Gold stocks breaking out

Back then I concluded “…gold’s pullback doesn’t need to suck in gold stocks this time around. While gold soared to extremely-overbought levels recently requiring a rebalancing selloff, gold stocks sure didn’t. … Gold stocks were merely moderately overbought at their metal’s recent interim high, with little greed or euphoria evident. Indeed during the couple weeks since, gold stocks have largely defied gold’s pullback.”

“Rallying through most of it, they are consolidating high even at worst. This outperformance should continue as long as gold’s selloff stays orderly and avoids correction territory. Gold’s pullback maturing will be a great mid-upleg buying opportunity for gold miners…” My contrarian take on gold stocks ten weeks ago proved correct. GDX largely drifted sideways, only suffering a modest selloff by sector standards.

From mid-May to early June, gold’s overall sentiment-rebalancing pullback merely extended to 5.7%. In roughly that same span, GDX only retreated 11.0% for 1.9x downside leverage. Normally major gold stocks amplify material gold moves by 2x to 3x, with downside drops sometimes exceeding the upper end of that range. The gold miners have proven quite resilient, with GDX just slumping to $33.15 on June 13th.

Those sector lows held for the next couple weeks during the heart of gold’s summer-doldrums seasonal lull. That gold-stock drift could’ve easily persisted into early July, which is peak vacation time for traders. Yet gold miners surged anyway, with GDX blasting a dramatic 9.2% higher month-to-date as of midweek! That leveraged gold’s underlying move by a huge 4.5x, revealing rapidly-improving gold-stock sentiment.

My work may have played a tiny role in that impressive shift. On June’s final trading day, I published a popular essay called “Gold Miners’ Record Quarter”. It analyzed why their upcoming Q2 results will show the fattest gold-mining profits ever witnessed! Despite heading into a big holiday week, I was surprised to get unusually-large positive feedback and questions on that from professional investors and fund managers.

Some weren’t aware how fantastically-bullish gold miners’ fundamentals are. And interestingly all the sector buying in early July came before Q2 earnings season. The gold miners report quarterlies from three to six weeks after quarter-ends, so late July to mid-August. Odds are these upcoming epic results will still surprise the large majority of traders. Record earnings ought to stoke accelerated gold-stock buying.

Back to gold stocks breaking out, again GDX last crested at $37.26 in mid-May. On the Wednesday-close data cutoff for this essay, GDX challenged that hitting $37.05. Then Thursday morning before I started writing this essay, the latest CPI inflation data came in cooler than expected sparking a US-dollar slide and gold rally. GDX surged again on that, running as high as $37.99 midday Thursday as I pen this.

This draft will be finished before Thursday’s close, but a decisive breakout happens when a past high is exceeded by 1%. That works out to $37.63 on GDX. So by the time you read this, that key upleg-is-alive-and-well threshold has probably already been exceeded on close. All this is making for quickly-improving summer-doldrums trading action, as this indexed chart of gold stocks’ gold-bull-year summers reveals.

Here all the market summers from 2001 to 2012 and 2016 to 2024 are indexed to Mays’ final closes. The red line is the gold-bull-year seasonal average up to 2023, and the dark-blue line is this year’s gold-stock performance. This chart uses the older HUI gold-stock index, which closely tracks GDX as they include the same major-gold-miner components. Gold stocks’ summer-doldrums seasonal low tends to hit mid-June.

Entering summer 2024 from overbought levels, gold stocks fell more than usual in early June. By its mid-month nadir of $33.15, GDX was down 6.1% month-to-date. But that was still well within gold stocks’ usual summer-doldrums trading range of +/-10% from May’s final close. Gold stocks mostly ground along near those lows for most of the rest of last month, regaining little ground. Then they caught a bid in late June.

Recent weeks’ recovery surge has been strong, catapulting gold stocks back over their average levels this time of year. As of Wednesday, HUI and GDX performance ranked as the 6th best at this point in July out of all 21 of these modern gold-bull years! And if midday Thursday’s 298.78 HUI levels hold into the close, gold stocks would be up 7.0% summer-to-date. Their July performance has been outstanding.

Seeing this recent excellent action in context helps illuminate how unusual and impressive it is this time of year. Before this entire surge when GDX was still under $34 on June 21st, I wrote an essay on gold stocks reloading. My conclusion then was “…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.” We took that opportunity to refill our newsletter trading books, adding new positions in mid-tier and junior gold miners to replace ones stopped out with big realized gains.

As of Wednesday, those new trades already had unrealized gains running as high as +16.6%. About 3/4ths of our newsletter trades were added earlier in this gold-stock upleg, with unrealized gains as high as +98.3%! So smart contrarian traders willing to buy in early before the herd figures out gold stocks are running have already been nicely rewarded. While those opportunities are over, gold stocks still have big upside.

This chart looks at gold-stock technicals in recent years. Today’s upleg was born with gold’s back in early October. But since GDX was crushed slightly under those levels in late February, that’s technically where gold stocks really started running. This upleg is the latest in a mounting bull-market uptrend since early September 2022. Yet despite surging strongly recently, today’s upleg remains small compared to precedent.

Again as of Wednesday’s data cutoff for this essay, GDX hadn’t yet bested mid-May’s closing high of $37.26. At that point GDX had rallied 43.8% over 7.5 months, or 44.5% from late-February’s marginally-lower nadir. But meanwhile gold’s own underlying upleg since early October had powered a mighty 33.2% higher by mid-May! Its latest all-time-record close then was just over $2,424, which should soon be bested.

That leaves GDX’s overall leverage across gold’s entire upleg at a pathetic 1.3x, way under that 2x to 3x historical average! As gold stocks heap big additional operational, geological, and geopolitical risks on top of gold price risk, they have to amplify gold considerably to be worth owning. Merely to return to historical norms relative to their metal, GDX’s upleg needs to balloon to 66% to 100% gains from early October.

That yields upside targets between $43.00 to $51.75 or so, assuming gold’s upleg has crested. If gold continues marching higher on balance as it ought to, GDX’s potential rises proportionally. In my essay last week looking at gold’s doldrums strength, I explained why gold’s fundamentals continue to look so bullish. Unbelievably American stock investors haven’t even started chasing gold’s mighty upleg yet!

They’re still coming once this dangerous AI stock bubble inevitably deflates sufficiently to free them from its enchantment. American stock investors’ gold investment can be measured with the combined bullion holdings of the world-dominating GLD and IAU gold ETFs. Astoundingly during gold’s 33.2% upleg so far, GLD+IAU holdings fell 4.5% or 57.4 metric tons! American stock investors have been selling during it.

This is an extreme and unsustainable anomaly, unprecedented in this modern gold-ETF era! Today’s gold upleg is its biggest by far and the first to achieve new-record-high streaks since a pair both peaking in 2020. New record highs are important as they spawn self-feeding momentum buying. The more records gold attains the more the financial media reports on it, building awareness to drive more capital inflows.

This record-chasing dynamic ultimately grew 2020’s gold uplegs to monster 42.7% and 40.0% gains! Those were mostly driven by American stock investors flooding into GLD and IAU shares. Their holdings soared an enormous 30.4% or 314.2t during the first, then an even-bigger 35.3% or 460.5t during the second! It is amazing today’s gold upleg has already grown to 33.2% despite that 57.4t GLD+IAU-holdings draw.

Chinese investors and central banks have taken the lead this time, with massive gold-bullion buying that has overpowered American stock investors’ stunning apathy. But sooner or later all these gold records will attract back the latter, who have colossal mean-reversion buying to do. That should easily catapult today’s gold upleg well over monster 40% gains. But even at 40%, GDX should power 80% to 120% higher.

That implies GDX targets between about $46.75 to $57.00, another 26% to 54% above mid-week levels! And such gains are right in line with sector precedent. GDX averaged excellent 105.4% gains during gold’s monster 40%+ 2020 uplegs! And again gold-stock upside targets rise proportionally the higher gold’s upleg extends over 40% gains. Also these levels are conservative given today’s uniquely-bullish scenario.

Gold stocks’ upside leverage to their metal tends to mount the longer gold uplegs last. Herd sentiment continues to shift more bullish, attracting in more traders. Their buying accelerates gold-stock uplegs, ramping interest and convincing more traders to chase big gains. That fuels powerful virtuous circles of buying begetting buying. GDX amplified gold’s last record-achieving upleg in mid-2020 by a great 3.4x!

Many gold stocks also remain considerably undervalued fundamentally, with stock prices nowhere near reflecting the fat profits generated by record and near-record gold levels. Our best-performing new gold-stock trade since late June was sporting a dirt-cheap 9.9x trailing-twelve-month price-to-earnings ratio when we added it! Great valuation bargains still abound in this long-neglected small contrarian sector.

Those upcoming record Q2 results ought to work wonders for gold-stock awareness among professional investors and fund managers. Since most traders don’t follow this sector, the colossal profits growth will surprise them. As gold stocks blast higher on huge earnings, more traders will take notice and join in the buying. An epic earnings season combined with gold surging back to more record highs is incredibly potent!

So despite gold stocks’ upleg so far, the majority of their gains are almost certainly still coming. While it was better to buy in lower in recent months like our newsletter subscribers did, it isn’t too late to deploy capital in gold stocks. We’ve long preferred and specialized in smaller fundamentally-superior mid-tier and junior gold miners. They are better able to consistently grow their production from smaller bases.

Their market capitalizations are also much lower than the majors’ dominating GDX. That makes it much easier for capital inflows to bid up their stock prices faster and higher. Smaller gold miners outperform the larger ones during gold uplegs. Our newsletter trading books are currently full of excellent ones with big upside potential trouncing GDX’s. Traders should get deployed before the herd really starts chasing gold stocks!

The bottom line is gold stocks are breaking out. After successfully weathering the summer doldrums with a minor selloff, they’ve surged dramatically in July. Mid-week GDX was challenging its latest mid-May high, and either just achieved or soon will a decisive breakout beyond it. That confirms this upleg is alive and well, gold stocks off to the races again. Their upside potential remains massive despite recent upleg gains.

Gold’s own fundamentals are still very bullish, with American stock investors not yet chasing gold’s mighty upleg. But they will return as gold increasingly catches their attention. Meanwhile gold stocks are quite undervalued relative to today’s gold levels, let alone where it is heading. And the gold miners are on the verge of reporting their best quarterly results on record, which should attract professional investors to this sector.

(By Adam Hamilton)