Gold Stocks’ CPI Surge

Adam Hamilton     July 14, 2023     2309 Words

The gold miners’ stocks surged back mid-week after a major Fed-dovish inflation report.  The latest US consumer-price-index read came in cooler than expected, continuing this past year’s disinflation trend.  That lowered Fed-rate-hike odds, slamming the US dollar.  So gold-futures buying flared, quickly driving gold and its miners’ stocks sharply higher.  Bullish technicals argue this sector’s autumn rally is getting underway.

Heading into Wednesday morning’s latest June CPI print, traders figured headline inflation would keep moderating.  The prior-year base effect was very favorable, as the CPI peaked in June 2022 soaring a blistering 9.1% year-over-year!  Energy prices have plunged since, with the Biden Administration’s unprecedented release of over 230m barrels of crude oil from the emergency Strategic Petroleum Reserve.

Economists were looking for this new June 2023 headline CPI to climb 0.3% month-on-month and 3.1% YoY.  The actuals both came in a tenth lighter, up 0.2% and 3.0%.  Those falling energy prices were the primary driver, with the CPI’s energy subindex collapsing 16.7% YoY.  June also proved the twelfth month in a row the headline CPI’s rate of increase had shrunk, tying the longest disinflation stretch on record in 1921!

While underlying core inflation excluding energy and food remained sticky up 4.8% YoY, that also came in below +5.0% forecasts.  So futures-implied Fed-rate-hike odds beyond late July’s baked-in 25-basis-point hike plunged.  The US Dollar Index was sold hard on that, falling 1.1% in its worst down day since early January.  So speculators poured into gold futures, pushing gold up an inversely-proportional 1.3% to $1,958.

While that wasn’t a huge up day by gold standards, it had an outsized impact on sector sentiment.  Gold has been languishing in a pullback since early May, exacerbated by June’s usual summer-doldrums apathy.  Late last month that total selloff extended to 6.9% over 1.8 months, which really ramped bearish psychology.  Last week as gold retested that pullback low, I wrote an essay analyzing gold’s bullish technicals.

Gold was due to bounce soon igniting its normal big autumn rally, as speculators’ gold-futures positioning was really bearish with vast room for big mean-reversion buying.  All that was necessary to spark those leveraged gold-futures capital inflows was some substantial Fed-dovish news.  This week’s cooler-than-expected June CPI fit the bill nicely.  Gold’s resulting surge shocked gold-stock traders out of their malaise.

The leading GDX gold-stock index naturally mirrored and amplified gold’s healthy mid-upleg pullback, dropping 18.9% at worst between mid-April to last Thursday.  That wasn’t unusual, as the major gold miners of GDX tend to leverage material gold moves by 2x to 3x.  Their recent 2.7x downside leverage was right in that normal range.  But gold-stock sentiment had been sucked into gold’s weak June seasonals.

This updated chart from my latest summer-doldrums research in early June shows how major gold stocks have performed in all modern gold-bull-year summers.  Because this analysis starts years before GDX was born, the older HUI gold-stock index is used which still closely mirrors GDX.  All gold-stock summer price action is indexed to 100 at May’s final close, rendering it in perfectly-comparable percentage terms.

The red line averages together all major-gold-stock summers from 2001 to 2012 and 2016 to 2022, distilling out their gold-bull seasonality.  This sector tends to drift lower into mid-June, and then mostly grind sideways into early July.  During market summers gold stocks usually meander within 10% either direction from their summer entry point at the end of May.  They did that again this year despite gold’s pullback.

The blue line shows how the HUI and GDX are tracking this summer.  The major gold stocks proved slightly stronger than their seasonal average in the first half of June, but slumped under it in the second.  That breakdown started on June 20th, when gold plunged 1.0% to its own new pullback low after some Fed-hawkish anomalous US-housing data.  GDX drifted lower into late June, then retested those lows last week.

But at worst the HUI was merely down 6.4% summer-to-date, well above major support at 90 indexed.  And because GDX is constructed differently, it was only down 6.0% since May’s final close.  Gold stocks weren’t having an ugly summer by any means, but traders were pretty bearish on them after their recent correction.  All that started to change last Friday on more Fed-dovish data in the latest official US jobs report.

After 13 consecutive monthly upside surprises including some suspicious statistically-impossible ones, headline US jobs finally missed.  The June number came in up 209k jobs, well shy of +240k forecasts.  On top of that there were another -110k in past-month revisions.  That weak data lowered the odds the Fed would keep hiking rates beyond late July.  So gold rallied 0.8% on a parallel 0.8% US Dollar Index drop.

GDX’s 1.3% bounce that day wasn’t big, but it started to bleed off excessively-bearish sentiment after a miserable 5.4% two-day capitulation.  Psychology was shifting, as GDX surged another 2.0% this Monday despite flat gold.  That nascent recovery took off like a rocket on this Wednesday’s cooler CPI, with GDX blasting up a massive 5.2%!  Bullishness is being rekindled with gold stocks amplifying gold’s upside by 3.9x.

Interestingly this overdue young mean-reversion rebound left GDX and the HUI 2.9% and 2.4% higher summer-to-date!  That’s back above their seasonal average running +1.8%.  So all June’s gold-stock angst worrying about their correction rolling over into a more-serious selloff was misguided.  Rather than selling low, traders should have been aggressively buying.  We certainly were as gold and gold stocks bottomed!

Starting on June 20th the very day gold and GDX broke down to new selloff lows, we began redeploying capital in fundamentally-superior mid-tier and junior gold stocks.  With better production growth and lower market capitalizations than the majors, smaller gold stocks usually enjoy bigger gains as gold rallies on balance.  Since then we’ve added 20 new gold-stock trades across both our weekly and monthly newsletters!

And their gains are already mounting, supercharged by plenty of massive 8%+ surges Wednesday on that cooler CPI.  Our unrealized gains so far in new late-June trades are already running as high as +22.6%, +19.0%, and +16.8%!  Once this high-potential gold-stock sector inevitably reverses out of major lows, it moves fast.  So it is foolish for traders to ostrich and back away when gold and gold stocks are bottoming.

I’ve been pounding the table about this great opportunity for a month, trying to drum up newsletter sales to help traders buy in relatively low.  My last four weekly essays were “Gold Bottoming Despite Fed” in mid-June, then “Gold-Stock Seasonal Buy”, followed by “Gold Stocks at Key Support” exiting June, and “Gold Technicals Bullish” last Friday in a quiet holiday-shortened week.  Gold and GDX surging shouldn’t surprise.

That latest essay detailing today’s really-bullish setup in gold analyzes the main reasons.  Again the gold-futures speculators have sold lots of contracts on expectations for more Fed rate hikes.  But after an epic-extreme 500bp of hiking in just 13.6 months, the Fed is running out of room to keep going.  It might have one or two 25bp ones left, but that’s it.  Much more risks plunging the US economy into a severe recession.

With the threat of more violent rate hikes vanishing, traders will increasingly interpret major economic data like jobs reports and inflation as Fed-dovish.  That’s what reignited and fueled these just-starting mean-reversion rebounds in gold and GDX.  During the last four trading days as of mid-week, they soared 2.5% and 9.5%!  And that should only be the beginning given speculators’ latest gold-futures positioning.

As I analyzed last week, these hyper-leveraged traders still had room to do a whopping 7/8ths of their likely gold-futures long buying!  After another Commitments of Traders report since that essay, that was still running 4/5ths remaining.  As specs return to gold futures, the resulting mounting gold gains should increasingly attract investors.  They command far more capital and have barely started shifting into gold!

As goes gold, so go the gold stocks at 2x to 3x leverage for majors and even-better upside for mid-tiers and juniors.  It’s unfortunate many traders ignoring gold stocks today while they are still relatively low will scramble to start chasing them at way-higher prices in coming months.  Despite this week’s big surge, this sector still has much room to power higher with gold.  GDX remains relatively low and far from overbought.

This last chart recasts GDX as a multiple of its all-important trailing 200-day moving average.  That tends to form a horizontal trading range, the basis of my old Relativity trading system.  The closer to 200dmas gold stocks drift after selloffs, the greater the odds they will soon start powering to new highs.  GDX fell to just 0.985x its 200dma at last week’s selloff low, and has since rebounded to only 1.073x that baseline.

The blue line is the normal GDX, while the red line is GDX divided by its 200dma.  The resulting multiples flatten that 200dma to 1.00x, with major gold stocks oscillating around that.  During the past five calendar years, this rGDX construct has generally meandered in a trading range from an extremely-oversold 0.80x to an extremely-overbought 1.35x.  Above the latter is when uplegs get too overextended to continue for long.

Even at its latest upleg high in mid-April, GDX only stretched 1.295x over its 200dma which remained well below upleg-slaying levels.  The same was true with gold at its early-May upleg peak, extending to 1.132x its 200dma which was also well under its 1.16x+ danger zone.  So these strong uplegs in the metal and its miners’ stocks still have plenty of room to run yet.  There’s still time for smart contrarian traders to buy in.

At their latest mid-week 200dmas, gold and GDX would have to soar near $2,160 and $40 to reach those 1.16x+ and 1.35x+ extremely-overbought zones.  That would make for another 10% and 26% upside from Wednesday’s post-CPI-surge levels.  But those targets are understated, as 200dmas climb accelerating higher as uplegs mature.  Both gold and GDX will have higher 200dmas in coming months, upping their targets.

And today’s gold upleg should prove bigger than normal, probably growing into a monster before giving up its ghost.  Soaring 26.3% at best over 7.2 months into early May, this is already the strongest gold upleg by far since 2020.  That year two monster gold uplegs peaked at huge 42.7% and 40.0% gains!  Ever since today’s gold upleg was born, I’ve expected it to reach that rarefied 40%+ territory before petering out.

40% gains from late September’s deep secular low would extend today’s upleg near $2,275.  That is way over gold’s all-time-record nominal peak of $2,062 in August 2020.  Once gold-futures buying pushes gold decisively above that, bullish psychology will explode.  New record highs for major assets are big financial news, and speculators and investors alike love chasing upside breakouts!  That would make GDX soar higher.

During those last two monster gold uplegs, GDX’s own averaged awesome 105.4% gains!  A similar upleg today from September’s brutal nadir would catapult GDX way up near $45.  That’s another 41% higher from mid-week levels, lots more upside potential from here.  And fundamentally-superior smaller mid-tier and junior gold stocks that we’ve long specialized in at Zeal should well outpace the majors’ gains.

Wednesday’s massive gold-stock surge was a wake-up call to sidelined traders bearish on gold and its miners’ stocks.  Their recent healthy mid-upleg selloffs served their mission of rebalancing sentiment, eradicating the excessive greed of early May.  Yet both these gold and GDX uplegs remain intact, still in their upleg trading ranges carving higher lows and higher highs on balance!  These uplegs are resuming.

Both gold and gold stocks enjoy strong autumn-rally seasonals really accelerating in July.  I hope to update my autumn-rally research thread in coming weeks.  While most traders will chase that and buy in higher later, it makes a lot more sense to deploy earlier and lower.  That’s why we’ve been aggressively refilling our newsletter trading books after gold’s pullback stopped out earlier gold-stock trades at good gains.

Excellent times to buy gold stocks occur when gold and GDX are bottoming after sizable-to-major selloffs.  While exact lows can’t be known in real-time, battered technicals and prevailing bearish sentiment are big tells that bottomings are underway.  The last few weeks have seen those in spades in both gold and GDX.  Gradually redeploying in great smaller gold and silver miners to straddle that bottoming is a smart strategy.

Successful trading demands always staying informed on markets, to understand opportunities as they arise.  We can help!  For decades we’ve published popular weekly and monthly newsletters focused on contrarian speculation and investment.  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.

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The bottom line is gold stocks blasted higher mid-week after a cooler-than-expected US inflation report.  That Fed-dovish data lowered future-rate-hike odds, hitting the US dollar fueling gold-futures buying.  That accelerated gold’s young mean reversion higher, which gold stocks amplified with outsized gains.  That big buying reflects traders’ psychology on this sector improving, a bullish omen for mounting capital inflows.

The higher those push gold stocks in coming months, the more excited traders will get to chase those gains.  Big gold and gold-stock uplegs are driven by this powerful buying-begetting-buying dynamic.  With gold-futures speculators’ long positioning still really low and investors barely buying so far, this interrupted gold upleg has lots of room to run yet.  The gold stocks will amplify those gains like usual, surging way higher.

Adam Hamilton, CPA     July 14, 2023     Subscribe