Gold-Stock Upleg Mounts

CPA, Principal & Co-Founder of Zeal LLC
April 8, 2022

The gold miners’ stocks have powered higher lately, enjoying mounting upleg gains. Their nice surge paralleled gold’s own, but they’ve increasingly outperformed in recent weeks. The resulting bullish gold-stock technicals are naturally fueling more-optimistic sentiment, enticing traders back. Their buying is supported by strong fundamentals, with gold miners earning fat profits at these high prevailing gold prices.

While this small contrarian sector is slowly returning to favor, it certainly isn’t popular yet. So despite their growing gains, gold stocks still haven’t hit the radars of the great majority of speculators and investors. But awareness is gradually improving, with gold miners getting mentioned with increasingly frequency on both CNBC and Bloomberg. This sector’s dominant benchmark remains the GDX VanEck Gold Miners ETF.

Gold stocks’ last correction technically bottomed in late September when GDX fell to $28.91. That was driven by gold drooping to $1,725 in the wake of a pivotal Federal Open Market Committee meeting on monetary policy. That was the one where the Fed pre-announced quantitative-easing tapering, slowing its blistering rate of conjuring up vast new money. Fed officials’ rate-hike outlook also waxed more-hawkish.

That proved the gold-stock nadir after GDX had fallen 27.1% over 4.4 months. That climaxed in a sharp capitulation plunge, leaving this sector deeply-oversold. The gold miners initially V-bounced out forming a strong early upleg, but that soon fizzled and rolled over. With the FOMC decisionmakers increasingly signaling imminent rate hikes and even quantitative-tightening monetary destruction, gold futures were dumped.

By late January GDX was pounded back down to $29.30, just 1.3% above its late-September bottoming. That swoon happened soon after late-January’s FOMC meeting, where the Fed warned it would both end its QE4 bond monetizations and start hiking its federal-funds rate off zero in March. Although gold miners’ stocks were technically still in an upleg, that was more like a double-bottoming with very-bearish sentiment.

So over 19/20ths of GDX’s total upleg gains so far accrued since just late January! Thus these past 2.2 months’ sector action is important for traders to understand. It looks like a major new gold-stock upleg is gathering steam, and those tend to grow very-large. So far during this secular gold bull born back in mid-December 2015, GDX has enjoyed five uplegs averaging massive 85.0% gains! This is a high-potential sector.

This GDX chart covering the past couple years or so helps frame this latest young gold-stock bull upleg in context. It includes gold stocks’ total gains and losses during recent uplegs and corrections, their defining trend lines, and catalytic events that ramped this sector’s volatility. GDX has made remarkable progress since late January despite some fierce headwinds, revealing traders finally warming back up to gold stocks.

To help understand how awesome gold stocks are doing, some context is necessary. Last spring GDX started powering higher in a strong young upleg. But that was prematurely truncated by a big hawkish surprise in mid-June’s FOMC dot plot. Then top Fed officials first started predicting a couple of distant-future FFR hikes. That unleashed extreme gold-futures selling, battering gold and miners’ stocks sharply lower.

A subsequent relentless parade of Fed-hawkishness and economic data supporting it forced gold stocks into that last correction. But even after GDX fell too far too fast hitting deeply-oversold levels in late September, gold stocks had a tough time recovering. Psychology among contrarian traders interested in this small sector remained bearish. That compressed GDX into an important technical pattern rendered in red here.

It was something of a cross between a consolidating pennant formation similar to gold’s own gigantic one and a descending triangle. Gold stocks couldn’t break free from its upper resistance in this upleg’s early months into mid-November. That initial GDX surge also failed near its key 200-day moving average. Both convinced technically-oriented traders that gold stocks suffered insufficient upside momentum to buy.

But that finally changed in early February as gold’s own young-upleg gains started accelerating. GDX’s composition and weighting is dominated by major gold miners. Their stocks tend to amplify their metal’s material price moves by 2x to 3x, since their earnings are highly-levered to prevailing gold prices. Gold stocks usually follow gold higher whenever it enjoys sizable sustained gold-futures and/or investment buying.

It’s important to realize gold’s upleg was mounting well before Russia invaded Ukraine. Russian armor, artillery, and infantry didn’t first roll into Ukraine’s eastern Donbas region until early on February 22nd. And the formal invasion into other non-separatist-plagued areas of Ukraine didn’t start until overnight into February 24th. Before that most traders assumed Russia’s vast military buildup was just a negotiating tactic.

By late January the day before that QE-end-heralding FOMC meeting, gold closed near $1,848 which was up 7.1% since its last correction bottomed in late September. GDX had only rallied a pathetic 9.5% in that span, highlighting the festering bearish sentiment dogging this sector. That made for terrible 1.3x upside leverage, way too little to compensate traders for gold stocks’ big additional risks on top of gold’s.

By mid-February, when Russia-preparing-to-invade-Ukraine skepticism remained high, gold had surged back up to $1,899 for a 10.1% upleg-to-date gain. That was starting to thaw the pessimistic gold-stock psychology, helping drive up GDX to $34.79 for a parallel 20.3% rally that made for better 2.0x upside leverage to gold. This young gold-stock upleg was well-established and 4.6 months old before Russia invaded!

GDX achieved two major upside breakouts in the week before Vladimir Putin unleashed his geopolitical crisis upon the world. The upper-resistance line for this dominant gold-stock ETF’s big hybrid technical consolidation pattern was running near $32 into mid-February. GDX’s decisive 1%+ breakout above that arrived back on February 11th. That certainly piqued the interest of technically-oriented gold-stock traders.

They started buying to chase the gold miners’ mounting upside momentum, accelerating it to a second more-important breakout just a few trading days later on February 16th. That’s when GDX powered decisively above its 200dma, which was running $33.11. While chart-pattern trend lines are eyeballed and thus somewhat ambiguous, moving averages are mathematically-precise and easily-observable by everyone.

These crucial major upside breakouts had both happened by several trading days before Russia invaded. After the massive Russian military might arrayed around Ukraine’s borders breached them and stormed in, most traders and financial analysts were shocked. Putin wasn’t just saber-rattling to keep Ukraine from moving towards NATO, he wanted to decapitate Ukraine’s elected government and install a puppet one!

So surprised markets rushed to price in the huge implications of the biggest European war since World War II in the couple weeks after Russia formally invaded. Within that short post-invasion span the US flagship S&P 500 stock index plunged 4.9%, the US Dollar Index blasted up 3.3% on safe-haven buying, and US crude-oil prices skyrocketed 34.8% higher! Gold joined commodities’ massive geopolitical spike.

Within that same compressed span, gold soared 8.6% to $2,051 on massive gold-futures and investment buying! The gold stocks per GDX weakly amplified their metal’s huge gains, surging up 13.2% for 1.5x upside leverage. Upleg-to-date since late September, GDX had powered 33.4% higher to gold’s 18.9%, making for a better 1.8x. But geopolitical gold spikes are always risky, tending to soon symmetrically reverse.

I warned our weekly-newsletter subscribers about that in real-time on March 8th as gold euphoria soared with that lofty peak. With gold closing at $2,051, I wrote “Unfortunately gold is getting overbought after such a big, fast run.” Thus “the odds for an imminent sharp rebalancing selloff” were soaring. Indeed that massive gold geopolitical spike started collapsing the very next day, dragging down the miners’ stocks with it.

Big-and-fast rallies generate excessive greed sucking in too much capital too soon. That exhausts gold’s near-term buying firepower, leaving it at the mercy of sellers. Geopolitical spikes are the most fragile of such surges because they are headline-dependent. Whatever the crisis du jour happens to be, traders soon come to accept it moderating whatever fears it spawned. Their focuses soon shift back to other things.

And gold selling after sharp spikes soon cascades, due to the extreme leverage inherent in gold-futures trading. This week for example each contract controlling 100 ounces of gold worth $192,500 just required traders to keep $7,200 cash margins in their accounts. That enables exceedingly-risky leverage running up to 26.7x! Up there a mere 3.7% adverse gold move would wipe out 100% of speculators’ capital deployed.

Over just a week after its geopolitical spike topped, gold plunged a brutal 6.6% on heavy gold-futures selling! When gold-stock sentiment is bearish, GDX tends to amplify big gold drops closer to 3x. So the major gold stocks could’ve easily crashed close to 20% during that gold plummeting. Yet in a stunning testament to how much sector psychology had improved, GDX only lost a relatively-small 4.8% within that same span!

That made for extraordinarily-mild 0.7x downside leverage to gold, its miners’ stocks were showing amazing resilience. Gold stabilized near $1,916 after that big gold-futures selling abated. In the several weeks since then, the yellow metal has largely ground sideways on balance. It rallied as high as $1,962 later in March, but was quickly bashed back down near $1,920 a couple days later and again to $1,921 this week.

So gold’s upside momentum has almost totally stalled since its geopolitical spike pulled forward too much near-term demand. Normally that would poison sector sentiment enough to leave the gold stocks drifting lower or sideways at best. Yet GDX defied gold’s breather to continue powering higher on balance later in March into early April. On this month’s opening trading day, GDX surged 3.0% to a new upleg high of $39.49!

That came in 2.4% above where the major gold stocks traded at gold’s $2,051 geopolitical-spike topping. Yet gold itself was still down a big 6.2% from that peak! GDX’s full-upleg leverage had soared to 3.2x. Traders have continued to move capital into gold stocks on balance over the several weeks since gold crested. That proves sector psychology is really improving, with bullishness increasingly edging out bearishness.

GDX’s post-geopolitical-spike gains are even more remarkable considering the FOMC’s uber-hawkish meeting on March 16th. That day the Fed hiked its FFR for the first time since mid-December 2018, launching the 13th rate-hike cycle of this modern era since 1971! Even worse, top Fed officials’ dot-plot rate-hike outlook more than doubled from three quarter-point hikes in 2022 to an incredible seven this year!

Back in mid-June when that FOMC dot plot first changed from zero hikes forecast to maybe two way out in late 2023, GDX cratered 9.2% in just three trading days. Yet during the four starting with this latest far-more-hawkish mid-March FOMC decision, GDX actually rallied 3.4%! The Fed’s tyranny over gold-stock traders’ worldview has broken. Both technical and fundamental factors contributed to this pivotal sea-change.

One of the most-powerful buy signals in all of technical-analysis-dom is the legendary Golden Cross. It happens when a shorter moving average migrates back above a longer one during sizable rallies out of major lows. The classic golden cross is when a 50dma climbs back over a 200dma. Normally when this happens after a full-blown correction, it confirms a new bull-market upleg is indeed marching higher again.

GDX achieved this rare 50-200 golden cross on March 15th, fully a week after gold’s geopolitical spike peaked and the eve of that latest FOMC decision. While this leading gold-stock benchmark’s last golden cross soon fizzled after last June’s hawkish-dot-plot surprise, the prior one in early May 2020 confirmed a young gold-stock upleg that would ultimately mature to mammoth 134.1% GDX gains over just 4.8 months!

Traders really notice golden crosses, since most financial-charting websites and software throw in the widely-followed 50dmas and 200dmas by default. Speculators and investors just love chasing strong upside momentum, and 50-200 golden crosses are a high-probability signal that it will likely continue for some time. These strong gold-stock technicals were recently confirmed with even-stronger fundamentals.

The major gold miners dominating GDX recently finished reporting their Q4’21 operational and financial results in March. After every quarterly earnings season, I painstakingly analyze the reports from the top 25 GDX gold miners. The resulting GDX Q4’21 essay was published several weeks ago. A quick proxy for how the major gold miners are faring looks at their mining costs compared to prevailing gold prices.

Gold averaged $1,796 in Q4’21, while the GDX-top-25 gold miners reporting all-in sustaining costs were averaging $1,188 per ounce. That made for implied sector unit profits of $608 per ounce, which proved the seventh-highest on record behind only the preceding six quarters! Those earnings are understated too, as average AISCs were skewed high by a handful of outliers. AISCs should have moderated a bit in Q1’22.

Let’s assume they came in down a conservative 1% quarter-on-quarter to $1,175 last quarter. And due to gold’s mounting upleg, Q1’s average gold price blasted up 4.6% QoQ to $1,879! So that less projected $1,175 AISCs would yield GDX-top-25 Q1 implied unit earnings of $704 per ounce. That would make for a huge 15.8% QoQ surge, and tie Q3’21 for the sixth-highest ever seen. Gold-mining profits are big and growing.

Yet gold-stock prices remain fairly-low absolutely, and very-low relative to the fat earnings this industry is generating with these high prevailing gold prices. Even at April 1st’s latest interim high of $39.49, GDX is still 40.7% under its all-time high of $66.63 from way back in early-September 2011. Unfortunately that was years before I started my comprehensive quarterly analyses of GDX miners’ results 24 quarters ago.

But back in Q3’11 gold averaged $1,706, marking a mighty secular gold bull’s peaking seeing much-lower quarterly averages for years both before and after. So those big gold-mining profits were an anomaly, not sustained. Yet average gold prices during the last eight quarters including Q1’22 have run between $1,714 to $1,912. Those implied sector unit profits have stayed between $608 to $884 per ounce, super-high.

So the gold miners’ stocks have generally rarely if ever been as chronically-undervalued relative to their strong earnings as they are today. And gold itself is likely heading much higher too, driven by this raging inflation unleashed by the Fed’s epic money printing in recent years. Gold also has a many-decades-long history of rallying strongly through the exact spans of Fed-rate-hike cycles, which are bearish for stock markets.

In light of all this, today’s young gold-stock upleg with mere 36.6% gains at best so far is likely just getting started. Again GDX’s average upleg during today’s secular gold bull ran +85.0%. And this upleg’s setup is far better than most with radically-unprecedented money-supply growth fueling the worst inflation super-spikes since the 1970s and early 1980s. This gold-stock upleg ought to prove the best of their entire bull!

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The bottom line is this latest gold-stock upleg is mounting. This sector has continued powering higher on balance in recent weeks, despite gold consolidating lower after its Russia-Ukraine-invasion geopolitical spike peaked. The leading GDX gold-stock ETF had already achieved a pair of major decisive breakouts before that crisis. That strong upside momentum is shifting sentiment back to bullish, enticing in more traders.

With sector herd psychology improving, gold stocks are increasingly outperforming their metal again. And their growing gains are fully justified fundamentally. Gold miners continue to earn fat profits with these high prevailing gold prices. And gold’s own secular bull the gold stocks amplify is likely to keep generally marching higher for years on the Fed’s epic money printing. That gives gold stocks vast upside potential!

Adam Hamilton, CPA

Copyright 2000 - 2022 Zeal LLC (www.ZealLLC.com)

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Adam Hamilton, CPA, is a principal of Zeal LLC, which he co-founded in early 2000 as a pro-free market, pro-capitalism, and pro-laissez faire contrarian investing and speculating Information Age financial-services company. Hamilton is a lifelong contrarian student of the markets who lives for studying and trading them.


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