first majestic silver

Gold Stocks Languishing

CPA, Principal & Co-Founder of Zeal LLC
March 1, 2024

The gold miners’ stocks continue languishing seriously out of favor, grinding along near deep lows.  This is a major anomaly given this sector’s bullish backdrop.  Consolidating just under record territory, gold’s high prevailing prices are fueling fat profits for its miners.  Many gold stocks are incredibly undervalued and massively oversold, phenomenal bargains.  So they are overdue to mean revert way higher for big gains.

Virtually no one is interested in gold stocks today, speculators and investors alike have forgotten about this high-potential contrarian sector.  The main reason is the extreme euphoria spewing out of this latest general-stock-market bubble.  The greedy rush to chase AI stocks has overshadowed almost everything else.  But that mega-cap-tech stampede has forced the S&P 500’s price-to-earnings ratio to a bubble 31.6x!

The ringleader for this popular speculative mania is AI-chip market-darling NVIDIA.  It did just report a spectacular quarter, but is still trading at extreme valuations of 65.6x and 32.1x trailing-twelve-month earnings and sales!  NVDA stock has skyrocketed parabolic, stretching an astounding 67% above its 200-day moving average!  While vertical blowoffs always end badly, retail investors are aggressively buying high.

Last weekend my family attended three big parties Friday, Saturday, and Sunday, season-end bashes for my kids’ competitive basketball teams.  NVIDIA was the main topic of conservation at all, coming up again and again.  Dozens of parents who aren’t stock-market people were eagerly discussing how they had just deployed a bunch of money in soaring NVDA or soon would!  This AI bubble has captivated the mainstream.

But once any parabolic mania bubble stock sucks in all available near-term buyers, crashes inevitably follow.  NVDA rocketed vertical in late 2021 too, on extreme hype for cryptocurrency mining using its graphics chips.  The bubble-valued S&P 500 rolled over into a fairly-mild bear in 2022, falling just 25.4% from January to October.  Yet in roughly that same span, market-darling NVDA plummeted a catastrophic 66.4%!

Markets are forever cyclical, rising and falling.  Bubbles inflate then pop, and sectors flow and ebb into and out of favor.  Hot sectors collapse, and neglected sectors soar.  So the days are definitely numbered for these extreme market anomalies of this AI bubble and gold stocks languishing.  Big mean reversions are coming on major shifts in capital allocations.  That will almost certainly really boost gold and gold stocks.

Gold stocks are normally leveraged plays on their metal, which overwhelmingly drives their profits and ultimately stock prices.  Gold is actually faring really well, which is impressive overshadowed by a stock bubble.  This gold bull’s latest upleg powered 14.2% higher between early October to late December, achieving two new nominal record closes.  At worst since then, gold has merely suffered a mild 4.2% pullback.

Mid-week at $2,033, gold’s young upleg is still up 11.7% and gold is just 2.2% under nominal-record territory.  Quarter-to-date, gold’s average price is running $2,027 which is the highest ever witnessed.  The gold miners are earning fat profits hand over fist with these high prevailing gold prices, which their stocks will eventually reflect.  Yet the leading GDX gold-stock index is trading as if none of this exists.

Back in early October when gold plunged near $1,820 birthing today’s upleg, GDX plummeted as low as $25.91 on close.  The major gold stocks comprising it were extremely oversold, with GDX trading at under 85% of its 200dma.  That was a perfect setup for gold stocks to mean revert sharply higher with gold’s new upleg.  That indeed started happening into late December, with GDX surging 23.5% to $32.01 then.

But that only made for 1.7x upside leverage to gold, and historically GDX has amplified major gold moves by 2x to 3x.  So the gold stocks were lagging, but not languishing.  Gold-stock gains tend to accelerate later in gold uplegs, when traders’ excitement mounts.  That’s kind of like NVIDIA shooting parabolic in this AI stock bubble’s terminal blowoff.  The higher and faster stocks climb, the more traders rush to chase them.

Gold uplegs take two steps forward before one step back, in the form of pullbacks to rebalance sentiment.  Those bleed off excessive greed, extending uplegs’ longevity.  Gold retreated in most of January and early February, driven lower by gold-futures selling in response to a US dollar bear rally.  Though that futures selling was intense, and gold too was overshadowed by the stock bubble, the resulting pullback was mild.

Again gold only slumped 4.2% at worst to $1,991 in mid-February.  That was nowhere near enough to spawn meaningful fear, but it did anyway.  Gold stocks remained so out of favor that GDX plunged a way-outsized 19.1% during that gold pullback!  That made for excessive 4.6x downside leverage to gold, much larger than normal.  Gold-stock traders freaking out for no reason pounded GDX way back down to $25.89.

That was a hair under early-October levels when gold was trading near $1,820.  So gold stocks’ entire upleg had been erased, despite gold holding 9.4% higher at its low!  This serious disconnect is a huge anomaly that isn’t sustainable.  This GDX chart of recent years highlights the absurdity of gold-stock pricing today.  Gold stocks are languishing at levels last seen in early November 2022 when gold was $1,675!

Gold stocks’ recent pounding is highly illogical, driven by irrational and unsustainable fear.  Seeing gold stocks so darned low relative to high prevailing gold prices is an anti-bubble, the opposite of NVIDIA’s hyper-overbought moonshot.  Gold-stock technicals have been battered to oversold extremes, with GDX bashed down to just 88% of its 200dma mid-week!  Traders are overwhelmingly bearish on gold stocks.

Being in the financial-newsletter business, I’m blessed with lots of feedback.  I’m grateful for it, thinking of the Proverbs Bible verse “As iron sharpens iron, so one person sharpens another.”  And after a quarter-century writing our newsletters, definite feedback patterns are apparent.  Traders grow very excited about gold stocks when they are high late in major uplegs, then despise them when they are low after big selloffs.

The overall tenor of incoming e-mails has long proven a great indicator of gold-stock sentiment.  Lately it has been utterly miserable, with a high proportion of feedback along the gold-stocks-are-dead-you’re-a-fool theme.  Speculators and investors alike have totally capitulated on this sector, convinced it is doomed to spiral ever lower indefinitely.  Only at major gold-stock bottomings before big uplegs is bearishness so shrill.

That virtually assures gold stocks are on the verge of blasting higher in a big mean-reversion rally, which will eradicate this excessive fear.  That will be fueled by gold’s own surge on massive mean-reversion buying of gold-futures long contracts by speculators.  Astoundingly as analyzed in my essay last week, total spec longs which help drive major gold uplegs have been fully reversed back under early-October levels!

So despite gold being 11.7% higher now, specs actually have more capital firepower available for buying longs than when gold was near $1,820!  After recent past episodes of spec longs dropping way back to such excessively-bearish levels, gold has surged sharply.  Speculators’ normalizing those bets tends to catapult gold about 12% higher in roughly six weeks!  The battered gold stocks would sure soar on that.

That’s partially because they are abnormally low relative to gold, requiring big outperforming rallying to catch up.  But a much-rarer dynamic is also coming into play, new record gold prices.  Again gold is only about 2% under new records, so a normal 12%ish futures-buying-fueled surge would catapult it way up into nominal-record territory.  New record highs generate widespread bullish financial-media coverage.

That fuels mounting excitement attracting in more traders and capital than usual.  Gold’s last two uplegs achieving new records both crested in 2020 at monster 42.7% and 40.0% gains!  Remember today’s was merely up 14.2% at best in late December, still young.  Such powerful gold uplegs generate big gold-stock buying.  GDX blasted 76.7% and 134.1% higher in gold’s last mighty uplegs forging into record territory!

But gold stocks being drenched in bearishness and deeply oversold aren’t the only reasons a big mean-reversion surge is imminent.  The gold miners’ fundamentals also support much-higher stock prices.  Few analysts in the world know more about gold-stock earnings than me.  For the last 30 quarters in a row, I’ve painstakingly analyzed the latest results from GDX’s 25-largest component stocks in quarterly essays.

While Q4’23’s earnings season is underway, foreign gold miners won’t finish reporting until mid-to-late March.  I’m eager to start that analytical project when enough of them have reported.  For now, the major gold miners’ latest full quarterly results are still Q3’23’s.  Gold averaged $1,926 that quarter, while the GDX top 25’s all-in sustaining costs averaged $1,304.  That made for implied sector unit profits of $622 per ounce.

In Q4’23 average gold prices surged to $1,976, just shy of Q2’23’s all-time record of $1,978.  As discussed in depth in my recent essay previewing gold miners’ Q4’23 earnings, last quarter’s average AISCs will likely shake out around $1,275.  That would yield fat profits of $701 per ounce, on the high side of the last 30 quarters’ range.  And with gold averaging a record $2,027 QTD in Q1’24, earnings are still climbing!

The GDX gold miners haven’t enjoyed $700+ unit earnings since Q2’21.  Yet in mid-February, GDX was again slammed back to prices last seen in early November 2022.  That month GDX averaged $26.92 on close, well above mid-February’s lows.  Yet the GDX top 25’s unit earnings that quarter were far lower at just $463.  If they indeed hit $701 in Q4’23, that would make for massive 51.3% year-over-year growth!

Gold-stock prices need to be way higher fundamentally to reflect their super-strong profitability.  Usually this high-flying sector has higher valuations, but a surprising number of gold miners are now trading at low-double-digit and even single-digit TTM P/Es!  Gold stocks are languishing at some of their lowest prices relative to underlying earnings ever seen.  Contrarians should be rushing to buy these deep bargains.

Interestingly that last time GDX traded so darned low in early November 2022 was early in a large 63.9% GDX upleg over 6.5 months!  Then like now traders wrongly assumed gold stocks were doomed since they were so battered technically.  Yet as gold soon mean reverted sharply higher on speculators’ big gold-futures buying, gold stocks blasted higher amplifying their metal’s gains.  That is coming again soon.

And talking about weak technicals, take another look at this chart.  GDX has suffered a big breakdown to seriously-oversold levels.  Yet still this dominant gold-stock ETF hasn’t fallen way under its uptrend channel’s support.  Occasionally both gold and gold-stock prices briefly stray out of upleg uptrends, going both above and below.  But those extra-trend moves usually prove anomalous and short-lived, like today’s will.

Market extremes never last long, as the excessive greed or fear necessary to drive them soon reverses.  This stunning AI stock-market bubble led by parabolic NVIDIA won’t last much longer.  When it pops and decisively rolls over, investors will remember they need to diversify their bleeding stock-heavy portfolios.  That will dispel stock markets’ shadow over gold and its miners’ stocks, unleashing big mean-reversion buying.

Ignoring gold investment demand entirely, speculators’ gold-futures long buying alone should easily again drive gold up about 12% in roughly six weeks.  Such a surge off mid-February’s pullback low would launch gold way up over $2,225, deep into new-record territory above late December’s $2,077.  There’s no doubt gold-stock buying would explode on that, potentially catapulting GDX 50% to 60% higher in short order!

The smaller fundamentally-superior mid-tier and junior gold miners we specialize in should fare much better.  They are better able to consistently grow their production from lower bases, and their smaller market capitalizations are easier for capital inflows to drive higher faster.  Our newsletter trading books are currently full of great smaller gold stocks, which are due to blast dramatically higher as gold’s upleg resumes.

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 are languishing.  Excessive selling has slammed GDX way back down to early-October levels when today’s gold upleg was born.  Yet that makes zero sense fundamentally with gold remaining about 12% higher.  These seriously-oversold gold stocks riddled with capitulatory bearishness is an anomaly that will prove short-lived.  They are due to soon mean revert sharply higher with gold.

Despite consolidating high near record territory, gold’s bull advance will soon resume on big gold-futures long buying.  Incredibly all that fueling gold’s young upleg has been reversed, fully reloading spec-long buying.  After similar past excessively-bearish longs, mean-reversion buying has catapulted gold about 12% higher in roughly six weeks.  The battered gold stocks will fly as that drives gold deep into record territory.

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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.


It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.
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