Gold-Stock Gains Mount, Power Higher On Balance

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by Adam Hamilton of Zeal LLC

The gold miners’ stocks are enjoying mounting gains, with their young upleg continuing to power higher on balance.  Their recently-reported Q1 results revealed strong fundamentals, fully justifying better stock prices.  The gold stocks have achieved major upside breakouts technically, and will soon trigger a major buy signal.  Yet sentiment remains apathetic if not skeptical, so the lion’s share of capital inflows are still coming.

This small contrarian gold-stock sector is in a key transition zone.  It has mean reverted sharply higher in recent months, but still hasn’t surged far enough yet to hit most traders’ radars.  That is the tipping point when gold-stock buying becomes self-feeding, when higher prices attracting in more capital coalesce into a virtuous circle.  Then gold-stock uplegs grow huge as excitement and greed climb back to high levels.

The leading gold-stock benchmark and trading vehicle remains the GDX VanEck Vectors Gold Miners ETF.  From early August to early March it was mired in a rare extended correction with gold, which is the dominant primary driver of gold stocks since their earnings leverage its fortunes.  But since drooping back to $30.90 on March 1st, GDX has rallied a sizable 28.4% at best in 2.5 months to regain $39.68 in mid-May.

While already quite profitable for smart contrarian traders who bought in low when gold stocks were deeply out of favor surrounding that correction nadir, this upleg is still small and young.  This secular gold-stock bull born in January 2016 has already seen four previous uplegs.  They averaged massive 99.2% GDX gains over 7.6 months each!  Near-doublings in individual bull-market uplegs are actually par for the course.

The previous secular gold-stock bull had literally a dozen uplegs averaging 87.5% gains over 7.8 months!  That’s why traders put up with this volatile contrarian sector.  When gold stocks are running, they tend to multiply wealth fast.  And this current young upleg has a long way to go yet before exhausting its big upside potential.  Given the deeply-oversold conditions in early March, another doubling-plus is very likely.

The gold miners’ strong fundamentals certainly support much-higher stock prices.  I spent the past month wading through and analyzing Q1’21 operating and financial results from many dozens of gold stocks.  The major gold miners of GDX reported soaring accounting earnings, as their profits margins were huge with $1,793 average gold prices compared to just $1,067 average all-in sustaining costs for mining this metal.

That profits proxy implied hefty sector profitability of $726 per ounce, the fourth-highest ever seen by the GDX-top-25 gold miners.  As explained in a comprehensive essay on all this a few weeks ago, that was the seventh quarter in a row of fast-growing profits.  By that measure, the major gold miners’ unit earnings had rocketed up 53.5%, 57.8%, 39.0%, 66.2%, 49.7%, 50.3%, and 25.3% year-over-year in that fantastic streak!

That generally left their classic trailing-twelve-month price-to-earnings ratios seriously undervalued.  Plenty of major gold stocks were sporting P/Es in the teens and even single digits in mid-May as this latest Q1’21 earnings season wrapped up!  So the gold miners’ outstanding fundamentals certainly support way-higher stock prices.  But most traders aren’t aware yet, as they simply aren’t paying attention to gold stocks.

That realization point is probably coming sooner rather than later as technicals drive sentiment.  This young gold-stock upleg is looking increasingly impressive, climbing sharply on balance carving a nice series of higher lows and higher highs.  The major gold stocks per GDX have already achieved multiple key breakouts, and are on the verge of flashing a super-important buy signal.  That will spark some enthusiasm.

GDX’s 28.4% gains at best so far over 2.5 months are nothing to sneeze at.  And those are just in the lumbering major gold stocks, which are fundamentally inferior to the smaller mid-tier and junior miners.  We aggressively deployed in the best of those gold stocks straddling that early-March bottoming, filling the trading books in our newsletters.  This week, these trades’ unrealized gains were running as high as +68.5%!

Again this bull’s uplegs have averaged 99.2% gains in GDX terms, and the last upleg emerging from 2020’s brutal stock-panic lows ballooned to +134.1% before giving up its ghost!  As greed and euphoria soared heading into that early-August peak, gold stocks were very popular.  And they will be again as today’s young upleg matures, with bigger gains fueling bullishness ramping up capital inflows driving bigger gains.

In recent months the gold stocks have achieved several major technical-breakout milestones, which are helping shift sentiment from seriously-bearish back towards neutral if not mildly-bullish.  Back in early April, GDX broke out decisively above its 50-day moving average which is rendered in white.  That was an important technical clue that gold stocks’ vexing extended correction had likely finally run its course.

Further technical confirmation that gold stocks were transitioning from bull-market correction to new upleg came soon after.  GDX powered above the correction-downtrend resistance line that had mostly capped it since September.  Once that became decisive, meaning closing 1%+ beyond a key technical level, odds grew that a new upleg was underway.  I wrote an essay detailing those key early breakouts back in early April.

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It concluded “another young gold-stock upleg is underway.  GDX has carved a lovely series of higher lows and higher highs in the 5+ weeks since bottoming in early March.  This nascent uptrend looks very different technically from the short-and-sharp countertrend rallies within corrections.  It is very young-bull-upleg-like, arguing that the latest one is indeed marching.”  That was a great time to buy gold stocks low.

Obviously the earlier traders buy into new uplegs, the bigger the gains they win on their trades.  Yet most people wait far too long to deploy capital, they need way too much convincing before believing an upleg is underway and sustainable.  About halfway through uplegs is when most traders start deciding to chase their mounting gains.  While they can still make money piling into momentum, it is much less than buying in low.

After that initial breakout surge, GDX retreated sharply in a pullback.  That’s perfectly normal even within the strongest uplegs.  They naturally flow and ebb, taking two steps forward before sliding one step back to rebalance sentiment and keep greed in check.  That pattern creates the higher lows and higher highs defining uplegs’ uptrends.  Within uplegs, the best entry points come after those periodic pullbacks strike.

Indeed the gold stocks’ journey higher soon resumed as GDX blasted back up to its key 200-day moving average.  This is the single-most-important technical line, which countless chart-watching traders use to help determine whether uplegs or corrections are underway.  Once prices charge back above their 200dmas after hitting oversold levels in mature corrections, that’s a strong signal that young uplegs are now marching.

GDX struggled a bit trying to overcome its 200dma in early May, consolidating around it.  But as gold gathered steam in mid-May, the gold stocks surged dramatically shattering that overhead resistance line.  That decisive 200dma breakout strongly confirmed a young gold-stock upleg is indeed mounting!  That breakout surge proved so violent it left gold stocks short-term overbought, so they drifted sideways near highs.

That sharp 200dma breakout also catapulted GDX well over its young upleg’s uptrend resistance line, so it isn’t surprising that gold stocks needed to take a breather.  They had to either consolidate high and digest those big gains or roll over into a pullback.  Both have happened since, again serving to rebalance sentiment and keeping greed from waxing too excessive too soon.  GDX could retreat to its uptrend support line.

That’s running around $37 today.  So if you missed the boat on buying in low early in this upleg, look to aggressively add fundamentally-superior gold-stock positions on a support approach.  If you are prudently already fully-deployed like our newsletter subscribers, trailing stop losses on trades should easily be able to weather an intra-uptrend selloff.  By automating sell decisions, stops really slash the stress of trading.

One of the most-powerful technical buy signals is called a golden cross, although it has nothing to do with the metal it is named after.  Golden crosses trigger when shorter-term moving averages cross back above longer-term moving averages after corrections.  The longer the averages used, the more weight these buy signals carry.  The gold-standard golden crosses look for 50dma crossovers back above 200dmas.

As this chart shows, GDX’s white 50dma line has nearly regained its black 200dma one.  Given the rate of ascent of GDX’s 50dma, this latest golden cross will likely trigger in the next couple weeks!  Out of all the myriads of technical indicators chart-oriented traders watch, golden crosses are among the most universal and most powerful.  GDX’s upcoming golden-cross signal should entice in considerable new buying.

The major gold stocks’ last 50-200 golden cross flashed in early May 2020, emerging from that COVID-19-lockdown-fueled stock panic.  While the gold stocks’ blisteringly-sharp mean-reversion upleg was already well underway at that point, it still had a few more months left to run when that great buy signal triggered.  Technically-aware traders know golden crosses strongly confirm young uplegs are real and sustainable.

As gold stocks’ latest uptrend continues to solidify technically, sector sentiment will continue to improve.  Speculators and investors alike will increasingly pay attention to gold stocks’ mounting gains, and grow comfortable that their young upleg is likely to persist.  So they will increasingly chase this growing upside by adding more gold-stock positions.  That will push gold stocks even higher, accelerating overall bullishness.

As always the trajectory of this gold-stock upleg depends on gold’s fortunes.  The great majority of traders have some awareness of what gold is doing, as this massive alternative asset is widely tracked by the financial media in tickers and commentary.  So gold-stock interest and thus capital flows directly depend on how gold itself is faring.  And its own upleg driven by investment buying starting to return is looking good.

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Gold’s extended correction that drove gold stocks’ also bottomed in early March.  Its own young upleg has powered 13.5% higher at best so far, giving GDX’s 28.4% rally 2.1x upside leverage.  That’s on the low side of the major gold stocks’ typical 2x-to-3x range.  So after this newest pullback runs its course, the gold stocks are due for another big surge to catch up with gold’s strong run.  That shouldn’t tarry too long.

Gold itself is nearing its own 50-200 golden cross, which will really galvanize gold-futures traders into flooding back in.  Due to the extreme leverage those guys run, they are forced to closely watch technicals by necessity.  Gold’s golden cross is lagging behind gold stocks’ a little, with its 50dma still well under its 200dma.  At current convergence rates, gold’s next golden cross is likely in about several weeks or so.

And there are lots of reasons to expect gold’s own upleg to continue powering higher on balance.  The current gold-futures setup remains bullish for gold, with much room for speculators to do more buying.  I analyze that latest data so critical to gold’s near-term fortunes in all of our newsletters.  Gold investment buying is also returning and accelerating, as higher prevailing gold prices start attracting investors back in.

Every investor needs a material portfolio allocation in gold, and those remain exceedingly rare.  The Fed and US Treasury are printing and spending money like there’s no tomorrow, fueling surging inflation in prices across the entire US economy.  Gold remains the ultimate inflation hedge, as ballooning money supplies bid it higher since its own supply only slowly inches up through mining.  Gold looks incredibly bullish.

The gold stocks will follow their metal higher and amplify its gains like usual.  And contrary to historical seasonals, gold and its miners have both surged within the past couple summers.  From the end of May to early September 2019, gold blasted 19.0% higher catapulting GDX to a huge parallel 43.4% gain!  And GDX soared 28.9% again last summer from the end of May to early August, driven by gold’s own 19.1% surge.

So in recent years, traditionally-slow market summers haven’t been obstacles to improving technicals and thus sentiment in gold and its miners’ stocks.  The more their gains mounted, the more traders wanted to chase them.  And the more they bought, the more those late-stage uplegs grew.  Today’s young gold-stock upleg is nearing that tipping point where bullish technicals and sentiment start reinforcing each other.

Remember gold-stock uplegs tend to see doublings in GDX terms over about 8 months or so.  Today’s current young upleg is only between a-quarter-to-a-third up into that bull-market precedent so far.  Thus the great majority of gold stocks’ gains in their current upleg are likely still yet to come.  It isn’t too late to get deployed in fundamentally-superior gold stocks, which our newsletter trading books are chock full of.

At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can.  We overcome popular greed and fear by diligently studying market cycles.  We trade on time-tested indicators derived from technical, sentimental, and fundamental research.  That has already led to unrealized gains in this current young upleg as high as +68.5% on our recent newsletter stock trades!

To multiply your wealth trading high-potential gold stocks, you need to stay informed about what’s going on in this sector.  Staying subscribed to our popular and affordable weekly and monthly newsletters is a great way.  They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  Subscribe today while this gold-stock upleg remains young!  Our recently-reformatted newsletters have expanded individual-stock analysis.

The bottom line is gold stocks’ gains are mounting in their young upleg.  GDX is on the verge of a classic golden-cross technical buy signal after achieving multiple major upside breakouts in recent months.  All that is overwhelmingly confirming this gold-stock upleg is real, sustainable, and likely to power way higher before giving up its ghost.  The gold miners’ strong fundamentals in Q1 also support much-higher stock prices.

While most traders remain unaware of the bullish implications of all this recent gold-stock strength, the tipping point is approaching.  Soon both this metal and its miners’ stocks will have rallied long enough and high enough to pique traders’ interest.  That will shift their sentiment back to bullish, unleashing sizable buying.  Those capital inflows will accelerate gold stocks’ upleg, driving a virtuous circle of mounting gains.

Adam Hamilton, CPA

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