Gold stocks still in game

Sports commitments are nothing new for my family, both our kids have competed in high-level competitive basketball for years including championship games. But the passion surrounding football is something else, bringing back lots of memories for me playing in high school. We live outside of Denver as well, and the excitement over the Broncos this season with a new experienced winning head coach is just electric!

I also went to college at the University of Colorado Boulder back in the mid-1990s when the Buffaloes were great. They haven’t been for a long time, but that may be changing with Deion Sanders at the helm. This past Saturday’s incredible upset victory Coach Prime and his quarterback son engineered against TCU was epic! The Buffs’ potential this season looks awesome, and people here are proudly flying CU’s colors.

Gold stocks are kind of like a stumbling home team for contrarians. They’ve greatly multiplied our capital with many past victories, but they’ve been sucking wind this past summer. The dominant GDX gold-stock ETF rallied 63.9% higher in 6.5 months into mid-April, a powerful upleg. But following such a strong offensive drive, the gold miners switched to defense. They needed a healthy pullback to rebalance sentiment.

That ran 18.9% over the next 2.8 months into early July, which eradicated the excessive herd greed seen at that upleg interim high. The gold stocks were ready to take the ball again, blasting up 12.3% in less than a couple weeks into mid-July! The momentum behind that drive was strong, with GDX achieving a major technical breakout above its 50-day moving average that all but guaranteed it was heading much higher.

In football, turnovers are some of the most thrilling or crushing events. A fumble or interception at the right or wrong time can really change a game’s momentum. I played as a defensive tackle, and was blessed with some key fumble recoveries. My son the defensive end is really gunning for interceptions on short passes, which he prizes more than sacking quarterbacks. Possession changes really alter psychology.

Gold stocks are ultimately leveraged plays on the metal they mine, as its price trends greatly impact their profitability. Gold surged into mid-July as well, then consolidated high near $1,975 even as the Fed hiked rates for the eleventh time in this monster cycle. But after closing at $1,974 that day with GDX still near $31.75, a freak turnover happened the next morning. The football was stripped right out of gold’s hands!

On July 27th, the initial read on US Q2 GDP proved a shocking upside surprise. Expected to come in at 1.8% annualized growth, the US government claimed the actual was +2.4%! Unlike monthly US jobs, the GDP reports usually don’t deviate much from expectations. So that extraordinary beat was Fed-hawkish, implying the US economy may be overheating so the Fed will have to hold interest rates higher for longer.

That GDP-surprise forced fumble slammed gold 1.5% lower, crushing sentiment so violently that GDX plunged an ugly 4.1%! That unlikely turnover when gold and its miners’ stocks were early in a strong drive to new upleg highs really altered psychology. Nascent bullishness and confidence for more upside quickly reversed into widespread bearishness and resignation. That felt kind of big-turnover football-like too.

That one outlying GDP report led traders in currencies, gold futures, and the stock markets to interpret the subsequent weeks’ economic data more-Fed-hawkishly. Remarkably mostly in the first half of August, gold suffered an exceedingly-unusual stretch where 13 of 14 trading days clocked in at losses! The gold stocks just wilted on that, fueling serious selling which prematurely truncated this sector’s next surge higher.

When a football team’s drive is killed by a fumble or interception, sometimes the players start giving up mentally. Like traders, they extrapolate that misfortune extending into the immediate future. Their hopes for victory quickly collapse to surrender to losing. One of the most-important jobs for coaches during games is to keep up players’ spirits after setbacks. Putting that broken play into perspective is a big part of that.

After GDX’s 50dma breakout in mid-July technically confirmed this sector’s powerful upleg had resumed, I sure wasn’t expecting it to quickly fail. It was like a defensive lineman stripping the football from a running back, stopping cold a good drive. But despite that and the selling since that was ignited by the resulting bearish psychology, gold stocks are still in the game. They are behind like CU against TCU, but not out.

This first chart looks at gold stocks’ summer price action during all modern gold-bull years. Each of these is individually indexed to the older HUI gold-stock index’s final May close leading into market summers. I explained the methodology behind this seasonal chart in much more depth in my early-June essay on gold’s summer doldrums. Gold and therefore gold stocks tend to drift sideways on balance during summers.

The miners usually meander in a summer range running 10% either way from May’s close, and that’s exactly what happened recently. Despite that suspect Q2 GDP beat stripping away gold’s football, the gold stocks still mostly stayed in their normal center-mass-drift summer trend. At best in mid-July before that key turnover, GDX was up a solid 5.6% summer-to-date. And it exited August down 5.4% on the summer.

That’s not great, well behind where gold stocks should be with their seasonal autumn rally that amplifies gold’s own gathering steam in August. On average during these modern gold-bull years of 2001 to 2012 and 2016 to 2022, the major gold stocks of both the HUI and GDX left August climbing 3.9% across the whole summer. This week that underperformance widened, leaving gold stocks about 13.5% behind their mean.

That’s considerable, but not worth totally capitulating on this sector for. Like football, gold stocks move fast. This volatile sector can easily soar 15%+ in just a week or two when gold decisively bounces. In merely a couple drives, gold stocks could blast back up above their autumn-rally seasonal-average gains this time of year. That’s just a touchdown or two behind where the gold stocks would’ve been without that fumble.

Ever since our son was old enough to throw balls, he has loved sports. So he has played football and basketball for the majority of his young life. While I haven’t coached his teams, I’ve volunteered in other roles to stay close to the action. With kids there’s nothing more devastating for morale mid-game than a pick six, when a defender intercepts your quarterback’s pass then runs it straight back for a touchdown!

The kids leave the field stunned and dejected after giving up six or seven points in one broken play. You can see the frustration and defeat on their faces, convinced the game is over. The coaches always try to encourage them with essential perspective, pointing out that is only one play and one touchdown in a long game. A six-or-seven-point deficit can be easily overcome, it is way too little to give up and stop playing hard.

The unusual gold and gold-stock pullbacks since mid-July igniting on that Q2 GDP pick six have sure damaged sector psychology. Contrarians went from excited this upleg’s next surge higher was underway to dejected that gold stocks just can’t win. But like being behind by a touchdown or two, the gold-stock technicals actually still look good. With perspective, this recent setback in gold-stock fortunes is pretty minor.

Interestingly that should probably start with the revelation late July’s huge Q2-GDP beat was fake news! The US government reports GDP quarterly, but each quarter has three separate reports released a month apart. That late-July read on Q2 was its initial print, but last Wednesday August 30th saw its first revision released. Instead of coming in at that original blistering 2.4% annualized growth, that was revised sharply lower.

Usually GDP revisions are small, around 0.1% off the original number. But Q2’s growth collapsed by GDP standards falling 0.3% to just +2.1%! Had that 2.1% been the original headline back in late July, it likely wouldn’t have been a big-enough upside surprise to really bully around Fed rate expectations, the US Dollar Index, and gold. Gold’s reanimated pullback probably would never have ignited in that scenario.

This is part of a troubling trend I analyzed again in our latest Zeal Speculator weekly newsletter. You can buy a single issue for just $19, probably cheaper than a burger at an NFL game this season! The Biden Administration’s bureaucrats in charge of key economic data are releasing overstated numbers initially to make the US economy look better than it really is. Then these big beats are later quietly revised away.

Economic data involves estimates, and if statisticians were making them honestly subsequent revisions would be roughly equally divided between better and worse. But this year’s all-important monthly US jobs reports for example have all been subsequently revised much lower! Every single one was overstated on its initial release, making this Administration’s policies look better. Partisan politics have tainted economic data.

These endless better-than-expected releases have fueled the US dollar’s blistering surge unleashing tons of gold-futures selling in recent months. My essay last week digs into how the resulting huge gold-futures shorting spike is very bullish for gold. While unusual, gold’s latest stripped-football pullback was fairly mild. The yellow metal lost 4.5% from mid-July to mid-August, extending its total selloff since early May to 7.9%.

That was in line with February’s mid-upleg pullback of 7.2%, after which spec shorts grew so excessive that gold bounced fast on short-covering buying. During the next 2.3 months into early May, gold blasted up 13.2% to new upleg highs. That pullback too was driven by this same dynamic of fake Fed-hawkish data fueling big US-dollar buying and gold-futures selling. GDX soared 34.4% in 1.2 months as gold rebounded!

Similar big mean-reversion bounces are probable again given specs’ massive gold-futures shorts. They legally have to be covered soon, which means big proportional buying catapulting gold and gold stocks higher. Gold and GDX need to best $2,050 and $35.85 to achieve new upleg highs, which would greatly improve sector sentiment. That would be like a football team responding to a pick six with a touchdown drive.

But like an interception run back into the end zone, gold stocks’ reanimated selloff is fairly minor in the grand scheme of this upleg. This next chart looks at GDX’s technicals in recent years. While there was certainly some damage done, gold stocks’ powerful upleg remains intact. It won’t take much rallying for them to return to the game, they aren’t behind by much. Traders are foolish to give up after such a minor setback.

When GDX’s original healthy mid-upleg pullback bottomed in early July, that was ideal technically. The major gold stocks found major support at both the lower end of their upleg’s uptrend channel and GDX’s important 200-day moving average. It was great to see that uptrend channel intact, which was confirmed when GDX bounced sharply then broke out above its 50dma before that Q2 GDP report stripped gold’s football.

GDX decisively broke down below that key 200dma support line in early August. It would’ve been nice if it hadn’t, but temporary breakouts from major-upleg trends aren’t uncommon. As uplegs advance, their uptrend channels have to periodically be redrawn as ascent slopes change. Uptrends are defined as a series of higher lows and higher highs. And despite gold stocks’ setback, that still holds true for them today.

GDX’s first sharp mid-upleg selloff of 19.8% over 1.4 months into early March bottomed at $26.68. That really damaged psychology at the time, with traders walking off the field throwing their helmets down in defeat. Yet GDX soared dramatically with gold out of that healthy pullback, again powering 34.4% higher in just 1.2 months! Who would risk missing a great comeback drive like that? Not quitting was really rewarded.

GDX’s second healthy mid-upleg selloff originally ran 18.9% over 2.8 months into early July, when this leading gold-stock ETF bottomed at $29.07. That should’ve held, and probably would’ve if gold hadn’t been slammed by that fake overstated GDP data. The resulting heavy gold and gold-stock selling extended GDX’s selloff losses to 23.4% over 4.2 months into mid-August, when GDX started bouncing at $27.45.

This recent unusual reanimated-gold-pullback low remains well above early March’s, keeping that higher-low upleg uptrend intact! As long as GDX holds over $26.75 or so, that will remain true. That may lower the slope of this upleg’s uptrend, which isn’t a big deal. Those tend to moderate anyway as uplegs march on, since the original blistering V-bounce pace out of major secular lows simply can’t be sustained for long.

But plenty of upleg uptrends also see temporary forays outside of trend channels that soon return. GDX’s mid-April and early-May highs as this upleg surged are great examples. While they shot above its upper resistance line, GDX soon dropped back in. The overdue sharp gold V-bounce on frenzied gold-futures short covering could quickly catapult GDX back up above both its uptrend’s lower support line and 200dma.

So gold stocks are very much still in the game, this upleg isn’t dead! Like I tell my son with his intense competitive basketball and football games where leads often change and outcomes aren’t known until the very ends, persevere. Never give up, never defeat yourself mentally, never stop playing hard! Life is full of setbacks, like pick sixes in football or breakdowns in uplegs. But they have to be kept in proper perspective.

Even Jesus Christ himself warned his followers “In this world you will have trouble.” I’ve got plenty of my own troubles, and everyone I know close enough to confide in me has lots of theirs too! Struggles are just par for the course. But relatively-minor gold and gold-stock selloffs freaking out traders again? Come on, that’s nothing in the grand scheme. As I’ve analyzed in multiple essays during this gold upleg, it should grow big.

Ever since it was born late last September at a major secular low of $1,623, I’ve expected it to ultimately best 40% due to multiple factors. That would imply gold challenging $2,275 before this upleg finally gives up its ghost, deep into new nominal all-time-record-high territory! That would radically improve sentiment in gold and gold stocks, attracting in much new capital. GDX generally amplifies material gold moves by 2x to 3x.

That suggests 80%-to-120% gains for major gold stocks, and GDX was only up 64% at best in mid-April and is only up 30% mid-week. 80% upleg gains would drive up GDX from $28.50 today near $39.50, and 120% would catapult it up over $48.00! And once gold achieves new record highs over $2,062, interest in gold stocks should really snowball fueling bigger-than-usual gains. Gold stocks’ upside potential remains vast.

The bottom line is gold stocks are still in the game. That’s despite just suffering a reanimated selloff with gold that prematurely truncated another run higher. Triggered by overstated US-GDP-growth data that was quickly revised lower, gold stocks did roll over into technical breakdowns. But though they fell under both uptrend support and GDX’s 200dma, their powerful upleg that launched a year ago remains intact.

The major gold stocks of GDX continue to carve higher lows and higher highs on balance. Maybe their uptrend channel is moderating and will have to be redrawn, but gold stocks are still marching higher overall. They are poised for massive gains soon as gold mean reverts sharply higher on big gold-futures short-covering buying. Traders mentally-tough-enough to persevere through this setback ought to win big.

(By Adam Hamilton)