Gold stocks still coiling

That remains the GDX VanEck Gold Miners ETF. From early March to mid-May last year, GDX powered 28.4% higher in a solid young upleg. But in mid-June that was derailed by speculators fixating on Fed-tightening fears. They started periodically puking out heavy-to-extreme bouts of gold-futures selling on Fed-hawkish news including Fed officials’ jawboning, better-than-expected economic data, and FOMC decisions.

That hammered gold sharply lower from time to time, which the major gold stocks of GDX amplified like usual by 2x to 3x. So over 4.4 months into late September 2021, GDX collapsed 27.1% to a 17.7-month low. That reversed the gold-stock-sentiment pendulum hard, from mounting bullishness last spring to serious bearishness last autumn. Like usual traders extrapolated that downside indefinitely, so they fled.

But in sell-the-rumor-buy-the-news mode, gold and thus gold stocks rebounded sharply in October and early November. Those surges came soon after the FOMC first warned it was going to start slowing its epic quantitative-easing money printing and then later pulled that trigger. By mid-November GDX had surged 20.7% out of its QE4-taper-scare lows, a budding upleg. Then more extreme gold-futures selling erupted.

With bearish sector sentiment still festering, GDX dropped 14.9% into mid-December’s uber-hawkish FOMC meeting. That was the one where the Fed doubled the pace of its QE4 taper to a turbo-taper, paving the way for rate hikes sooner. And Fed officials’ rate-hike outlook tripled from two hikes in 2022 and 2023 to fully six! Yet GDX bottomed that very Fed Day before rebounding a solid 7.8% by year-end.

But the legs were cut out from under that rally in early January, on the minutes from that same FOMC meeting. There Fed officials were thinking about soon starting quantitative tightening to begin unwinding their mind-boggling money printing. Between March 2020’s pandemic-lockdown stock panic and mid-December, the Fed’s balance sheet had skyrocketed by 110.6%! That more than doubled the monetary base.

The result of all these Fed-tightening-fears-spawned gold-futures selloffs since last summer is this uninspiring gold-stock chart. GDX has been grinding along near lower support, which is rising but only modestly. Over this past half-year, the gold stocks have mostly been drifting sideways in a classic low consolidation. While this basing does nothing for improving sector sentiment, gold stocks are bullishly coiling.

Nothing attracts traders like upside momentum, which has been sorely lacking in gold stocks since mid-November. When sectors are rallying, capital inflows become self-feeding as buying begets more buying. This positive feedback loop which helps fuel major gold uplegs hasn’t ignited yet in this current bottoming. But it is coming as gold’s own young upleg, which is technically-superior to GDX’s, keeps powering higher.

Considering what has to be the Fed’s fastest hawkish lurching ever, gold’s upside progress fighting these fierce psychological headwinds has been impressive. The yellow metal also bottomed at $1,725 in late September, a week after the FOMC first warned QE4 tapering was imminent. Back then I pointed out that gold’s “taper tantrum” futures selling had already been mostly expended in anticipation of that key tightening.

While doubted at the time, that hardcore contrarian argument soon proved correct. Gold bounced nicely in October before surging way up to $1,867 in mid-November! Those latter sharp gains came right after the FOMC formally launched that long-feared QE4 taper. Unfortunately that frenzied momentum buying left gold-futures speculators way overextended on the long side, so a sharp rebalancing selloff erupted.

But gold kept climbing on balance anyway, carving higher lows in a much-steeper uptrend than GDX has seen. That uber-hawkish mid-December FOMC meeting accelerating the QE4 turbo-taper and tripling Fed officials’ rate-hike outlook didn’t even faze gold. It clawed back up to $1,829 by year-end. While gold got hit briefly by that FOMC meeting’s minutes discussing QT bond runoffs, its uptrend rallying soon resumed.

By late January gold had regained $1,848, closing in on new young-upleg highs. Although gold-futures selling flared again on late January’s next FOMC meeting, it was short-lived. That was after the Fed chair said “I think there’s quite a bit of room to raise interest rates without threatening the labor market.” Yet by the middle of this week, gold was back up over $1,832. Gold is weathering this crazy-hawkish Fed shift well!

As it should, because gold’s outlook is wildly-bullish as I’ve analyzed from multiple fronts in recent essays. Technically gold is nearing a huge upside breakout from a gigantic pennant chart formation. That will work wonders to attract back legions of gold-futures speculators, whose hyper-leveraged buying will drive gold sharply higher. Gold is also really lagging the raging inflation unleashed by the Fed’s insane money printing.

Just this week the intentionally-lowballed US Consumer Price Index still soared 7.5% year-over-year in its latest January print! That’s the hottest read since February 1982! The last time similar massive inflation spikes erupted in the 1970s, gold tripled in one and more than quadrupled in a second before they were brought under control! Gold ought to at least double in this current spike, even with its far-larger market now.

That soaring inflation unleashed by the Fed more than doubling its monetary base won’t be easily tamped down. To slay this monster it spawned, the FOMC has to hike its federal-funds rate well over headline inflation rates. It also has to unwind a big fraction of its colossal $4,715b of money printing since March 2020’s stock panic. But either sufficient rate hikes or QT would crash these QE-levitated stock markets!

That would force the US economy into a severe recession if not a full-blown depression. So the FOMC will drag its feet on tightening, allowing its inflation to fester. This central bank actually has a long sorry track record on tightenings, capitulating and killing them prematurely once stock markets fall far enough to risk a major economic slowdown on the negative wealth effect. The Fed doesn’t have the will to fight inflation!

That’s bad news for Americans trying to make ends meet, but great news for gold. The longer these high and rising price levels persist, the longer the FOMC holds real rates deeply-negative by refusing to hugely hike the FFR, the more investors will return to gold. Its investment demand is starting to improve, and gold portfolio exposure today effectively remains near zero. Forgotten prudent portfolio diversification will return.

Gold has always been the ultimate diversifier, tending to rally when stock markets materially weaken. Just to return to historical minimum gold portfolio allocations of 5% to 10%, American stock investors would have to do unbelievably-enormous gold buying. And it’s not just runaway inflation that will drive big gold investment demand, but these lofty bubble-valued US stock markets rolling over into a long-overdue bear.

Because gold’s outlook is so darned bullish, the gold stocks’ is even more so. The GDX gold miners are effectively leveraged plays on gold, again tending to amplify its uplegs and corrections by 2x to 3x. Gold-stock uplegs tend to grow really large. Even including that Fed-stunted dwarf GDX upleg last spring, this leading gold-stock ETF’s five uplegs during this secular gold bull have averaged massive 85.0% gains!

At best so far in mid-November, GDX’s current young upleg was merely up 20.7%. Since gold stocks have been grinding sideways basing, in the middle of this week GDX was only up 9.3% upleg-to-date. So the vast majority of gold stocks’ gains are still yet to come.  This sector’s super-strong fundamentals and deep undervaluations support far-higher gold-stock prices. But apathetic traders haven’t figured this out yet.

The gold miners will soon start reporting their latest Q4’21 results, which include their all-in sustaining costs necessary to produce each ounce of gold. Averaging these AISCs across the gold miners yields a great sector proxy for profitability. Over the past four reported quarters ending in Q3’21, the top 25 GDX gold miners averaged $1,057 AISCs. The upcoming Q4 ones should shake out somewhere around there too.

Because gold hasn’t soared yet on this profligate Fed’s raging inflation, traders generally remain bearish assuming the yellow metal is weak. But that’s really not the case. Gold averaged $1,789 per ounce in Q3, which was actually the fifth-highest on record after the preceding four quarters. The peak of $1,912 a year earlier in Q3’20 wasn’t that much higher. Surprisingly to many, gold actually fared even better in Q4’21.

With gold-futures speculators periodically puking out heavy selling on a steady hawkish drumbeat of Fed-tightening fears, gold still averaged $1,796 last quarter! That’s slightly better quarter-on-quarter, actually the fourth-highest ever witnessed. Assuming the GDX major gold miners’ AISCs hover around that recent $1,050 trend, these companies will average earnings around $746 per ounce! Those are really-hefty profits.

That would also prove the fourth-highest levels on record for this great sector-earnings proxy. And gold stocks are so out of favor that many are already dirt-cheap, trading with trailing-twelve-month price-to-earnings ratios in the teens and even single-digits! So gold-stock upside potential is explosive fundamentally as well as technically. Once gold starts decisively running again, these coiled gold stocks will soar higher.

Their potential upside targets are stellar as gold-stock rallying momentum gradually restores popularity to this forgotten sector. For a quick example, GDX’s record high of $66.63 came in early September 2011. That’s a whopping 110.9% above today’s depressed levels! Yet gold averaged just $1,706 in Q3’11 and four-quarter gold-stock earnings were far smaller. Headline CPI inflation also averaged a way-lower 3.8% YoY.

And gold is doing even better this quarter almost halfway through Q1’22, averaging $1,815. So gold-miner profitability continues to improve as gold’s young upleg mounts. Fatter earnings will force already-low valuations even deeper into serious bargain territory if these companies can hold the line on costs. Undervalued fundamentals, basing technicals, and apathetic sentiment are explosively-bullish for this sector.

With the US money supply more than doubled, much-higher gold prices are inevitable. Fundamentally-superior mid-tier and junior gold stocks will be the biggest beneficiaries. Smaller than the GDX majors, these sweet-spot-for-stock-price-appreciation miners achieve far-better production growth off of smaller bases. Their lower market capitalizations also make them easier to bid higher, to big gains trouncing the majors’.

The bottom line is gold stocks are basing technically, coiling like a spring before their next explosive surge higher. Despite mostly consolidating low over this past half-year, GDX is slowly grinding higher in a young upleg. That will accelerate dramatically as gold starts decisively running higher again. Traders will flock back to this deeply-undervalued sector as upside momentum builds, catapulting the gold stocks way higher.

Gold’s own setup here is super-bullish, on the verge of a major upside breakout from a gigantic chart formation. Gold just weathered the Fed’s most-extreme hawkish lurching ever, still enjoying a solid uptrend. Gold investment demand is set to soar as this raging inflation unleashed by the Fed’s epic money printing persists. The higher gold marches as investors return, the more traders will flock back to gold stocks.

(By Adam Hamilton)