Gold stocks reloading

Back then ammunition was cheap, making target shooting affordable. You could buy 1000 rounds of 5.56 at many sporting-goods stores for under $100! That made for a fun afternoon of shooting with friends. My favorite targets were eggs. They are small and challenging to hit at range, explode nicely, and don’t need to be cleaned up as they’re biodegradable. Reloading magazines before shooting was the worst part.

That tedious chore took more time than shooting, eventually leaving sore fingers covered with lead dust. But that was necessary before loosing rounds downrange, so that anticipation overcame drudgery. Gold stocks remind me of that today, reloading before the fun rallying returns. They’ve been working off both serious overboughtness and greed since mid-May, paving the way for amplifying gold’s resuming upleg.

The leading GDX gold-stock ETF had a strong run into mid-May, powering 44.5% higher in just 2.7 months! That amplified gold’s driving surge in that same span by 2.3x, in the major gold stocks’ usual 2x-to-3x range. But gold stocks rallied so far so fast they grew really overbought. Just a month ago, GDX had stretched way up to 1.253x its trailing 200-day moving average. That proved a 12.6-month high in this metric.

Though extreme overboughtness for major gold stocks doesn’t begin until GDX stretches 35%+ above its 200dma, this sector was very overextended. Even more importantly, gold itself had blasted well up into its own extremely-overbought territory. The yellow metal needed to either sell off or drift sideways for some time to bleed away greedy sentiment. My essay last week analyzed gold’s high consolidation since.

That included charts of both gold and GDX divided by their 200dmas, revealing their overboughtness in mid-May and its subsequent mean reversions sharply lower. In major gold stocks’ case, during this past month GDX fell from 1.253x its 200dma to just 1.095x earlier this week! So the great majority of gold stocks’ serious overboughtness has been worked off, which also shifted herd sentiment from greedy to apathetic.

The problem with rallying too far too fast is it sucks in too many near-term buyers too soon. Traders really get excited when prices surge dramatically, so they rush to chase those gains. But that quickly exhausts their collective capital firepower for buying, prematurely burning it out. That leaves sellers in charge, and they easily force prices lower without offsetting buying. Slow and steady is far healthier for uplegs’ longevity.

That also reminds me of target shooting, where squeezing the trigger slowly is essential for accuracy. For long shots, you carefully control your breathing and pull so gradually the hammer dropping surprises you. Like fast gold-stock surges fast firing is fun, but quickly eats your magazines while mostly missing your targets. Then you have to reload again, giving hot barrels time to cool. That’s analogous to gold stocks’ June.

This chart is updated from my essay a couple weeks ago anticipating gold’s summer doldrums this year. It looks at the older HUI gold-stock index, which has been around far longer than GDX. But these are functionally interchangeable, including the same major gold stocks and moving in lockstep. The blue line is this summer’s gold-stock action indexed to May’s final close, while the red line is the gold-bull-year average.

Despite being much more overbought than usual heading into this market summer, the gold stocks have ground lower well within their seasonal drift. That has generally run between +/-10% from May’s final close, with June action usually being in the bottom half. At worst month-to-date so far, GDX was down 6.1% late last week. That may prove this summer’s gold-stock low, which occur two weeks into June on average.

But gold stocks are ultimately leveraged plays on the metal they mine, with their earnings and thus stock prices heavily dependent on gold’s fortunes. So how GDX fares in the next couple weeks will reflect what gold does. While gold’s own average summer-doldrums seasonal low is also in mid-June, that was only pulled forward in recent years. Historically gold tended to bottom in the last week of June into early July.

There are some good arguments for gold drifting lower before resuming its upleg, which I explained in my essay last week. Gold remains overbought, merely retreating to 1.096x its 200dma in early June. That is about 2/3rds up into its overboughtness range, compared to GDX only being around 1/4th up into its own. In addition, the latest-reported speculators’ gold-futures short positions are at a deep 4.1-year secular low!

That means these super-leveraged traders who often bully around gold prices now have massive capital firepower available for short selling on the right catalyst. That ramps near-term downside risks for gold, and thus their miners’ stocks. Picking bottomings is always a probabilities game, traders never know for sure when they are in. So spacing out adding new positions to attempt to straddle bottomings is prudent.

Both our weekly and monthly subscription newsletters had full trading books carefully built before GDX blasted higher in recent months. Those fundamentally-superior mid-tier and junior gold stocks had huge unrealized gains. While we tightened our trailing stop losses as gold hit extremely-overbought territory all but guaranteeing an imminent selloff, about 3/4ths of our open trades weathered gold’s high consolidation since.

The remaining 1/4th was stopped out with big realized gains. But we didn’t want to redeploy that cash until a sizable fraction of that overboughtness and greed were worked off. That’s exactly what happened in this year’s summer doldrums, where June is the peak month. We’re probably going to refill our trading books over the next couple weeks, bringing our weekly back up to twenty positions and our monthly to ten.

That mid-upleg buying opportunity as gold stocks reload might not last long, as there are plenty of bullish factors arguing for gold’s mighty upleg to soon resume. Gold’s remarkable breakout surge leading into mid-May wasn’t fueled by its usual primary drivers, speculators covering gold-futures shorts and buying longs and American stock investors buying gold-ETF shares. Chinese investors and central banks took over.

And because gold consolidated high since then rather than selling off sharply out of extremely-overbought conditions, it sure looks like they are still sizable buyers. That won’t be confirmed until the World Gold Council releases its definitive global gold supply-and-demand data covering Q2, which will be out near the end of July. But gold couldn’t have consolidated high between $2,300 to $2,400 without buyers offsetting selling.

Gold tends to enjoy a strong autumn rally from early July to mid-September, initially fueled by buying after Asian harvests then later Indian wedding season. As gold resumes surging in Chinese-yuan terms, that country’s investors should see renewed zeal to chase those gains. But the biggest bullish factor of all for gold is American stock investors haven’t yet started chasing this upleg, which is unprecedented in the ETF era!

Fixated on this wild AI stock-market bubble, they’ve totally ignored gold so far. Fueled by an epic options gamma squeeze in ringleader NVIDIA’s stock, US stock markets have soared to many new records. Yet NVDA shooting parabolic can’t and won’t last long, historically such speculative manias always soon burn themselves out. When these ultra-narrow precarious stock markets decisively roll over, gold will be noticed.

At best between early October to mid-May, gold’s latest upleg has powered 33.2% higher. Yet crazily during that span, the combined holdings of the world-dominating GLD and IAU gold ETFs slumped 4.5% or 57.4 metric tons! American stock investors infatuated by hallucinating large language models returning authoritative well-written-but-wrong answers have actually further pared their near-zero gold allocations!

To illustrate how anomalous this is, today’s gold upleg is the biggest and first achieving new-record-high streaks since a pair both cresting in 2020. They grew to monster 42.7% and 40.0% gains, mostly fueled by GLD+IAU holdings soaring 30.4% or 314.2t and 35.3% or 460.5t! So to see gold still surge over 33% in recent months despite American stock investors selling is extraordinary, and all their buying is still coming.

And it’s not just gold’s upleg resuming that is constricting gold stocks’ summer-doldrums buying window. The gold miners are almost certain to report their best earnings ever in this current almost-over Q2. Those full results will be released between mid-July to mid-August, and should prove utterly spectacular. The main reason is gold’s dazzling record average price of $2,339 achieved so far this quarter, trouncing all others!

The previous record was merely $2,072 in Q1’24. Gold-mining profits are the difference between average gold prices and gold-mining costs. The GDX gold miners have mostly predicted growing production in Q2 pushing their all-in sustaining costs lower. I analyzed this Q2 potential in a mid-May essay on the GDX-top-25 gold miners’ Q1 results. They’re looking at $1,050ish per ounce sector profits, skyrocketing 75%ish YoY!

Almost all professional fund investors aren’t paying any attention to gold stocks, so there should be plenty of surprise when their phenomenal Q2 results come out. That ought to attract in lots of new capital to this small and still-deeply-undervalued sector. So this late-June-early-July timeframe is also the last chance to get deployed before gold miners report huge record earnings. Gold stocks are reloading before them.

So if you’ve been dragging your feet in adding gold-stock allocations, the next couple weeks may be the best opportunity before gold’s autumn rally really starts marching. Chinese investors and central bankers aren’t done buying, and American stock investors haven’t even started yet. When this NVIDIA-led bubble inevitably pops, they are finally going to remember the wisdom of prudently diversifying tech-stock-heavy portfolios.

Gold stocks’ biggest gains as gold’s powerful upleg resumes won’t be in the majors dominating GDX, but in smaller fundamentally-superior mid-tiers and juniors. They are better able to consistently grow their production, they tend to operate lower-cost more-profitable mines, and their stocks’ lower market caps are much easier to bid way higher. Our newsletters are mostly full of such trades, with new ones coming soon.

The bottom line is gold stocks are reloading. They slumped in the summer doldrums like usual, working off serious overboughtness and excessive greed after surging in recent months. Both have been bled off dramatically, spawning a mid-upleg buying opportunity before gold’s autumn rally gets underway. Given today’s bullish gold and gold-stock fundamentals, this may prove the last chance to buy relatively low for awhile.

The Chinese investors and central banks fueling this powerful gold upleg likely aren’t done buying. And American stock investors who normally drive major gold uplegs have yet to start chasing this one. They will as the AI stock bubble inevitably stalls then bursts. As gold resumes surging, still-deeply-undervalued gold stocks need to soar to reflect their fat earnings with high prevailing gold prices. Get deployed ahead of that.

(By Adam Hamilton)