Gold Stocks Lagging

CPA, Principal & Co-Founder of Zeal LLC
November 3, 2023

The gold miners’ stocks are lagging gold’s strong young upleg, their gains falling behind.  Their striking performance gap is undermining gold-stock sentiment, leaving traders even warier of this sector.  While definitely vexing, this anomaly has only arisen over the past couple weeks.  Gold stocks’ precedent during past major gold uplegs implies this will unwind soon, with miners surging fast to catch up with their metal.

Gold has been blasting higher on balance for a month now, confirming a new major upleg is underway.  While the sparking catalyst was certainly geopolitical, gold’s upside since has been fueled by the normal sequential buying pattern driving all major uplegs.  That’s stage-one gold-futures short-covering buying, then larger stage-two gold-futures long buying, then ultimately vast stage-three investment buying returning.

These growing capital-inflow stages are telescoping, ignited by preceding stages.  Those drive gold high enough for long enough to convince more traders to return, and their buying accelerates gold uplegs.  Gold’s sharp spike gains so far have mostly been driven by gold-futures short covering, but long buying has just started ramping up.  I wrote a whole essay last week analyzing gold’s new major upleg in depth.

The gold miners’ stocks amplify gold’s gains due to their inherent profits leverage.  Their mining costs are largely fixed, so higher gold prices directly translate into higher earnings.  This sector’s benchmark is the GDX gold-stock ETF, which includes the world’s biggest gold miners.  While their Q3 earnings season is underway, it won’t be finished until mid-November.  So Q2’23 results are still the most current we have now.

The top 25 GDX gold miners averaged all-in sustaining costs of $1,380 per ounce in Q2.  At $1,820 gold in early October as the last correction bottomed, that yields $440 in unit profits.  But at late October’s $2,005, those soar 42.0% to $625 per ounce!  That is 4.1x gold’s 10.2% gains at best so far in this young upleg.  Higher gold prices drive fatter mining profits, so gold stocks are bid higher reflecting better fundamentals.

Despite this current real-world example, GDX’s major gold stocks tend to amplify material gold moves by 2x to 3x.  I’ve done extensive research on gold-stock performance for decades, and that range is where it usually shakes out.  Gold’s last major upleg peaked up 26.3% in early May, and GDX powered up 63.2% in that exact 7.2-month span.  That made for 2.4x upside leverage, right in line with historical precedent.

Candidly if gold stocks can’t significantly leverage gold, they aren’t worth owning!  Gold mining adds all kinds of risks on top of the underlying commodity’s price trends.  Those run the gamut from geological to operational to geopolitical.  So much can go wrong in gold mining, and traders need to be compensated for those additional risks.  If gold stocks only pace and match gold’s gains, sticking to gold is way safer for traders.

GDX’s upside leverage to gold was normal in the first couple weeks of this new upleg.  Starting just before the Islamic Resistance Movement invaded Israel to slaughter and kidnap Jews, gold blasted 5.6% higher over eight trading days.  GDX shot up 12.2% in that span, for 2.2x leverage.  But the major gold stocks had bottomed one day before gold.  Include that, and GDX’s nine-trading-day surge grows to 14.0% for 2.5x.

That’s perfectly normal, especially early in uplegs.  Naturally herd sentiment keeps improving the longer they run, with greed mounting as gains grow.  So gold-stock outperformance tends to peak later in major gold uplegs when universal bullishness reigns.  The major gold miners are more likely to double gold’s gains early on while bearishness and skepticism linger, then gradually improve to triple later on as traders believe.

Yet from mid-October to gold’s latest interim high of $2,005 last Friday, gold stocks looked terrible.  The yellow metal surged another 4.3% in that span as Israel prepared to invade Gaza to root out the Hamas terrorists and rescue their hostages.  Yet unbelievably GDX slumped 1.1% in that span, leaving miserable -0.3x leverage in its wake!  Traders would’ve been far better off in gold over those next eight trading days.

That underperformance was so bad that it crushed GDX’s leverage ratio for this entire young gold upleg.  Again gold was up 10.2% at best so far over several weeks, but GDX’s gains even starting at its day-earlier low were only 12.7%.  That 1.2x leverage has been way too low, making gold stocks not worth owning in that span.  Their young parallel upleg with gold has proven very underwhelming technically too.

When gold started mean reverting sharply higher on that massive terrorist attack, GDX quickly recovered to regain its uptrend’s lower support.  But major gold stocks slumped since, failing at that key technical line.  GDX remains well under its important 200-day moving average, while gold has blasted way above its own.  At best recently GDX recovered to just 0.966x its 200dma, while gold shot up to 1.038x its 200dma.

There’s nothing good to say about this latest very-disappointing gold-stock action.  With the miners failing to mirror and amplify the metal’s gains, bearish sentiment has soared.  Incredibly the gold-stock apathy and skepticism today may rival that of early October before gold surged!  Traders are now faced with two pressing questions, why is this happening and how long is it likely to last?  I’ve sure been wrestling with them.

Surprisingly the root cause of gold stocks’ underperformance may be the nature of gold’s young upleg.  Normally major gold uplegs are birthed out of major lows by some market-based catalyst, like surprises in major US economic data that are Fed-dovish.  Examples are cooler-than-expected headline inflation or worse-than-expected US jobs growth, leaving the Fed less likely to hike rates which drives US dollar selling.

The gold-futures speculators look to the dollar’s fortunes for their primary trading cues, and then do the opposite.  Both gold’s enormous 20.9% selloff in mid-2022 and latest 11.3% correction in mid-2023 were driven by massive US Dollar Index rallies.  Those in turn were fueled by aggressive Fed rate hikes and prospects for higher rates for longer.  Had this latest gold upleg started normally, it would be more accepted.

Overshadowed by the Middle East crisis, gold’s upleg technically started the day before Hamas shocked the world with its barbarism.  On Friday October 6th, gold actually bounced a sizable 0.5% despite a Fed-hawkish way-better-than-expected monthly US jobs report that morning.  Wall Street was looking for 170k jobs added in September, but the Biden Administration claimed the actual doubled that at a huge +336k!

Gold should’ve plunged on that kind of beat, but speculators’ gold-futures positioning was already so extremely bearish that their capital firepower available for selling was exhausted.  Total spec shorts were nearing major secular highs, while total spec longs threatened major secular lows.  Those were the very conditions that birthed past major gold uplegs, so a new one was overdue even if Israel hadn’t exploded.

The next morning the Islamic atrocities against the Jews shocked the world, and gold blasted 1.8% higher on Monday the 9th.  So what would’ve been a normal gold upleg was turned into a geopolitical spike.  That was further confirmed on Friday the 13th, when gold rocketed up 3.2% on indications Israel would soon invade Gaza to destroy Hamas.  Geopolitical spikes can be fragile, dependent on newsflow that fades.

The last big one came in late February and early March 2022 after Russia invaded Ukraine.  In just eight trading days, gold blasted 7.9% higher to $2,051!  But like many geopolitical spikes, gold symmetrically collapsed as traders came to accept that war as the new norm.  Fully 9/10ths of those gains were lost in just five trading days.  I’ve never been a fan of gold geopolitical spikes since they are often quickly reversed.

But this Israel-Gaza one has a far-superior setup than that Russia-Ukraine one, due to radically-different spec gold-futures positioning.  As discussed in my essay last week, spec longs generally trade within a range between 240k to 413k contracts.  The lower they are, the more room specs have to keep buying so the more bullish gold looks.  In late February 2022, total spec longs at 399.2k were challenging resistance.

So speculators didn’t have much more room to keep adding gold futures no matter what happened.  They surged to 420.6k by early March, and specs’ capital firepower was spent.  Gold’s geopolitical spike then fizzled because it happened near the end of a well-established gold upleg.  Had this Israel-Gaza one erupted back in early May 2023 as gold’s last major upleg topped, it would be just as bearish for gold’s outlook.

Spec shorts have their own range between about 95k to 175k contracts, and the higher they are the more bullish gold’s near-term outlook.  Once specs have shorted about all the futures they have the capacity to do, symmetrical covering buying soon comes to normalize their bearish bets.  Back when Russia invaded Ukraine, total spec shorts were running 129.5k.  Translating these into comparable percentages is useful.

In late February 2022, total spec shorts were 57% up into their secular range while total spec longs were 92% up into their own.  The most-bullish-possible near-term setup for gold is 100% shorts and 0% longs, indicating selling exhaustion necessitating big mean-reversion buying.  It’s also important to realize that spec longs outnumber shorts by about 2.5x on average, making them proportionally more important for gold.

Fast-forward to early October 2023, and specs’ gold-futures positioning couldn’t have been more different just after Hamas invaded Israel.  Total spec shorts were way up at 174.4k contracts, while total spec longs were way down at 264.8k.  In trading-range terms, that was a whopping 99% shorts and only 14% longs!  So specs had vast room for both stage-one gold-futures short covering and stage-two long buying.

When Russia invaded Ukraine, specs had room to do 57% of likely short covering and just 8% of long buying.  When Hamas invaded Israel, specs had room to do a massive 99% of probable short covering and 86% of the much-larger long buying!  Birthed in radically-different spec-gold-futures-positioning and gold-upleg-correction-cycle environments, these two gold geopolitical spikes are very different beasts.

That earlier spike collapsed as that little bit of remaining gold-futures buying was quickly spent by early March 2022.  But today specs have such huge capital firepower available for buying that it can be sustained for months.  Just after Hamas invaded Israel, specs had room to buy a stupendous 227.6k gold-futures contracts of both longs and shorts!  Per the latest-available data, 152.1k remain despite gold surging.

So fully 2/3rds of likely gold-futures mean-reversion normalization buying remains even after gold shot up 10.2% in several weeks!  That argues that this gold upleg is the real deal, just starting to power higher despite its geopolitical-shock birth.  And if gold continues climbing on balance, bullishness will mount until gold stocks surge and catch up with their metal.  GDX’s upside leverage should near the 3x high side of its range.

In addition to geopolitical-spike skepticism, the sharp selloff in the US stock markets in the last couple weeks also contributed to gold stocks’ dreadful performance.  While miners usually follow gold, they are also stocks trading in the stock markets.  So particularly-intense stock-market sentiment can bully them around, temporarily decoupling them from gold.  Gold stocks can get sucked into material stock-market selloffs.

During this young gold upleg’s first eight trading days where gold and GDX surged 5.6% and 12.2%, the flagship US S&P 500 stock index climbed 2.7%.  So gold stocks didn’t face any general-stock selling pressure.  But during the next eight trading days where gold rallied another 4.3% but GDX shed 1.1%, the S&P 500 plunged a serious 5.8%!  That big selloff into correction territory really tainted sentiment for all stocks.

In my line of work as a speculator and financial-newsletter guy, I’m blessed to watch and study markets all day everyday.  On material S&P 500 down days, gold stocks tend to split the difference between gold and the stock markets.  October 18th is a recent example, a day with minimal geopolitical news.  Gold still surged 1.4% on gold-futures momentum buying, while the S&P 500 fell 1.3% on soaring US Treasury yields.

Ideally GDX would’ve amplified gold’s big gains by 2x to 3x, surging 2.8% to 4.2% that day.  Instead the general-stock bearishness dragged down gold stocks, and GDX slipped 0.3% roughly halfway between where gold and stock markets ended up.  While major gold stocks tend to amplify gold uplegs by 2x to 3x across their entire spans, within them that leverage is lumpy.  And big stock-market selloffs can retard it.

Gold stocks have lagged gold in recent weeks because of gold-geopolitical-spike skepticism and plunging stock markets sucking them in.  The former is unfounded due to speculators’ exceedingly-bearish gold-futures positioning when Hamas invaded Israel.  And the latter should be over for now with the S&P 500 bouncing sharply within its correction downtrend.  So odds are gold stocks will soon resume leveraging gold.

As that huge gold-futures mean-reversion buying continues on normal market news like surprises in key US economic reports, gold will power higher even as Israel fades from financial headlines.  That will fuel mounting bullishness, which will lead to parallel gold-stock buying.  The longer and higher GDX rallies, the more traders will want to deploy in high-potential gold stocks.  They will quickly catch up with gold’s gains.

And again as analyzed in last week’s essay on gold’s new major upleg, this one has exceptional upside potential.  Gold is already within spitting distance of new nominal all-time highs, which are only 4.3% above mid-week levels!  Once gold challenges and exceeds August 2020’s record close of $2,062, the financial-media gold coverage will explode.  That will dramatically ramp bullishness and greed in this sector.

Traders love chasing winners, and will flock back to gold and its miners’ stocks to ride their gains.  This powerful dynamic soon becomes self-feeding.  The more traders buy, the higher gold and GDX surge.  The bigger their gains grow, the more excited other traders get to jump in.  The last time this happened as gold forged into nominal record territory was summer 2020.  The gold stocks fared pretty darned well then.

GDX skyrocketed 134.1% higher in just 4.8 months, amplifying gold’s underlying monster 40.0% upleg by an awesome 3.4x!  Today’s gold upleg merely has to grow to +13.3% before gold gets back into record territory, unleashing this potent positive feedback loop.  Gold’s new major upleg should easily hit 25% gains, and probably 40%, before giving up its ghost.  Gold stocks will soar again with gold hitting records.

Interestingly the fundamentally-superior smaller mid-tier and junior miners tend to enjoy gold-upleg gains well outpacing the majors.  The smaller gold stocks are better able to consistently grow their production, and their lower market capitalizations make them much easier to bid higher.  So we’ve long specialized in them, and our newsletter trading books are currently full of great smaller gold miners ready to soar with gold.

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 have really lagged gold in recent weeks.  That vexing underperformance has really damaged sentiment.  Skepticism on the staying power of gold’s latest geopolitical spike is a major factor.  But speculators’ gold-futures positioning was exceedingly bearish leading into it, and despite gold’s surge they still have vast room to continue big mean-reversion buying driving gold higher.

A sharp stock-market selloff sucking in gold stocks also contributed to their recent slump, tainting overall market sentiment.  But as gold resumes climbing on balance, traders will return to its miners’ stocks.  They should quickly catch up with gold as their accelerating gains attract in more capital, reestablishing normal upside leverage.  Gold entering record territory soon will greatly boost sector bullishness and greed.


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.

A single ounce of gold (about 28 grams) can be stretched into a gold thread 5 miles (8 kilometers) long.
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