This gold-stock upleg is big, but does it look excessive?
The gold miners’ stocks are blasting higher, just achieving major new secular highs! Traders are flocking back to gold stocks as the metal they produce relentlessly advances on strong investment demand. That is atypical during market summers, but the pandemic has made for unprecedented times. This gold-stock upleg is big, but doesn’t look excessive yet. It should keep marching with investment capital flowing into gold.
With these red-hot stock markets fueled by extreme Fed money printing, the small contrarian gold-stock sector has largely remained overlooked. But the gold miners’ gains since March’s stock panic have been awesome. The leading and dominant gold-stock benchmark is the GDX VanEck Vectors Gold Miners ETF. Its impressive $16.9b in net assets this week doubled all the rest of the US gold-stock ETFs combined!
The major gold miners tracked by GDX have skyrocketed since being briefly sucked into that COVID-19-lockdown stock panic. As of the middle of this week, GDX has soared 105.1% higher in just 3.8 months! This fantastic performance has been exceptional, it is not often speculators and investors can double their capital in such a short span. Those enormous fast gains are creating an interesting dichotomy of thinking.
They are bringing legions of new traders to this sector, as they love chasing winners. Nothing attracts in fresh capital like strong upside momentum. This is a very-bullish dynamic, fueling a powerful virtuous circle. The more gold-stock buying traders do, the larger this sector’s uplegs grow. And the higher gold stocks climb, the more traders want to buy them. Major new secular highs greatly reinforce this rallying cycle.
But many traditional gold-stock traders are wary, worried this sector has run too far too fast to sustain these levels. That’s certainly prudent to consider after anything more than doubles in a few short months. But somewhat surprisingly, GDX still isn’t yet flashing normal warning signs signaling major upleg toppings. That argues this gold-stock upleg still has plenty of room to keep running higher, which is encouraging.
This first chart looks at this gold-stock bull’s technicals. This sector is so wildly volatile that its bull and bear markets are reckoned based on gold’s own. Gold’s ongoing secular bull was born in mid-December 2015, and has yet to see a single bull-slaying 20%+ correction. This parallel gold-stock bull began its long march higher about a month later in mid-January 2016. It has been a choppy and often-trying run since.
While GDX’s recent massive 105.1% gains in just 3.8 months sure sound excessive, it’s always essential to maintain longer-term perspective. That violent surge didn’t erupt from euphoric highs, but from the depths of despair in an ultra-rare stock panic. Late in those, which are technically 20%+ plummetings in major stock indexes in 2 weeks or less, gold gets sucked into the frantic selling. That wreaks havoc on gold stocks.
In just 0.6 months leading into mid-March’s epic fear maelstrom, GDX collapsed 38.8%. It was radically oversold! Oversoldness and overboughtness are technical measures of when prices move too far too fast to be sustainable. One easy way to quantify that mathematically is simply to divide a closing price by its trailing 200-day moving average. 200dmas are ideal technical baselines, ever-so-gradually following prices.
On March 13th, GDX collapsed to just 0.694x its 200dma. That was the most oversold it had been by far in this entire secular gold bull. As the gold baby was thrown out with the general-stock bathwater in the scary heart of that panic, GDX literally crashed 24.5% in just 2 trading days! A crash compresses that 20%+ decline into 2 trading days or less. GDX cratered to just $19.00 on close that day, unbelievably low.
In their darkest hour, the major gold stocks had collapsed 35.1% year-to-date! And bull-market-to-date, GDX was only 52.4% higher over a long 4.2-year secular span. Gold had climbed 40.0% during that, and GDX usually amplifies its material moves by 2x to 3x. GDX should’ve been up 80% to 120% bull-to-date at March’s stock-panic nadir, trading between $22.45 to $27.43. Those panic lows were an epic anomaly!
And that’s why GDX immediately rocketed higher out of them. In late February before getting sucked into that stock panic, GDX traded at $31.05 which was up just a modest 6.0% year-to-date. That was largely seen as a reasonable level for gold stocks. They remained far from overbought then, with GDX trading at just 1.153x its 200dma. The danger zone for major upleg toppings over the past 5 years or so exceeds 1.50x.
While GDX soaring 105.1% in the 3.8 months since that brutal stock-panic low sounds extreme, realize that over 60% of those gains merely recouped what was lost in several weeks in that panic! The gold stocks have been mostly mean reverting higher out of extreme losses. From its late-February high to this week, GDX has only rallied 25.5% in 4.4 months. And this week GDX was only 33.1% higher year-to-date.
Believe it or not, that is actually fairly-weak 2020 gold-stock performance! Why? The major gold stocks almost always amplify gold’s own gains and losses. This Wednesday gold itself had soared 19.2% so far this year. A normal gold-stock upleg over this span would’ve seen GDX blast 38% to 58% higher, again leveraging gold’s upside by the usual historic 2x to 3x. Gold stocks are still really underperforming gold.
And while they are definitely overbought technically after GDX blasted 20.1% higher over about several weeks since mid-June, danger signs aren’t yet flashing. Again that Relative GDX or rGDX measure of this leading gold-stock ETF as a multiple of its own 200dma has to soar over 1.50x to reach upleg-killing extremes of overboughtness. That certainly happened late in this gold-stock bull’s monster maiden upleg.
In essentially the first half of 2016, GDX skyrocketed 151.2% higher in just 6.4 months! Those gains were so big so fast that GDX soared as high as 1.646x its 200dma. On the actual day that upleg gave up its ghost before rolling over into a severe correction, the rGDX ran 1.567x. The odds of today’s gold-stock upleg failing and rolling over would definitely be high if the rGDX was back over 1.50x in that rarefied territory.
But GDX still hasn’t stretched anywhere near that radical overboughtness in this upleg. About a month ago I ran an rGDX chart in another essay if you want to take a look at this indicator’s history during this gold-stock bull. Back in mid-May when GDX’s initial post-panic peak was carved, this leading gold-stock benchmark was only trading at 1.311x its 200dma. That’s overbought, yet still far from upleg-slaying levels.
Then the rGDX didn’t exceed that high until this Wednesday, when GDX surged 3.3% to a major new 7.4-year secular high. This rGDX overboughtness indicator clocked in at 1.327x on that. So the major gold stocks still haven’t rallied anywhere near fast enough or far enough to reach the historical danger zone warning of imminent upleg failures. And interestingly the stock panic skewed these latest rGDX reads high.
Again that exceedingly-anomalous event pummeled the gold stocks to radically-oversold depths far under GDX’s 200dma. While those extreme lows were short-lived, they definitely dragged that 200dma lower and retarded its subsequent upslope. 200 trading days from this week extends all the way back to late September 2019. Again imagine that crazy ultra-rare stock panic hadn’t happened, erase it mentally.
We can approximate that technically. Instead of GDX plummeting 38.8% in 0.6 months, without a panic it probably wouldn’t have dropped much more than 5% in a mild pullback. So in the 6 weeks or so that surrounded that panic, we can infer a non-panic GDX no more than 5% off February’s peak. A simple formula recasts GDX during that short span as the higher of its actual daily close or late-February levels less 5%.
GDX’s 200dma based on that hypothetical no-panic scenario is a bit higher, which drags this week’s highest rGDX read down from 1.327x to 1.297x. The major gold stocks would look even less overbought without the stock panic’s skew lower. Either way, technically this sector isn’t dangerously overbought yet by its own bull’s standards. And that’s certainly not the only reason the gold stocks likely have room to run.
Gold stocks are ultimately just leveraged plays on gold, which overwhelmingly drives their earnings. So as goes gold, so go gold stocks. Gold-stock uplegs don’t peak until gold itself does. Back in early July 2016 after these gold and gold-stock bulls’ huge maiden uplegs, gold crested at $1365. After that it consolidated high for several weeks, helping GDX grind up modestly to its later upleg peak in early August.
Gold’s ascent then ran out of steam because gold investment demand petered out. The best daily proxy for gold investment demand is the changes in the physical-gold-bullion holdings held in trust by the major gold ETFs. I explained all this in depth in an essay on the strong gold investment a month ago. Rising gold holdings in the dominant GLD SPDR Gold Shares gold ETF reveal stock-market capital flowing into gold.
As GDX has blasted higher in recent weeks culminating in this week’s major secular highs, investment capital inflows into gold have remained really strong. During the last several weeks or so as GDX shot up 20.1%, GLD enjoyed a powerful 5.8% holdings build! That compares to a 2.9% holdings draw during the several weeks in July 2016 after gold peaked when the last major gold-stock upleg was in the process of topping.
The second-largest gold ETF in the world well after GLD is the IAU iShares Gold Trust. It tends to be more favored by some institutional investors due to its lower management fees. Again all this was explained in my latest gold-investment essay. During these same last several weeks as GDX blasted higher, IAU’s holdings also saw a solid 2.3% build. Gold uplegs don’t peak while investment capital is still pouring in.
The major gold stocks of GDX can keep powering higher on balance as long as gold does. And one of the main signals gold is running out of steam is waning investment demand as evidenced in its pair of major physically-backed ETFs. That hasn’t happened yet. Another key signal flagging the ends of major gold uplegs is how gold-futures speculators are positioned, as their buying exhausting is a big warning sign.
A few weeks ago I wrote my latest essay on gold futures, which explored all this. In a nutshell, the specs’ capital available to deploy in gold futures is finite. They can only add so many long contacts, and buy to cover so many short contracts, before they run out of capital firepower to keep buying. That leaves them little room to buy but vast room to sell, so gold soon rolls over killing uplegs. We haven’t seen that yet this time.
Back in early July 2016, speculators’ gold-futures longs and shorts were running 100% and 7% up into their gold-bull trading ranges. That is excessively bullish in terms of these hyper-leveraged and highly-influential traders’ bets, and thus very bearish for gold. 100% longs and 0% shorts is the most-bearish-possible near-term setup for the yellow metal! And indeed that helped end gold’s massive maiden upleg.
At the end of June 2020, the latest gold-futures reporting week when this essay was published, total spec longs and shorts were running 71% and 20% up into their gold-bull trading ranges. And in 52-week terms which may be even more relevant since this gold bull has seen such record gold-futures extremes, that positioning was way more moderate at 47% longs and 80% shorts! Those ran 100% and 6% in early July 2016.
So like investors, gold-futures speculators have yet to show any indication they are done buying gold in this upleg. Gold stocks live and die by gold prices, they will follow gold higher or lower and amplify its material moves on balance. And fundamentally the gold miners are likely doing amazing, as higher gold prices drive much-higher earnings. I analyzed today’s gold-stock undervaluations a couple weeks ago.
From a sector level, the major gold miners’ profits are the difference between average prevailing gold prices and their all-in sustaining costs. For the top-25 GDX gold miners, over the last four quarters that have been reported ending in Q1’20 these implied earnings have run $439, $591, $552, and $649 per ounce. But Q2’20 would prove much bigger without the early-quarter COVID-19 disruptions affecting miners.
Q2’s average gold price of $1714 surged a major 8.4% quarter-on-quarter from Q1’s $1582! And gold miners’ AISCs generally don’t change much quarter to quarter, although reduced operations for part of Q2 due to government COVID-19 lockdowns could briefly skew that. But that impact remains unknown until the major gold miners report Q2 results from late July to mid-August. Otherwise gold-stock earnings are huge.
Q2’20’s $1714 average gold price less the GDX top 25’s $904 average all-in-sustaining costs over the last four reported quarters yields enormous $810-per-ounce implied earnings! If that had happened ex-shutdowns, the major gold miners’ profits would’ve skyrocketed 84.4% year-over-year. Actual Q2 results will be worse with COVID-19 impacts, but this sector will still see sharply-rising earnings in future quarters.
Major gold-stock uplegs are unlikely to peak and roll over into serious corrections before miners’ earnings prospects fade dramatically on lower gold prices. That certainly isn’t the case today. Least importantly of all, there’s one more minor peripheral gold-stock indicator that’s interesting. It considers how this sector has performed in market summers, Junes, Julies, and Augusts, during all gold’s modern bull-market years.
This chart is updated from my essay last week on gold’s usual summer doldrums. It takes the older HUI gold-stock index, since the newer GDX’s price history is insufficient, and individually indexes this sector’s price action each summer. Then all those summer indexes are averaged together, distilling out the seasonal tendencies. The red line is the result, while the blue line shows how the HUI is performing this summer.
The major gold stocks have broken out above their usual summer-doldrums center-mass drift this year, which runs +/-10% from May’s final close! As the HUI and GDX both include most of the same major gold stocks, they are functionally interchangeable. I’m intrigued by this chart this week because of how gold stocks have behaved in past counter-seasonal strong summer rallies. Note all the action above the 110 line.
2020 is only gold stocks’ 5th summer out of all gold-bull-market years since 2001 where this sector has managed to decisively power above its summer-doldrums trading range. Previously after such breakouts in 2003, 2016, and 2019, gold stocks continued rallying on balance for the rests of those summers. That strong upside momentum continued to attract in enough new buyers to keep driving gold and gold stocks higher.
So history suggests gold stocks’ current upleg driven by strong gold investment demand is likely to persist even during summer. Traders love chasing winners, and will happily ride upside momentum and ignore everything else including seasonals. The exception to this summer-breakout-momentum precedent was 2005, when gold stocks broke out then soon returned to trend. But all that happened much later in August.
Despite gold stocks blasting higher in recent weeks, there’s no reason yet to expect an imminent upleg failure. While they could roll over into a correction anytime, key indicators flagging the ends of historical major uplegs aren’t flashing warnings so far. That argues the gold stocks still have plenty of room to run higher yet. Thus any GDX pullbacks can be used as opportunities to add positions in excellent gold stocks.
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The bottom line is despite gold stocks blasting higher, their upleg likely still hasn’t run its course yet. The majority of their massive post-panic gains were merely a mean reversion out of extreme anomalous lows. The gold stocks haven’t outperformed gold normally year-to-date, they aren’t super-overbought, investors are still buying gold, and speculators haven’t exhausted their gold-futures-buying firepower in this upleg.
All this is bullish for gold stocks in coming months. While their Q2 results will be somewhat impaired due to COVID-19 disruptions, their earnings-growth potential in future quarters is enormous with these higher prevailing gold prices. And counter-seasonal gold-stock summer breakouts usually keep rallying on momentum buying instead of rolling over. This sector’s odds of keeping marching higher on balance look good.
Adam Hamilton, CPA