Gold Stocks Clawing Back

Adam Hamilton     September 3, 2021     2489 Words


The gold miners’ stocks suffered a rough summer, getting hammered lower as collateral damage on gold-futures speculators fearing Fed tightening.  That heavy gold-stock selling certainly wreaked havoc, leaving overwhelmingly-bearish sentiment in its wake.  But the unloved and deeply-out-of-favor gold stocks are starting to claw back.  Their strong fundamentals continue to support much-higher stock prices ahead.


Gold stocks’ summer of woe was certainly reflected in their leading benchmark, the GDX VanEck Gold Miners ETF.  While long since forgotten, the gold miners actually had strong momentum heading into the ill-fated summer of 2021.  They were enjoying a solid young upleg, with GDX advancing 28.4% in 2.5 months into mid-May.  The gold-stock technicals were very bullish then, implying more big gains coming.


GDX broke out decisively above both its 200-day moving average and uptrend resistance in early May.  All systems were go from a technical perspective.  The gold stocks consolidated high into mid-June after that, which is normal to digest big-and-fast gains.  Around then a fabled Golden Cross buy signal even triggered, GDX’s 50dma crossed back above its 200dma from below in a young upleg.  Gold stocks looked great.


Then out of the blue a gold-futures wrecking ball slammed this sector, kicking off a couple months of pain.  The Federal Reserve’s Federal Open Market Committee met for one of its eight monetary-policy meetings per year on June 16th.  Even leading into it, fears were mounting that the Fed would start getting hawkish after epic record pandemic money printing.  So both gold and GDX slumped in expectations of tightening talk.


Interestingly the FOMC did nothing that day, not even hinting about slowing its colossal quantitative-easing bond monetizations or hiking rates.  But a supplemental document with unofficial outlooks from top Fed officials, which the Fed chair himself warned to ignore that day, was hawkish.  That dot plot showed that just a third of those Fed guys expected to maybe see two quarter-point rate hikes way out into year-end 2023.


So what right?  2.5 years into the future is an eternity in markets, plenty of big surprises will unfold in that secular span.  But gold-futures speculators still freaked out at the prospect of distant-future Fed rate hikes, selling huge amounts of contracts.  That Fed gold-futures purge summarily truncated the young uplegs in both gold and its miners’ stocks, kicking off their weak summers.  Gold stocks were collateral damage.


In just three trading days starting with that unofficial hawkish dot plot, gold and GDX plunged 5.2% and 9.2%!  Unfortunately that heavily damaged gold-stock sentiment.  It was still fairly fragile leading into that anomalous overreaction, as GDX had recently finished a 30.5% correction over 6.8 months out of its huge upleg last year.  The volatile high-potential gold stocks are always a psychologically-challenging sector to ride.


From there GDX ground sideways to lower into late July, lagging gold which started trending higher again after that distant-future-Fed-rate-hikes scare.  Gold stocks’ underperformance reflected just how bad their prevailing sentiment had become.  Bearishness and apathy reigned, with most traders either convinced this battered sector was heading much lower or forgetting about it.  Gold stocks struggled to gain traction.


That’s not unusual in summers, which are the weakest time of the year seasonally for both the metal and its miners.  While 2021’s summer-doldrums setup was more bullish than most due to that anomalous hawkish-Fed-dots selloff, gold stocks are often abandoned during market summers.  Traders pull back from the markets in general then, enjoying the warm weather, sunshine, and vacations with their families.


Still GDX was stealthily clawing its way back, climbing 2.8% in July after June’s brutal 13.8% plummeting.  So gold stocks were looking up heading into their second-strongest month of the year seasonally of August.  Then a second Fed-inspired gold-futures sledgehammer crushed this sector’s skull.  A modest upside surprise in monthly US jobs in early August unleashed near-record levels of gold-futures short selling.


Why?  Those hyper-leveraged speculators who dominate gold’s near-term price action figured better-than-expected US jobs growth will force the Fed’s hand on starting to taper its QE money printing.  On Jobs Friday August 6th, gold plummeted 2.5% on extreme gold-futures shorting.  Gold’s worst daily loss since the day after mid-June’s FOMC meeting battered GDX 3.0% lower.  But its late-July support was holding.


Gold normally would’ve rebounded sharply the next trading day, pushing gold stocks sharply higher.  The major gold miners of GDX generally leverage material gold moves by 2x to 3x.  But the following Sunday evening in terribly-illiquid light trading, some large trader tried to manipulate gold lower.  They dumped a huge slug of gold-futures contracts instantly in a textbook gold-futures shorting attack, pummeling gold lower.


So this embattled metal plunged another 1.7% that Monday, which GDX leveraged with a 2.5% loss to new post-mid-June-FOMC lows.  Already-bearish sector sentiment was further devastated, paving the way for heavy capitulation selling.  I’ve been in the financial-newsletter business for decades, and some of our longest subscribers through much of that span threw in the towel.  Gold stocks were utterly despised.


That panicked capitulation climaxed in mid-August, when GDX plummeted 5.1% in three trading days where gold itself merely edged 0.3% lower!  The weak hands fled the gold miners, exiting right at major lows.  Over 3.1 tough months, GDX had fallen 22.3%.  That entire young upleg truncated by those Fed-tightening fears had been erased.  As this chart shows, the resulting sector technical damage is severe.



The GDX gold stocks collapsed through their 50dma in mid-June’s plunge, which is a major upleg support line.  Then they stabilized near upleg trend support into early August, but that was shattered on gold’s Jobs Friday plunge on extreme gold-futures short selling.  That breakdown was so serious that it triggered a Death Cross, a 50dma falling back under a 200dma!  GDX slipped a hair under early March’s correction low.


With such a depressing summer, gold stocks must be doomed right?  Who’d ever want to deploy capital in this languishing sector?  Surely the remaining shareholders are going to flee, forcing these battered gold miners ever-lower.  Traders always overweight the most-recent past in assuming future direction, extrapolating trends to continue indefinitely.  But deep oversold lows usually instead herald major trend reversals.


Hardened contrarians tolerate gold stocks’ outsized volatility because their gains grow colossal when gold powers higher in its own uplegs.  Just a year ago into August 2020, GDX skyrocketed 134.1% higher in just 4.8 months in a massive gold-driven upleg.  That was the fourth one of this secular bull, which have averaged huge 99.2% absolute gains over 7.6 months each in GDX terms!  Gold stocks often double out of lows.


The secular gold-stock bull before that into September 2011 saw the earlier HUI gold-stock index that predated GDX skyrocket 1,664.4% higher over 10.8 years!  That epic bull run included literally a dozen major gold-stock uplegs averaging super-profitable 87.5% absolute gains over 7.8 months each!  So the gold stocks have a long history of enormous wealth-multiplying uplegs born in despair out of oversold lows.


And given the recent capitulatory gold-stock technicals and sentiment in mid-August, odds are GDX’s next big upleg is just getting underway.  Gold stocks have started clawing back out of deeply-oversold lows in recent weeks.  As of the end of last week, GDX had bounced 5.8% on a 2.0% gold recovery.  So it looks like the worst of the selling has passed, that the weak hands were forced out carving a major bottoming.


Gold stocks’ perpetual upleg-correction cycles are dependent on gold’s own, and it too is looking up.  Last Thursday one of the regional Fed presidents gave a crazy-hawkish interview on CNBC, calling for that QE tapering to start soon so the bond monetizations can be finished by Q1’22!  That most-aggressive timeline floated by far didn’t ignite more gold-futures selling, so it is likely exhausted.  Gold just drifted sideways.


Then gold surged last Friday after the Fed chair’s virtual speech for its annual Jackson Hole symposium was considered dovish.  While he said QE tapering could start this year, he didn’t signal it was coming soon.  Most of his time was spent rationalizing the red-hot inflation spawned by the Fed’s epic money printing, claiming it is “transitory”.  Gold surged 1.4% on that, blasting GDX 3.6% higher.  Gold stocks are recovering.


And their clawing back ought to continue.  Gold’s own bullish outlook is one big reason, as a resurgent gold upleg will attract traders back to its miners’ stocks.  Because of this summer’s pair of extreme gold-futures-selling episodes, speculators’ gold-futures positioning is very bullish for gold.  Their long upside bets remain relatively-low, while their short downside ones are relatively-high.  These need to mean revert.


With selling largely exhausted on both the long and short sides, these hyper-leveraged traders mostly have room to buy.  Past episodes of low spec longs and high spec shorts have preceded big-and-fast gold surges as these traders add new longs and pare shorts.  Speculators’ gold-futures trading dominates gold’s short-term price action, due to gold futures’ extreme leverage and their price being gold’s reference one.


Not too long ago in late June 2020, specs’ gold-futures longs and shorts were running at similar levels up into their past-year trading ranges as today.  Over the next six weeks or so, big mean-reversion futures buying helped catapult gold 16.6% higher!  Low longs and high shorts are very bullish for gold over the near-term.  So this metal itself is likely to resume powering higher on balance as those bearish bets are reversed.


The Fed’s insane money printing ought to drive parallel gold investment demand.  Since March 2020’s ugly pandemic-lockdown stock panic, the Fed has mushroomed its balance sheet by an absurd 93.2% in just 17.5 months!  That $4,021b of money printed nearly doubled the entire US-dollar supply in that very-short span, which is why price inflation is red-hot.  And monetary growth will persist even with QE tapering.


The Fed continues to conjure up another $120b out of thin air every month it delays tapering.  And if that is done in $10b monthly increments, it would take 11 months and add another $660b to the Fed’s balance sheet.  This super-bullish-for-gold extreme monetary growth isn’t going away anytime soon.  The global gold supply only grows about 1% annually via mining, but the Fed’s balance sheet soared 19.2% year-over-year.


Relatively-far-more dollars available to bid up relatively-much-less gold is why this metal has proven the best investment to own in inflationary times for many centuries.  As gold powers higher, the major gold stocks of GDX will nicely leverage its gains.  Adding to their big upside potential in the coming months, many of the gold stocks are dirt-cheap.  Their valuations were just pounded to deeply-undervalued levels.


I spent August digging into and analyzing many dozens of quarterly reports from the world’s gold and silver miners.  Their latest operational and financial results generally proved quite strong.  Despite gold’s couple of futures hammerings lower this summer, its prevailing price levels remain high.  So the big gold miners of GDX are earning money hand over fist.  I analyzed that in depth in my recent Q2’21 GDX-results essay.


Adjusted for a few big one-off non-cash writedowns, the top 25 GDX gold miners’ accounting profits last quarter soared 49.4% YoY to $3,532m!  Those strong earnings in concert with battered stock prices left major-gold-miner valuations the lowest I’ve ever seen in decades of doing this.  Many gold stocks are trading at wildly-cheap trailing-twelve-month price-to-earnings ratios way down in the teens or even single digits!


Thus the gold miners’ stocks aren’t only really-low technically and deeply-out-of-favor sentimentally, but they are incredibly-undervalued fundamentally.  And their strong earnings should continue in this current Q3.  So far quarter-to-date, the average gold price is running just 1.0% under Q2’s high super-profitable level!  This gold-stock setup is very bullish, with great odds for a strong rebound to much-higher stock prices.


Gold stocks’ near-term outlook really depends on gold’s fortunes.  And they may prove way better than most traders imagine.  Everyone is assuming the Fed really starts tapering QE later this year, slowing its epic money printing.  But what if that continues to be delayed, due to weaker US jobs growth caused by the soaring COVID-19-delta fears?  What if bubble-valued stock markets sell off hard, forcing the Fed to hold?


What if political pressure causes the FOMC to keep spinning its printing presses?  Without the Fed’s $960b per year of direct monetizations of US Treasuries, the federal government would struggle to keep spending at huge deficit levels without forcing interest rates much higher.  The long-anticipated QE taper is far from a sure-thing.  If traders start to think the Fed is bluffing, gold demand and prices will explode higher.


With gold stocks’ technicals really weak, sentiment really bearish, and fundamentals really strong, traders should be flocking back to this high-potential contrarian sector.  The biggest gains come from buying low early, before everyone else figures out this great opportunity and catapults gold stocks way higher.  The best time to buy low is when few others are willing, fighting herd sentiment to make contrarian trades.


We’ve been doing that all summer at Zeal.  We sure took our lumps on gold-stock stoppings from that post-FOMC gold-futures puking and later gold-futures shorting attack.  But we redeployed that capital in fundamentally-superior mid-tier and junior gold miners to keep our newsletter trading books full.  While buying in low and staying deployed while others are scared isn’t easy, that’s the surest way to multiply wealth.


At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can.  We overcome popular greed and fear by diligently studying market cycles.  We trade on time-tested indicators derived from technical, sentimental, and fundamental research.  That has already led to realized gains in this current young upleg as high as +51.5% on our recent newsletter stock trades!


To multiply your wealth trading high-potential gold stocks, you need to stay informed about what’s going on in this sector.  Staying subscribed to our popular and affordable weekly and monthly newsletters is a great way.  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 while this gold-stock upleg remains young!  Our recently-reformatted newsletters have expanded individual-stock analysis.


The bottom line is gold stocks have started clawing back out of their recent capitulation bottoming.  While their technicals are really oversold and sentiment deeply out of favor, their fundamentals remain incredibly strong.  The gold miners’ recent quarterly results were fantastic, showing massive profitability at these high prevailing gold prices.  Thus these seriously-undervalued stocks are due to mean revert much higher.


The extreme gold-futures selling that crushed gold destroying gold stocks’ summer looks to have passed.  Speculator positioning is very bullish for gold, with potential selling largely exhausted.  That paves the way for big buying, potentially on the Fed continuing to drag its feet on slowing its huge money printing.  As gold’s interrupted upleg resumes marching decisively higher, capital will flood back into left-for-dead miners.


Adam Hamilton, CPA     September 3, 2021     Subscribe