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Gold Stocks Technical Breakout

Commodities / Gold and Silver Stocks 2023 Jul 24, 2023 - 03:55 AM GMT

By: Zeal_LLC

Commodities

Gold-stock technicals are dramatically improving, turning increasingly bullish.  After slumping to major support zones in the summer doldrums, the gold miners’ stocks have surged sharply in the past couple weeks.  That strong advance has achieved a decisive breakout above the main gold-stock benchmark’s key 50-day moving average.  Similar breakouts in recent years have heralded imminent big sector rallies.

Gold-stock price action has been really interesting lately, so I’ve written several recent essays analyzing it.  Between late September to mid-April, the leading GDX gold-stock ETF powered 63.9% higher in 6.5 months.  That amplified gold’s underlying parallel 25.7% upleg by 2.5x, right in the middle of the major gold stocks’ usual leverage range of 2x to 3x.  Then gold rolled over into a healthy pullback in early May.

GDX closed just shy of a new upleg high on May 4th, the day gold hit its own latest of $2,050.  But with gold getting seriously overbought and greed growing excessive, the yellow metal reversed to work off both conditions.  So over the next 1.8 months into late June, gold pulled back 6.9% to $1,908.  That perfectly-normal mid-upleg selloff was right in line with February’s 7.2% pullback, and restored sentiment balance.


Gold stocks are ultimately leveraged plays on the metal they mine, so GDX sold off in concert with gold.  By early July, it had corrected 18.9% in 2.8 months from mid-April’s slightly-higher high.  That amplified gold’s downside by 2.7x, and was very similar to February’s earlier mid-upleg correction of 19.8%.  After that one, GDX quickly mean reverted higher in its upleg’s uptrend blasting up 34.4% to new upleg highs!

In late June when that gold-stock selloff was nearly finished, I wrote an essay detailing this sector being a strong seasonal buy.  June is its weakest time of the year seasonally due to gold’s summer-doldrums lull in investment demand.  The resulting bearish sentiment exacerbated gold’s latest pullback, extending and deepening GDX’s parallel one.  By late June, GDX had been hammered back to its 200-day moving average.

With gold stocks at key support, I wrote another essay at the end of last month analyzing the very-bullish technical implications of that.  Both GDX and its underlying driver gold were nicely set up for strong mean-reversion bounces.  Those indeed soon ignited and accelerated following two major Fed-dovish economic reports.  Both monthly US jobs and headline CPI inflation missed expectations, fueling gold-futures buying.

Last week I looked at gold stocks’ CPI surge, which was quite impressive.  GDX rocketed 5.2% higher the day that most-watched inflation metric printed cooler than expected!  That really outstripped gold’s own lower-Fed-rate-hike-odds surge of 1.3% that day, making for fantastic 3.9x gold-stock upside leverage to gold!  In just four trading days, GDX had blasted up 9.5% off major support which was 3.8x gold’s 2.5% rally.

While that powerful mean-reversion bounce was a really-bullish omen as explained in my last essay, it was lacking an important technical confirmation.  Last Wednesday’s CPI surge was big and impressive, but it carried GDX just 0.6% above its trailing 50dma.  Since prices sometimes challenge important technical lines then fail, I’ve long waited until 1%+ breakouts before considering them meaningful and decisive.

In the week since gold stocks’ CPI surge, GDX has advanced well beyond that important milestone.  This latest gold-stock rally has now technically confirmed a major upside 50dma breakout!  Those have proven very-bullish portents in recent years, flashing early in big gold-stock rallies that soon power much higher.  This GDX chart over the past few years or so reveals why decisive 50dma breakouts are strong buy signals.

Mid-upleg selloffs like GDX’s recent one exist to rebalance sentiment, to eradicate greed and ramp fear.  Still the resulting gold-stock bearishness in late June and early July sure felt really overdone.  GDX was bottoming at the convergence of two major support zones, its 200dma and upleg uptrend’s lower support line.  Gold stocks were still carving higher lows and higher highs on balance, their strong upleg remained intact.

Yet many traders foolishly capitulated in what was a textbook good mid-upleg buying opportunity.  During that bottoming month into early July, I pounded the table about how bullish that setup was for both gold and its miners’ stocks.  All my recent essays analyzed the reasons why, and we took advantage of that to aggressively add new fundamentally-superior mid-tier and junior gold and silver stocks in our newsletters.

We had been stopped out of many trades earlier in gold’s pullback, with big realized gains running as high as +83.3%.  Then we waited to redeploy that capital until GDX was clearly bottoming technically with bearishness running rampant.  So we added fully 20 new gold-stock trades total in both our newsletters over several weeks into early July.  Mid-week their unrealized gains are already running as high as +29.3%!

And GDX’s new 50dma upside breakout argues these are only the beginning.  The day after that inflation surge, GDX achieved that decisive metric closing 1.8% over its 50dma.  In the four trading days since, that key breakout has been further confirmed with GDX hitting 1.3%, 1.5%, 3.8%, and 3.2% above its 50dma on close!  So there’s no technical ambiguity left here, today’s latest 50dma breakout is the real deal.

Over the past few years or so, GDX has enjoyed five previous decisive 50dma breakouts which are noted in this chart with the white circles.  These buy signals occur early in major gold-stock-upleg rallies.  The first during this recent timespan flashed in early April 2021.  Including that initial 50dma breakout day, GDX surged 17.7% in the next 1.4 months.  Then another 50dma breakout happened in mid-October 2021.

That proved the weakest of this bunch for reasons beyond the scope of this essay, yet GDX still rallied a respectable 12.1% during the next 1.1 months.  Remember GDX is dominated by major gold miners, but fundamentally-superior smaller mid-tiers and juniors usually well outperform the majors.  So measuring this sector’s upside in GDX terms understates gold-stock gains for studious traders picking superior miners.

GDX’s next decisive 50dma breakout arrived not long after that truncated gold-stock upleg in mid-January 2022.  Over the next 3.0 months including that breakout-surge day, GDX blasted up another 33.6%!  Then that gold upleg was interrupted by extreme Fed rate hikes catapulting the US dollar parabolic, unleashing withering gold-futures selling.  That pounded gold and GDX to late September’s deep secular lows.

Bull markets consist of alternating upleg-correction cycles, and 50dma breakouts are rarely seen in the latter.  But soon after gold stocks’ next upleg ignited, GDX shot back over its 50-day moving average again in early October.  Over the next 3.7 months, the major gold stocks soared another 32.9% higher!  While buying 50dma breakouts isn’t as ideal as buying in preceding bottomings, it is still very profitable.

Finally GDX’s previous decisive 50dma breakout before last week’s flared in mid-March, soon after gold stocks’ earlier mid-upleg selloff bottomed leaving festering bearish sentiment.  Right after that GDX surged sharply, rallying another 22.9% in just 0.9 months!  Average all these recent post-50dma-breakout performances together, and GDX shot up 23.8% in 2.0 months following them.  Such gains are well worth chasing.

Gold stocks’ newest decisive 50dma breakout again happened last Thursday July 13th, the day after that CPI surge.  That implies another 24%ish upside from there, which would boost GDX up near $39.50 or so around early September.  While such merely-average post-breakout gains are nothing to sneeze at, those are conservative given today’s scenario.  Odds are this coming gold-stock upside will prove considerably larger.

There are plenty of reasons, and I analyzed the primary ones in the last six weeks’ essays.  They center around gold’s own bullish outlook driven by speculators’ low positioning in gold-futures long contracts and investors’ lack of meaningful buying so far in today’s gold upleg.  Again gold stocks are leveraged plays on gold, so they will amplify its coming upside like usual.  GDX will keep leveraging material moves by 2x to 3x.

But there are other gold-stock-specific reasons this sector is likely to power much higher in the months ahead.  GDX rallying that average 24%ish after a 50dma breakout near $39.50 wouldn’t be a stretch at all technically.  That would carry this dominant gold-stock benchmark back up near the upper resistance line of its upleg uptrend, where it last was in late January and mid-April.  And that is well under April 2022 highs.

GDX was above $40.75 then before that strong upleg was prematurely slaughtered by the Fed’s blistering rate hikes.  That was just a month after the Fed started its epic extreme 500-basis-point hiking cycle over just 13.6 months.  There’s a strong argument to be made that all the gold-stock rallying necessary to lift GDX back over $40 is merely a mean-reversion rebound after last summer’s exceedingly-anomalous selloff.

And that happening along that average timespan by early September wouldn’t leave GDX extremely overbought.  Baseline 200dmas from which overboughtness is measured tend to parallel upleg uptrend channels.  GDX’s 200dma climbed $0.77 in May and $0.60 in June, leaving it with an ascending monthly slope near $0.69.  Double that for two more months, and GDX’s 200dma would be near $31.00 in early September.

GDX rallying back up near that $39.50 post-50dma-breakout target would leave it stretched 27% above its 200dma, which is seriously overbought.  But that remains well short of upleg-slaying extremes starting at 35% over.  At this upleg’s last major interim high in mid-April, GDX surged an even-bigger 29.5% over its 200dma.  So overboughtness shouldn’t limit GDX from at least seeing average gains after this breakout.

And gold-stock seasonals support technicals in showing another GDX 50dma breakout surge is no big deal.  This chart reveals gold stocks’ indexed summer performances in all modern gold-bull years since 2001.  My latest summer-doldrums research thread explained this methodology in depth.  The blue line is how the older HUI gold-stock index which mirrors GDX is performing summer-to-date since May’s final close.

The red line shows major gold stocks’ average indexed summer performances from 2001 to 2012 and 2016 to 2022.  Partially because of these weak seasonals, gold stocks’ latest mid-upleg selloff waxed overdone.  With sector bearishness mounting on gold’s own June pullback, gold stocks were pounded lower than usual last month.  Much of GDX’s surge since merely returned them back near seasonal norms.

After the worst of their summer-doldrums slump in June, both gold and gold stocks tend to enjoy strong autumn rallies gathering steam in July then accelerating in August and September.  I hope to update that research thread in next week’s essay.  Since gold stocks’ latest surge erupted at below-normal summer levels, there’s lots of room for it to keep mounting without getting excessive.  Seasonals support big upside.

That should be boosted by strong fundamentals, as gold miners report their latest quarterly results into mid-August.  Earnings in this industry are generally the difference between prevailing gold prices and all-in sustaining costs.  Gold climbing while mining costs retreat fuels great profitability, which boosts gold-stock prices.  Gold averaged an all-time-record $1,978 on close in Q2’23, climbing 5.6% year-over-year!

Meanwhile plenty of gold miners are forecasting production improving as 2023 marches on.  As analyzed in my essay on GDX stocks’ Q1’23 results, Q1s have proven years’ weakest gold-output quarters for a variety of reasons.  Rising production usually drives proportionally-lower unit mining costs, since there are more ounces to spread mining’s big fixed costs across.  So gold miners’ AISCs should decline some in Q2.

Some miners have already reported Q2 production updates ahead of full quarterly results being released in coming weeks.  I always analyze those releases as they happen for our open trades in our weekly newsletter.  Among the fundamentally-superior mid-tiers and juniors we specialize in, plenty of production growth is being reported.  That ranged from +4% YoY from a new mid-tier gold to +92% at a junior silver miner!

In the comparable Q2’22, the top 25 GDX gold miners’ AISCs averaged $1,161 per ounce excluding a couple extreme outliers.  Raging inflation pushed that same adjusted metric to $1,210 in Q1’23.  With production growth happening, last quarter’s AISCs should shake out somewhere in between.  My best guess is around $1,175 without that handful of outliers.  That would imply sector unit profits around $803 per ounce.

A year ago those ran $591, so that would make for awesome 36% YoY earnings growth!  While we can’t know for sure until mid-August after all the gold miners report full Q2’23 results, by all indications profits will be strong.  That will encourage institutional investors like funds to add gold-stock positions, boosting this rally.  As usual I’ll analyze the latest results from the top 25 GDX and GDXJ gold stocks later in August.

While GDX’s latest decisive 50dma upside breakout last week is impressive alone, it is buttressed by other bullish factors making it a higher-probability-for-success buy signal.  Not only is underlying gold’s outlook very bullish on speculators’ and investors’ positioning, but other gold-stock technicals, sector seasonals, and the latest quarterly fundamentals look great.  With this setup, this breakout has big potential.

With it still only a week old, it is not too late to add gold-stock trades at still-decent prices.  Our newsletter subscribers didn’t need to wait for technical proof, they snatched up excellent bargains in those several bottoming weeks before GDX resumed surging.  While the unrealized gains are mounting fast in our trading book full of fundamentally-superior smaller miners, they ought to grow much larger in coming months.

Successful trading demands always staying informed on markets, to understand opportunities as they arise.  We can help!  For decades we’ve published popular weekly and monthly newsletters focused on contrarian speculation and investment.  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.

Our holistic integrated contrarian approach has proven very successful, and you can reap the benefits for only $8 an issue now (33% off!).  We research gold and silver miners to find cheap fundamentally-superior mid-tiers and juniors with outsized upside potential.  Sign up for free e-mail notifications when we publish new content.  Even better, subscribe today to our acclaimed newsletters and start growing smarter and richer!

The bottom line is the leading gold-stock benchmark just staged a decisive breakout above its key 50-day moving average.  This offers strong technical confirmation that a major new gold-stock rally is underway.  After previous 50dma breakouts in recent years, GDX surged about another quarter higher from those in the next couple months.  Today even-better gains are likely technically, seasonally, and fundamentally.

Gold stocks ultimately leverage gold, and its own outlook looks really bullish mainly due to speculators’ gold-futures positioning.  Gold stocks amplifying gold’s gains fuels their uplegs.  A typical post-breakout rally would leave GDX within its upleg’s uptrend, well under upleg-slaying overboughtness levels.  And the gold miners are likely to report great Q2 results in coming weeks, giving more fundamental reasons to buy.

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!

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