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Adam Hamilton

Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Gold Miners See Massive Upside Potential As Precious Metals Climb


The gold miners’ stocks have surged powerfully over the past few weeks, challenging upleg highs. Traders started returning to this small contrarian sector as gold blasted back above the psychologically-crucial $1300 line. While such early-summer strength is atypical, gold miners’ technicals, sentiment, and fundamentals all support more gains to come. Gold stocks need to mean revert to much-higher price levels.

Traders usually track gold-stock fortunes with this sector’s most-popular exchange-traded fund, the GDX VanEck Vectors Gold Miners ETF. Launched in May 2006, this was the maiden gold-stock ETF. That big first-mover advantage has helped propel GDX to sector dominance. This week its net assets of $9.7b ran 46.5x larger than the next-biggest 1x-long major-gold-miners ETF! GDX is this sector’s leading benchmark.

And it sure didn’t look pretty in May, with traders wanting nothing to do with gold stocks. GDX spent the great majority of last month languishing near its 200-day moving average. Just a few weeks ago on May 29th, GDX closed at $20.42. That was down 3.2 percent year-to-date, much worse than gold’s own slight 0.2 percent YTD decline. The gold stocks were really out of favor, just like the metal they mine which fuels their profits.

This sector started perking up on May 30th, when gold and GDX enjoyed 0.7 percent and 1.7 percent rallies. Major gold miners’ inherent profits leverage to gold usually helps their stock prices amplify gold’s gains by 2x to 3x. But there was still no excitement with gold and GDX trading at $1288 and $20.77 heading into June. Early market summers have gold’s weakest seasonals of the year, usually weighing on it and the miners.

But leave it to Trump to unleash a bombshell shaking the status quo. That evening he shocked, tweeting “On June 10th, the United States will impose a 5 percent Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied, at which time the Tariffs will be removed.”

The White House said those tariffs would be ratcheted up 5 percent each month until they hit their terminal 25 percent level on October 1st! While Trump later suspended his Mexico-tariff threat, it really surprised traders. Not only was Trump opening up a new front in the trade wars, but he was tying tariffs to non-trade issues as a hardline negotiating tactic. That had serious implications, so Asian traders flooded into gold after that tweet.

The next day that new momentum spilled into the US, driving gold 1.3 percent higher to $1305. Long-apathetic gold-stock traders rejoiced at seeing gold claw back over $1300. That has proven a crucial level for gold sentiment for years now, the dividing line between popular bearishness and bullishness. GDX shot up 3.9 percent that day. Asian traders bought gold aggressively heading into the next trading day, driving a $1300 breakout.

That upside action again carried into US markets on June 3rd, when gold powered another 1.5 percent higher to $1325. The major gold stocks’ gains mounted, with GDX surging another 4.2 percent to $22.49. In those two trading days following Trump’s Mexico-tariff threat, this leading gold-stock ETF blasted 8.3 percent higher on a 2.8 percent gold surge! GDX’s gains were amplifying gold’s breakout rally by a strong 3.0x, rekindling sector interest. Related: Tech Crackdown Creates $120 Billion Bloodbath

There’s nothing speculators and investors like more than chasing winners, riding the momentum. So that newfound gold and gold-stock buying persisted. By this Wednesday’s data cutoff for this essay, gold had powered 4.1 percent higher since May 29th. True to form, the major gold stocks as measured by GDX rocketed up 12.4 percent in that same span for 3.0x leverage. The gold miners’ stocks are starting to return to favor again!

Their strong gains in recent weeks didn’t erupt from major lows, but from a lull in a solid existing upleg. This chart looks at GDX over the past several years or so, across the life of gold’s current bull market. It is important to consider big moves in broader technical context, as that offers clues on what’s likely next. The gold miners’ stocks have lots of room to rally much higher from here, with major-upside-breakout potential.

(Click to enlarge)

While this week’s $23ish GDX levels feel high after May’s disheartening 200dma grind, they are actually fairly low. Since late 2016 GDX has mostly meandered in a major consolidation trend running from $21 support to $25 resistance. $23 is right in the middle of that long basing channel, which isn’t noteworthy at all technically. The gold miners’ stocks won’t get exciting again until GDX breaks out decisively above $25.

The past few weeks’ big surge is simply part of an in-progress upleg born in deep despair back in early September. That episode was brutal. All-time-record gold-futures short selling hammered the metal to 19.3-month lows. That unleashed cascading stop-loss selling in gold stocks, an ugly forced capitulation that crushed GDX to deep 2.6-year secular lows. All the gains since are just a normal mean reversion higher.

Gold stocks’ recovery from those anomalous extreme lows has already passed plenty of bullish technical milestones. GDX’s series of higher lows and higher highs carved the nice uptrend rendered above. This leading sector benchmark enjoyed a major triple breakout, climbing back over three key resistance zones including GDX’s 200dma. A powerful Golden Cross buy signal flashed as GDX’s 50dma surged over its 200dma.

By late February this young gold-stock upleg had lifted GDX 33.0 percent higher to $23.36. But there was no reason for gold stocks’ mean reversion higher to fail there. Those gains remained relatively small by sector standards. Back in essentially the first half of 2016, GDX skyrocketed 151.2 percent higher in a monster upleg on a parallel 29.9 percent gold one! And gold-stock uplegs during gold’s last bull averaged bigger gains too.

Before GDX came along, the primary gold-stock benchmark was the classic HUI NYSE Arca Gold BUGS Index. Like GDX it tracks most of the same major gold stocks, so HUI and GDX price action are usually indistinguishable. The last gold-stock bull straddling GDX’s birth saw the HUI soar 1664.4 percent higher over 10.8 years between November 2000 to September 2011! Those gains accrued over 12 separate uplegs.

One was an anomaly, the epic mean-reversion rebound after late 2008’s first-in-a-century stock panic. Excluding it, the other 11 normal gold-stock uplegs in that last bull averaged 80.7 percent gains over 7.9 months per the HUI! So GDX’s 33.0 percent upleg-to-date advance as of late February was nothing, way too small to be mature. Odds are it will yet grow much larger in line with past precedent before giving up its ghost.

Mid-upleg selloffs after big surges are normal and healthy to rebalance sentiment. If greed becomes too excessive early in uplegs, it can prematurely exhaust them by pulling forward too much future buying. In most cases mid-upleg pullbacks bounce at upleg support. But that didn’t hold in late April, as GDX fell even farther to its 200dma. That was the result of extreme stock-market euphoria stunting gold demand.

The gold stocks were down but not out, simply awaiting signs of life in gold before traders returned. That came in late May after the stock markets had entered a pullback and Trump’s Mexico-tariff threat rattled traders. GDX quickly leapt back up into its upleg’s uptrend channel, proving it is alive and well. Overall this upleg’s technicals remain very bullish, pushing this leading ETF’s price ever closer to a major upside breakout.

For the better part of several years now, GDX $25 has proven gold stocks’ graveyard in the sky. They’ve challenged it several times, but haven’t been able to decisively break though. They certainly can go much higher. In this gold bull’s monster initial upleg in H1’16, GDX rallied as high as $31.32. And near the end of gold’s last secular bull, this ETF peaked at $66.63 in September 2011. There’s nothing magical about $25.

And it isn’t far away at all. As of the middle of this week, GDX merely had to rally 8.9 percent more to regain $25! That’s nothing for a sector as volatile as gold stocks. Remember just a few weeks ago GDX surged 8.3 percent in only two trading days as gold powered back over $1300 after Trump’s Mexico-tariff threat. So a major gold-stock breakout that would radically improve sector psychology is very much within reach today.

The higher gold stocks climb, the more traders will want to buy them to ride that momentum. The more capital they deploy, the more gold stocks will rally. This normal virtuous circle of improving psychology and buying will become even more exaggerated as GDX $25 is surpassed. Seeing the highest gold-stock levels in several years will work wonders to improve sector sentiment, unleashing widespread bullishness. Related: What To Expect As Driving Season Kicks Off

This gold-stock upleg’s potential gains are massive spanning such a major upside breakout. Remember speculators and investors love chasing winners, so the higher gold stocks rally the more attractive they’ll look. If GDX’s current upleg grows to the last secular bull’s average upleg gain of 80.7 percent, it would catapult this ETF to $31.75. The major factor almost certain to push GDX well over $25 is gold’s own breakout.

Much like GDX $25, gold’s own bull since December 2015 has been capped near $1350 ever since. Last week I wrote a whole essay explaining why gold is winding closer and closer to blasting through that to new bull-market highs. New-bull-high psychology in gold would spark a frenzied rush to bring neglected gold stocks back into portfolios. Weakening general stock markets should create the necessary gold demand

Gold-stock sentiment is merely decent today, average at best even after recent weeks’ sharp surge. That leaves lots of room for improvement. The more bullish traders get on gold miners’ stocks, the more they will want to buy. Gold miners’ shift back into favor could easily propel GDX back above $25 anytime in the coming months. But we may have to wait until August, after the worst of the gold summer doldrums pass.

Normally this time of year I’d be updating my gold-summer-doldrums research. But that takes a backseat to the recent gold and gold-stock surges. In a nutshell, Junes and Julies are the weakest time of the year seasonally for gold with no recurring outsized gold-demand spikes. Gold and gold stocks can rally during early summers if unexpected demand materializes, but they usually don’t. Will summer 2019 prove an exception?

I sure hope so, but only time will tell. This next chart looks at the HUI’s average summer performances in all modern gold-bull-market years. Each summer is individually indexed to its final close in May, keeping gold-stock price action perfectly comparable regardless of prevailing gold levels. The yellow lines show 2001 to 2012 and 2016 to 2017. Last year’s summer gold-stock action is rendered in light blue for comparison.

All these lines averaged together form the red one, revealing the center-mass drift trend of gold stocks in market summers. Gold stocks’ current 2019 summer action is superimposed over all that in dark blue. As you can see, this sector is off to one of its best summer starts in all modern bull-market years! That could be sustainable like summer 2016’s powerful run, or gold stocks may end up consolidating until August.

(Click to enlarge)

Which way this summer plays out depends on gold. If gold keeps climbing on balance, so will the stocks of its miners regardless of seasonal tendencies. Weakening stock markets would spur gold investment demand continuing to push its price higher. A weaker US dollar would also help, motivating gold-futures speculators to buy as well. Only time will tell whether the gold and gold-stock breakouts come sooner or later.

Whatever the timing, the gold miners’ fundamentals remain strong and bullish and support much-higher stock prices. After every quarterly earnings season, I dig deep into the GDX gold miners’ fundamentals. They finished reporting their latest Q1’19 results about a month ago, and I wrote a comprehensive essay analyzing them. There’s no doubt fundamentally that gold stocks should be trading way over GDX $25 levels.

Stock prices are ultimately determined by underlying corporate earnings, and for the gold miners that is totally dependent on prevailing gold prices. Gold-mining costs are best measured in all-in-sustaining-cost terms. In Q1’19 the GDX gold miners’ AISCs averaged $893 per ounce. That’s right in line with the prior four quarters’ trend of $884, $856, $877, and $889. Gold-mining profits are going to soar with higher gold.

Gold averaged $1303 in Q1 when the major gold miners were producing it for $893. That implies they were earning $410 per ounce mined. $1400 and $1500 gold are only 7.4 percent and 15.1 percent higher from there. As the GDX gold miners’ AISCs reveal, gold-mining costs are largely fixed from quarter to quarter and don’t follow gold higher. So assuming flat AISCs, gold-mining profits surge to $507 at $1400 and $607 at $1500.

That’s 23.7 percent and 48.0 percent higher from Q1’19 levels on mere 7.4 percent and 15.1 percent gold gains from that quarter’s average price! And as of the middle of this week, gold had already climbed 2.3 percent of that. The major gold miners’ fundamentals are already bullish, but improve greatly at higher prevailing gold prices. With earnings growth hard to come by in general stock markets this year, the gold stocks will be even more alluring.

All the stars are aligning for big gold-stock gains in coming months, with their technicals, sentiment, and fundamentals all looking very bullish. This mounting gold-stock upleg has great potential to grow much larger later this year, greatly rewarding contrarian traders buying in early. More and more investors are becoming aware of this sector’s huge potential, including elite billionaires running major hedge funds.

This week one of them, Paul Tudor Jones, gave an interview in New York. He was asked what his best trade over the next year or two will be. He said, “The best trade is going to be gold. If I have to pick my favorite for the next 12 to 24 months it probably would be gold. I think gold goes beyond $1400, it goes to $1700 rather quickly. It has everything going for it in a world where rates are conceivably going to zero...”

This is not the summer to check out, but to do your homework and get deployed in great gold stocks. All portfolios need a 10 percent allocation in gold and its miners’ stocks! Many smaller mid-tier and junior miners have superior fundamentals and upside potential to the majors of GDX. And by the time the gold stocks get really exciting again in upside breakouts with gold, much of the easy gains will have already been won.

The bottom line is this gold-stock upleg is mounting. Despite weak early-summer seasonals, the gold miners’ stocks are rallying with gold and nearing a major breakout above GDX $25. Seeing the best gold-stock prices in several years will really motivate traders to return, fueling a virtuous circle of capital inflows and gains. Gold-stock technicals, sentiment, and fundamentals all support much-higher prices ahead.

Gold’s own inexorably-nearing major bull-market breakout will really light a fire under gold stocks. The higher gold climbs, the more investors and speculators will want to own it and its miners. While summer may force a consolidation, softening stock markets could easily overcome gold’s weak seasonals. The potential gold-stock gains as gold returns to favor are massive, so it’s important to get deployed early.

By Adam Hamilton

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