Big gold, miners breakouts

Russia’s unprovoked war shouldn’t have surprised markets, as its strongman president Vladimir Putin had spent nearly a year mobilizing a vast military buildup around Ukraine’s borders. Last spring geopolitical analysts were warning about this, and by late 2021 over 100k Russian soldiers were already massed on three sides of Ukraine! Russia bearing such colossal expenses only made sense if it planned to attack.

Much to its credit, the Biden Administration started warning in late January that Russian military action in Ukraine was increasingly likely based on US intelligence. In early February, extensive satellite imagery from private companies revealed Russian units moving from staging areas to attack positions. And eight years earlier in February 2014, Russia had invaded and annexed Crimea from Ukraine under false pretext.

So the writing was on the wall for this invasion long before Russian armor and artillery started breaching Ukraine’s territory. Yet traders mostly seemed to be ostriching, believing Russia’s propaganda that it had no intention to ignite a war. That pollyannaish fantasy that Russia was spending as much as US$20b per day to field its massive armies for nothing was finally shattered by the White House on Friday February 11th.

That afternoon, the US government declared Russia had formally made the decision to invade Ukraine! Putin was ready to unleash the immense military firepower he had painstakingly amassed around that adjacent country. Those troubling tidings of war ignited enormous gold-futures buying, catapulting gold 2.0% higher that day to $1,864! That geopolitical surge achieved a huge and important upside breakout.

This chart shows gold’s key technicals over the past few years or so. Note the gigantic pennant chart formation highlighted in red, which had been gradually winding tighter for about 18 months. Its converging lower-support and upper-resistance lines guaranteed a forced breakout was imminent, as I analyzed in depth in an early-January essay on the big gold breakout nearing. It indeed emerged just five weeks later!

Pennants, named because they resemble triangular flags billowing sideways in the wind, are a type of continuation pattern. That means prices usually exit these narrowing consolidations in the same direction they entered. Gold’s flagpole supporting this giant pennant was two massive 42.7% and 40.0% uplegs peaking during 2020! So as support and resistance lines converged, gold was likely to see an upside breakout.

Back in early January I got a lot of flak for predicting this imminent breakout. Gold sentiment was bearish then after this metal plunged down to $1,788 near pennant support after FOMC-meeting minutes revealed Fed officials were discussing soon starting quantitative-tightening bond selling. So looking for a breakout run higher in gold was highly-contrarian. Yet it came to pass as traders finally realized Russia wasn’t bluffing.

Gold’s initial $1,864 close that Friday was only the beginning, the yellow metal has powered much higher since. Often-shocking news from the Ukrainian frontlines certainly contributed, as did serious down days in the US stock markets. By this week, gold’s breakout surge had powered way up to $1,945 on a US closing basis! That 13.8-month high extended gold’s young upleg to strong 12.8% gains over 5.0 months.

Today traders seem to mostly assume gold’s recent strength is all Russian-invasion fueled. But that’s not true. Before that fateful mid-February Friday afternoon where markets’ oh-crap-this-is-real dawning hit, gold was already trading at $1,841. Its mounting upleg had already climbed 6.7% in 4.4 months before Putin’s resurrected Red Army marched. Well over half of gold’s recent gains accrued before Russia’s invasion!

Major gold-bullish developments were mounting well before the first missiles were lobbed, as I detailed in various essays. In mid-January I pointed out that gold was lagging the raging inflation unleashed by the Fed’s extreme money printing. Over the past 23.9 months, this gone-rogue central bank has ballooned its balance sheet by a radically-unprecedented 114.7% or $4,769b! That effectively doubled the US-dollar supply.

Inflation is relatively-more money competing for and bidding up the prices on relatively-less goods and services. The Fed’s vast monetary puking is why even lowballed headline inflation per the US Consumer Price Index is running at blistering 7.5% year-over-year gains. The last time similar inflation super-spikes were suffered in the 1970s, gold prices nearly tripled during the first and more than quadrupled in the second!

This latest scary Fed-fueled inflation super-spike has nothing to do with Russia and Ukraine. As these relentlessly-higher prices scare investors into dumping Fed-quantitative-easing-levitated bubble-valued stocks, they will increasingly flock back to gold. In early February I showed they had already started returning to this ultimate portfolio diversifier. With gold allocations near zero, investors had massive buying to do.

With its own inflation monster rampaging and spiraling out of control, the Fed has no choice but to tighten aggressively. Another rate-hike cycle is looming, kicking off at the FOMC’s next meeting on March 16th. Contrary to gold-futures speculators’ irrational fears of them, Fed-rate-hike cycles are actually very bullish for gold. In mid-February I wrote another essay analyzing how gold has thrived during past rate-hike cycles.

There have been a dozen in this modern monetary era since 1971, and gold averaged outstanding 29.2% absolute gains across their exact spans. In eight of those twelve where gold rallied, its average gains grew to a massive 49.0%! Gold fared best when it entered cycles relatively-low and they were gradual, both of which are true heading into this thirteenth modern Fed-rate-hike cycle. Rate hikes hit stocks, boosting gold.

This whole Russia-Ukraine nightmare is just icing on gold’s already-bullish cake. Geopolitical fears have certainly ignited a major gold bid. But they’ve simply accelerated buying that would’ve come anyway even if Putin had wisely stood down. Geopolitically-driven gold surges tend to be short-lived, as the big fear-driven buying they spawn soon peters out once those driving catalysts inevitably fade from headlines.

Gold’s latest young upleg, and entire secular bull since mid-December 2015, have far-larger and broader drivers than ill-fated Russian adventurism. Gold was powering higher on balance for years before this invasion, and it will continue for years after. So if Putin somehow miraculously comes to his senses and withdraws from Ukraine, that’s only short-term bearish for gold. Unfortunately Russia looks all-in on this.

Being in the financial-newsletter business, I’m deeply immersed in newsflow affecting markets. Everyday I voraciously read, listen, and take copious notes about what’s impacting the financial world. Everything I’m seeing indicates Putin will keep ratcheting up military-aggression screws on Ukrainians to attempt to break their will to fight back. Horrifyingly, US and British intelligence fear this war could run for a decade or two!

The more losses the lionhearted Ukrainian soldiers and people force on Russian invaders, the more Putin will order his armies to attack civilians. While shoulder-fired anti-armor and anti-aircraft missiles have helped the resistance inflict serious casualties on the invaders, Ukrainians are still radically-outgunned. The Russians have enough units to besiege many Ukrainian cities, and enough firepower to blast them to dust.

So while this war may fade from headline dominance in coming months, it is likely to persist and worsen. Putin is doomed politically and probably literally if he doesn’t succeed in this incredibly-costly gambit to take over Ukraine. Thus these geopolitical fears are likely to fester for a long time, which adds another bullish dynamic to gold investment demand. I sure wish this wasn’t the case, but we’re stuck in Russia’s quagmire.

Gold’s mighty upside breakout from its gigantic pennant chart formation ignited a similar lesser breakout in gold miners’ stocks. Their earnings are highly-leveraged to prevailing gold prices, so the major gold miners dominating the leading GDX VanEck Gold Miners ETF usually amplify material gold moves by 2x to 3x. The intrinsic and infrangible fundamental relationship between miners and their metal is easy to illustrate.

Gold-mining profits are the difference between prevailing gold prices and mining costs. In Q3’21, which is still the last quarter with full data available since Q4 earnings season isn’t over yet, the top 25 GDX gold miners averaged all-in sustaining costs of $1,085 per ounce. Gold averaged $1,789 that quarter, making for hefty industry profits around $704 per ounce. AISCs are usually stable, not changing much quarter to quarter.

Over the last four reported quarters, the GDX-top-25 stocks averaged $1,057. So that’s a solid estimate for current AISCs. So far in Q1’22, gold prices have averaged $1,841. That’s already 2.9% above those Q3’21 levels, with another month left to go in this quarter. That implies gold-miner earnings running near $784 per ounce in Q1. That would be 11.4% higher than Q3 levels, implying big 3.9x profits leverage to gold!

This core fundamental link makes gold-stock prices mirror and amplify material gold price moves. So it’s not surprising that gold stocks just enjoyed a major upside breakout parallel with gold’s! This next chart applies this same technical-analysis methodology used on gold to the GDX gold stocks. Their big recent gains are very-bullish as well, attracting momentum-chasing traders back in to ride their mounting strength.

Because the highly-leveraged gold stocks exaggerate major gold moves, the recent chart pattern GDX has carved isn’t as distinctive as gold’s. The gold stocks’ consolidating drift is much smaller, starting later in June 2021 after a strong young upleg began surging. That was derailed prematurely that month after Fed officials predicting distant-future rate hikes scared speculators into violently puking out gold futures.

The resulting chart formation looks something like a droopy pennant crossed with a descending triangle. The former is that same bullish continuation pattern when entered from below, but the latter is normally bearish. Had gold stocks not yet broken out decisively, traders could argue that lower support way flatter than upper resistance portended a downside breakout. But that point is moot now after gold stocks surged.

Like their metal, the miners just blasted decisively above their heavy overhead resistance! That breakout was followed by a second one above GDX’s core 200-day moving average. That extended the major gold stocks’ parallel young upleg with gold’s to 24.0% gains over 5.0 months. That made for 1.9x upside leverage to gold, on the lighter side compared with that usual 2x-to-3x range. Gold stocks are still lagging!

That’s fairly typical though. As a small contrarian sector, gold stocks are usually overlooked. Speculators and investors only get interested in them after gold has rallied high-enough for long-enough to win some attention. Gold’s gains gradually shift sector sentiment back to bullish, enticing increasing numbers of traders back to gold stocks. This soon spawns a self-feeding virtuous circle in both the metal and its miners.

The more capital traders deploy, the faster gold and gold stocks rally. The more they rally, the more other traders notice and start pouring in to chase those gains. So gold-stock uplegs usually start out slower as bearishness and skepticism linger, accelerate as traders slowly start believing gold’s driving uplegs are real and sustainable, and then later blast higher as popular greed spreads. Gold-stock gains are back-weighted.

That frustrates contrarian traders who buy in low and early, as gold-stock gains often initially fall behind where they ought to be given gold’s advance. But gold stocks’ slow start into a later acceleration and catch-up as gold’s driving gains solidify is a great boon to mainstream traders. Even if they return to gold stocks later, like around uplegs’ middles, they can still likely reap the lion’s share of this sector’s total gains.

Between the Fed’s raging inflation, radical underinvestment in gold, and the coming Fed rate hikes to try and close the Pandora’s box of grievous monetary excesses, gold’s outlook is exceptionally-bullish. This whole Russia-invading-Ukraine atrocity is another bullish tailwind added on top. The GDX major gold stocks will mirror and amplify gold’s gains like usual, ultimately leveraging its upside by at least 2x to 3x.

The recent huge upside breakout for gold and major upside breakouts for GDX will hasten this process. Traders love chasing gains, so momentum buying quickly builds on itself. Fast-rallying prices shift herd sentiment back towards and into bullish greed, which really ramps the numbers of traders and the amount of capital interested in gold and its miners. Buying begets buying, reinforced by increasing bullishness.

While gold-stock gains are mounting, it isn’t too late to get deployed in fundamentally-superior mid-tier and junior gold miners. Due to better production growth and lower market capitalizations, their gains in major gold uplegs well exceed GDX majors’. Our newsletters are overflowing with excellent gold-and-silver-stock trades, with growing unrealized gains. These gold and gold-stock breakouts are big buy signals.

The bottom line is gold and gold stocks just enjoyed big upside breakouts. The proximate driver was Russia-invading-Ukraine fears, but both the metal and miners had well-established young uplegs running for months before Putin went off the rails. That geopolitical shock accelerated buying, and the resulting gold and gold-stock surges are very important technically for attracting more traders and capital to this sector.

Momentum buying feeds on itself, becoming self-reinforcing virtuous circles. Traders just love chasing mounting gains. Ukraine frontline news will continue to stimulate gold investment demand. But even if that immoral imperialist war miraculously ended tomorrow, other larger bullish fundamental gold drivers remain. Raging inflation, Fed rate hikes, and rolling-over stock markets are great news for gold and gold stocks.

(By Adam Hamilton)