GDX’s all-time high of $66.63 in early September 2011, and it would make for a relatively-small post-stock-panic bull.
GDX’s total gains from mid-March’s latest extreme stock-panic low would only hit 224.3% at $61.62. After that previous late-2008 stock panic, GDX more than quadrupled with a 307.0% gain over 2.9 years! A similar huge run today would carry it all the way up to $77.33. Much-higher gold-stock prices are sure fundamentally-justified too, as the major gold miners’ Q1’20 earnings coming soon are likely to soar radically.
So odds are gold stocks’ major bull run after this latest stock panic is just getting started. The gold stocks should run higher for years with gold. It is going to see sustained capital inflows driven by lingering stock-market fear, government COVID-19 shutdowns’ devastating impact on economies, and the extreme money printing by the Fed and other major central banks to fight that. Gold couldn’t ask for a more-bullish outlook!
While GDX enjoys excellent gains in major gold-stock uplegs, they are dwarfed by those seen in smaller fundamentally-superior mid-tier gold miners. As explained in my latest essay on their Q4’19 results just over a month ago, the mid-tiers far-outperform the majors with their superior production growth and smaller market capitalizations enabling bigger ultimate gains. A big gold-stock upleg is a stock pickers’ paradise!
We do all that hard and tedious fundamental work at Zeal, winnowing the gold-stock field to uncover the likely big winners. And we’re currently still redeploying in these fundamentally-superior gold stocks as their latest upleg grows, which are recommended in our popular weekly and monthly newsletters. The unrealized gains in our new gold-stock trades deployed since mid-March are already running up to 55% this week!
To profitably trade high-potential gold stocks, you need to stay informed about the broader market cycles that drive gold. Our newsletters are a great way, easy to read and affordable. They 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. Subscribe today and take advantage of our 20%-off sale! Get onboard so you can mirror our great new trades being layered in for gold stocks’ next mighty upleg.
The bottom line is major gold stocks surged to their first bull-market breakout in well over several years this week! Despite no gold-driving news, their leading GDX benchmark blasted up to decisive major new secular highs. That is super-bullish for gold stocks going forward, as new bull highs radically improve sector sentiment. They will thrust gold stocks back onto mainstream traders’ radars, enticing them to return.
Broadening gold-stock interest will unleash massively-outsized capital inflows into this small contrarian sector. The more traders buy, the faster gold stocks will rally. The higher they are propelled, the more traders want to buy them. This powerful self-reinforcing virtuous circle fuels huge gains after major new bull-market highs are seen, as gold itself proved since last summer. This is the best news for gold stocks in years!
Adam Hamilton, CPA April 24, 2020 Subscribe at www.zealllc.com/subscribe.htm