Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Gold Stocks Recovering

Commodities / Gold and Silver Stocks 2018 Oct 06, 2018 - 06:31 PM GMT

By: Zeal_LLC

Commodities

The battered gold miners’ stocks are finally starting to recover after a rough few months.  Their prices slid with gold in July, plummeted in a brutal forced capitulation in August, and then dropped again in an echo capitulation into mid-September.  That left them at fundamentally-absurd price levels wildly disconnected from their actual profitability, leaving this sector with big mean-reversion upside ahead as it bounces back.

The leading gold-stock investment vehicle and increasingly benchmark is the GDX VanEck Vectors Gold Miners ETF.  As of this week it still had $8.5b of net assets even at today’s super-depressed gold-stock prices.  That dwarfs everything else in the 1x-long major-gold-miners ETF space, running 40.5x bigger than its next largest competitor!  So GDX is the dominant proxy for the fortunes of the gold miners’ stocks.


This small contrarian sector has had a tough 2018, with GDX down a serious 19.1% year-to-date as of the middle of this week.  That’s mostly explainable by gold’s own 8.0% YTD swoon.  Since their earnings are so dependent on prevailing gold prices, the major gold miners’ stocks tend to leverage gold’s trends by 2x to 3x.  With their downside leverage running 2.4x so far this year, that’s right in line with precedent.

But this serious gold-stock weakness is a recent thing.  Back in mid-June, gold and GDX were trading at $1302 and $22.66.  Gold was dead flat in 2018 at that point, and GDX wasn’t much worse with a 2.5% loss.  That was actually pretty resilient given the market backdrop.  The US dollar was strengthening with its US Dollar Index up 2.8% YTD.  The dollar’s fortunes heavily drive gold-futures speculators’ trading.

And gold investment remained decent then too despite the flagship S&P 500 stock index (SPX) climbing 4.1% YTD by mid-June.  Gold investment demand wanes when stock markets are euphoric.  Gold’s best investment proxy is the physical gold bullion holdings held in trust for shareholders of the leading GLD SPDR Gold Shares gold ETF.  They were only down 1.0% YTD then, so investors weren’t materially selling.

Thus the gold-stock story today isn’t a 2018 one, but a past-few-months one.  In July gold fell 2.3% on a big 2.3% draw in GLD’s holdings thanks to a strong 3.6% SPX rally.  Why prudently diversify stock-heavy portfolios with counter-moving gold when stocks seem to do nothing but rally indefinitely?  The weakness in gold that month forced GDX 4.6% lower, which made for 2.0x downside leverage which was on the light side.

But things really went pear-shaped in August.  A mounting emerging-markets currency crisis centered on the plummeting Turkish lira goosed the USDX on safe-haven buying.  So gold plunged 4.1% during that month’s first half on a sharp 2.2% USDX surge.  The gold stocks, which are ultimately leveraged plays on gold, took it on the chin.  GDX plummeted 14.7% in that short span making for serious 3.6x downside leverage!

That naturally devastated the already-fragile psychology in gold-stock land, leaving its traders despondent and super-bearish.  So the gold stocks couldn’t muster a recovery in August’s second half with gold.  While it rebounded 2.2% into month-end, GDX could only stage a pathetic 2.1% rebound.  Overall in August, gold fell 2.0% while the gold stocks per GDX plunged 12.8%.  That was the result of a forced capitulation.

With gold stocks so deeply out of favor, there aren’t many investors and speculators left in them who don’t want to be there.  Only hardened contrarians remain, traders who aren’t spooked by mid-August’s gold low near $1174.  But they still have to run stop losses, and lots of those were triggered as gold stocks fell exacerbating their plunge.  That forced technical selling begot more selling, snowballing out of control.

I wrote a whole essay explaining gold stocks’ forced capitulation several weeks ago.  That heavy-if-not-extreme gold-stock selling wasn’t voluntary or even sentiment-driven.  But it stoked raging bearishness as GDX was pummeled to a deep 2.6-year low.  It’s rare for major gold stocks to leverage gold’s downside by an extreme 6.4x, definitely not sustainable.  But exceptional sentiment extremes still take time to dissipate.

So the bleeding gold stocks were brutalized again in early September, suffering a truly-anomalous echo capitulation.  During the first third or so of last month, GDX plunged another 5.3% despite gold edging just 0.2% lower.  That leverage was crazy, off the charts.  But the gold stocks finally started recovering after that odd event, ultimately ending September essentially flat at -0.2%.  That was better than gold’s 0.7% loss.

Unfortunately all this carnage in recent months really wreaked havoc technically.  This chart shows GDX since early 2016, a span still considered a gold-stock bull because gold’s own bull remains in force with no 20%+ bear-market declines.  August’s cascading forced selling in gold stocks drove a major support breakdown, and ultimately snowballed to a deep multi-year low.  But the gold stocks are now recovering.

Since GDX’s echo-capitulation low in mid-September, it has rebounded 8.4% at best as of earlier this week.  That far outpaced gold’s little 0.5% rally in that span, for extreme upside leverage of 16.8x.  That’s already proving that gold stocks’ anomalous forced capitulation and secondary echo capitulation weren’t righteous fundamentally.  We are in the early weeks of a mean-reversion rebound likely to run at least a few months.

That portends major gains for contrarian speculators and investors willing to buy in low while sentiment still feels miserable.  The gold stocks as rendered by GDX had been meandering in a consolidation basing trading range between $21 to $25 for 19.3 months before August’s breakdown.  The gold stocks need to mean revert back up into that strong trend, which would require GDX rallies of 12% to 33% from current levels.

The former would merely return GDX to its lower support of $21, while the latter would carry it back up to its resistance of $25.  The odds definitely favor a bigger-rather-than-smaller mean-reversion rally.  When sentiment extremes force prices way outside of normal trading ranges, their inevitable rebounds tend to overshoot proportionally towards the opposite extreme.  That ought to at least be high in GDX’s trading range.

Traders invariably make major mistakes in judgment at price extremes, the consequence of our very human nature.  We tend to extrapolate current prices out into the indefinite future, assuming they are the new norm rather than a short-lived anomaly.  And we also figure those price levels must be fundamentally justified since they happen to exist in the markets.  Both are incredibly wrong, blinding traders to great opportunity.

Between mid-June to mid-September, GDX plunged 22.5% on an 8.1% gold drop.  That 2.8x leverage is on the high side of normal, but it’s still rare to see such a big plunge in gold-stock price levels in such a short 2.9-month span.  The last time anything remotely like this happened came in late 2016.  Gold and gold stocks plunged after Trump’s surprise election victory ignited a massive taxphoria rally in stock markets.

That ultimately hammered GDX 39.4% lower over 4.4 months by mid-December that year.  Then, just like now, traders got all wrapped up in the popular bearishness major lows always generate.  They assumed the gold miners were faring so poorly they’d keep spiraling lower indefinitely.  Yet as always around major lows, that extreme bearishness was dead wrong.  GDX surged 34.6% higher to rebound in the next 1.8 months.

That’s right in line with what GDX needs to see in the coming months to regain the high side of its long consolidation trend.  Continuing to extrapolate prices rarely works for long once they are driven to major extremes as evidenced by sentiment.  When everyone waxes super-bearish on gold stocks after a big and fast plunge, that’s when to fight the crowd and start betting heavily for a sharp reversal and mean reversion.

The recent capitulation gold-stock levels are wildly unjustified fundamentally as well, which means they can’t last for long.  I’ve been a hardcore contrarian speculator and investor for decades now, and run a small financial-research company specializing in contrarian trading.  One of my projects every quarter just after earnings season finishes is digging deep into the latest results from the major gold miners of GDX.

While Q3’18 is in the books, most major gold miners won’t report how they are doing operationally and financially until 4 to 6 weeks after quarter-end.  So the latest-available fundamental data remains Q2’s.  In mid-August I explored that in depth for GDX gold miners’ Q2 results.  The most-important fundamental metric for this sector is all-in sustaining costs, revealing how much it costs to mine and replenish each ounce of gold.

In Q2 the top 34 GDX gold miners representing nearly 92% of this ETF’s total weighting reported average AISCs of $856 per ounce.  That was right in line with past-year precedent as well, with these GDX miners’ AISCs in the preceding 4 quarters running $867, $868, $858, and $884.  For years now, the major gold miners have reported average AISCs usually between $850 to $875 or so.  Those are far below gold prices!

At worst during mid-August’s capitulation climax, gold closed near $1174.  Assuming Q2’s $856 average AISCs hold into Q3, which is very likely based on recent years’ history, the major gold miners of GDX were still earning $318 per ounce!  That makes for hefty 27% profit margins even when gold was at its worst.  This forsaken sector was still doing fine fundamentally at gold’s recent lows, there was no threat at all.

That’s why most contrarian speculators and investors didn’t sell out of fear in early August and again in early September, but simply because the trailing stops on their trades were hit.  Risk management is very important for any portfolio, and gold stocks are more volatile than most so stops are essential.  We saw plenty of our trades stopped out too, even though we run very-loose 25% trailing stops that don’t trip often.

Despite gold-mining costs remaining way under recent prevailing gold prices, Q3 will be a worse quarter for gold miners than Q2.  Gold’s average quarterly price fell 7.2% from $1306 in Q2 to $1211 in Q3, which will definitely hit earnings.  But again the major gold miners’ $856 average AISCs are still $355 under that weaker Q3 gold price!  This sector’s stock prices should be a heck of lot higher given such strong profits.

GDX is relatively new, born in May 2006 when gold stocks were soaring and heavily in favor.  To go back farther in history, another gold-stock benchmark like the HUI NYSE Arca Gold BUGS Index has to instead be used.  At worst in early September, the HUI closed at 134.0.  That’s the same level the HUI first traded at way back in May 2002, when gold’s entire price was $316 which was as high as it had been in its young bull.

Consider the ludicrous absurdity of all this.  At their recent echo-capitulation lows, the gold miners’ stocks were trading at prices first seen 16.4 years ago when the whole gold price was considerably smaller than their current profits!  That makes no sense at all, it’s an extreme anomaly resulting from unsustainable extreme bearishness.  Like any stocks, gold-stock price levels must ultimately reflect their underlying earnings.

So a major mean reversion higher is inevitable, as today’s gold-stock prices are fundamentally absurd.  Its primary driver is going to be a powerful upleg in gold itself, which will bring speculators and investors back to the beaten-down gold stocks in droves.  Two things are going to force gold dramatically higher in coming months, speculators and investors normalizing their own recent extreme bearish positions on gold.

Again GDX was pounded 22.5% lower during 2.9 months into mid-September where gold dropped 8.1% lower.  The sharp USDX rally inside that span drove gold-futures speculators to short sell aggressively.  In roughly that same timeframe, speculators’ total gold-futures shorts skyrocketed 156% higher in just 10 weeks!  That catapulted them to an incredible new all-time-record high of 256.7k contracts, off-the-charts extreme.

Legally these epic shorts must soon be closed by buying offsetting longs to cover them.  That means big gold buying that will propel gold sharply higher proportional to its shorting-driven drop.  If you don’t understand this whole short-selling-driven gold dynamic of recent months, you can’t understand how truly explosive gold’s near-term upside is.  I wrote a comprehensive essay digging into all this in early September.

Because gold was plunging in that most-extreme hyper-leveraged gold-futures short selling in history, the investors fled in sympathy.  GLD’s holdings plunged by 10.1% over that span, a massive draw in just a few months.  That left them at a deep 2.6-year low of their own in mid-September, and investment selling has continued modestly since pushing them lower still.  Investors have to do big buying to reestablish positions.

I wrote another essay digging deeply into these gold-investment dynamics in late September, which is equally important to understand.  The upshot is speculators and investors alike sold their gold exposure to exceedingly-low and abnormal levels in recent months.  Thus when they inevitably start buying back in to unwind bearish bets and reestablish new long positions, it’s going to require really-large capital inflows to do.

As of the latest data available this week, the gold-futures speculators would have to buy to cover a truly-staggering 147.2k short contracts to return to mid-June levels.  That’s the equivalent of 457.9 metric tons of gold.  Meanwhile American stock investors would have to buy enough GLD shares to force its holdings back up another 97.1t or 13.3% to return to mid-June levels.  Either alone would push gold dramatically higher!

Speculators will be forced to buy gold futures simply because gold starts rallying and their hyper-leverage leaves them very vulnerable.  Any US-dollar weakness will also contribute to gold-futures buying.  And the investors will return because speculators’ gold-futures buying drives gold higher or the stock markets start materially rolling over.  Ominously the latter is getting more likely every day with the Fed’s QT now full-steam.

Since mid-2000 I’ve written 829 of these weekly web essays, a heck of a lot of research and work.  Out of all those, last week’s Fed QT is Bull’s Death Knell is easily one of the most-important!  Every trader out there needs to understand Fed quantitative tightening and its dangerously-bearish implications for these lofty stock markets.  And anything that’s bearish for stocks is bullish for gold, since investors buy on stock weakness.

The gold stocks suffered capitulation selling and are anomalously low today because gold itself was hit by exceptional gold-futures and investment selling.  That left gold stocks exceedingly undervalued compared to their current earnings, not to mention wildly oversold.  So once gold starts powering decisively higher again on speculators and investors buying, the gold stocks will be off to the races with huge potential upside.

While investors and speculators alike can certainly play gold stocks’ coming mean reversion with the major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals.  Their upside will far exceed the ETFs, which are burdened by over-diversification and underperforming stocks.  A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.

At Zeal we’ve literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when.  As of the end of Q2, this has resulted in 1012 stock trades recommended in real-time to our newsletter subscribers since 2001.  Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +19.3%!

The key to this success is staying informed and being contrarian.  That means buying low when others are scared, before undervalued gold stocks soar much higher.  An easy way to keep abreast is through our acclaimed weekly and monthly newsletters.  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, for just $12 an issue you can learn to think, trade, and thrive like contrarians!

The bottom line is gold stocks are already recovering.  Their recent forced capitulations were extreme anomalies that aren’t sustainable.  Cascading stop-loss selling battered gold-stock prices to exceedingly-low levels that are fundamentally absurd.  The gold miners’ stocks must be bid much higher to reflect their underlying earnings in today’s gold-price environment.  That portends an inevitable mean-reversion rally.

And it should overshoot dramatically as gold itself powers much higher.  Gold suffered extreme selling in recent months from gold-futures speculators and GLD investors.  The former will soon be forced to cover their still-near-record gold-futures shorts, while the latter will buy as gold rebounds and the stock markets weaken.  Nothing attracts traders to gold stocks like higher gold prices, so major-to-massive buying is nearing.

Adam Hamilton, CPA

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm

Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

Copyright 2000 - 2018 Zeal Research ( www.ZealLLC.com )

Zeal_LLC Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules