Gold-Stock Tipping Point 2

Adam Hamilton, CPA

The gold miners’ stocks look to be getting even closer to a crucial psychological tipping point.  After years of being mired in apathy, this small contrarian sector appears poised to finally return to popularity.  When traders flock to gold stocks to chase their upside momentum, massive uplegs ensue where doublings-plus aren’t uncommon.  And across entire bull markets, total gold-stock gains can exceed an order of magnitude.

Eleven weeks ago, I penned my original gold-stock-tipping-point essay.  My thesis then was gold stocks were on the verge of being noticed by much-broader groups of speculators and investors.  They would increasingly pile in to ride mounting sector gains, catapulting gold stocks way higher.  Gold miners remain seriously undervalued relative to these record prevailing gold prices, they need to mean revert and normalize.

Much has happened in the several months since, making this case even stronger.  The day that essay was published, gold and the leading GDX gold-stock ETF were trading at $2,436 and $36.48.  Gold’s last nominal record close of $2,465 was seen several weeks earlier, while GDX’s upleg-to-date best then ran $39.28.  It really felt like traders’ interest in gold and its miners’ stocks was growing, a very-bullish omen.

While feelings aren’t empirical, decades of experience hones them into valuable indicators.  For a quarter-century now, I’ve been a financial-newsletter guy researching, writing about, and actively trading this gold-stock sector.  This is my 1,144th weekly web essay since mid-2000, and I’ve written 291 monthly and 1,118 weekly paid-subscription newsletters in that long span!  Active real-world gold-stock trading was a big part.

Both newsletters have recommended and realized 1,531 stock trades as of the end of Q3’24.  All those including all losers have averaged excellent +16.0% annualized realized gains!  That’s roughly double the long-term stock-market average.  After spending the vast majority of my professional life deeply immersed in this realm, my experience and knowledge is world-class.  Plenty of signs now point to improving psychology.

Chief among them is gold and GDX continuing to power higher on balance despite formidable challenges.  Since that original essay, gold has achieved 14 new nominal record closes including midweek’s latest one at $2,673!  That’s another big 9.8% rally despite gold recently facing high odds for a considerable selloff to rebalance sentiment and technicals.  Strength contrary to probable weakness reveals shifting psychology.

In early October I wrote an entire essay analyzing gold’s high selloff risk.  Two dominant factors fueled that, including gold blasting up to extreme overboughtness.  That was driven by massive gold-futures buying by speculators, leaving their positioning way-overextended and their likely capital firepower for buying exhausted.  Plenty of catalysts loomed that could spawn cascading gold-futures selling slamming gold.

Specs look to the US dollar’s fortunes to guide their wildly-leveraged and super-risky gold-futures trading.  And the US Dollar Index in turn is often bullied around by major US economic-data releases.  Depending on how they come in relative to economists’ forecasts, they can really move futures-implied expected Fed rate cuts.  Those seemed impossibly-high in early August, at 116 basis points in 2024 then another 100bp in 2025!

That was almost nine quarter-point cuts over 16 months, pretty optimistic.  While the FOMC did birth this latest cutting cycle with an outsized 50bp slashing in mid-September, those expected Fed rate cuts have indeed retreated on better-than-expected key economic data.  Heavy gold-futures selling has often been spawned in recent years on upside surprises in US jobs, CPI inflation, PPI inflation, and retail sales.

All four latest reads proved Fed-hawkish and boosted the US dollar, which should’ve unleashed big gold-futures dumping!  September’s nonfarm payrolls soared 254k, massively beating the +150k expected on top of +72k jobs in past-two-month revisions.  All four of the September CPI’s key metrics came in 0.1% hotter than forecasts, and two of the four PPI ones printed 0.2% above consensus.  These meant slower rate cuts.

Indeed by Wednesday expected Fed rate cuts in 2024 and 2025 had slumped to 45bp more and 99bp.  As of midweek, the USDX had surged 3.2% in several weeks which is a big-and-sharp rally for it.  Yet during that time with everything aligning out of favor for gold, it still managed to rally 0.4%!  While gold did suffer a minor 2.4% pullback into early October, it rapidly rebounded to that latest record close Wednesday.

September retail sales were released Thursday morning before I started writing this essay, also proving a Fed-hawkish upside surprise.  So this past month’s major economic data was certainly dollar-bullish and gold-bearish due to deteriorating expected Fed rate cuts.  Yet gold powered higher anyway, likely on big buying from Chinese investors, central banks, and Indian brides’ families.  Gold is really defying the odds.

Gold’s defiant march to more record highs is putting it on more traders’ radars.  Financial-media coverage is becoming more-frequent and more-bullish, building awareness.  Even American stock investors, who have mostly ignored gold’s monster 46.9% upleg over this past year, are increasingly nibbling in GLD and IAU gold-ETF shares.  While small, their daily gold-bullion-holdings builds on capital inflows have been relentless.

So gold looks to be nearing its own psychological tipping point, where gains accelerate sparking a fear-of-missing-out rush to pile in.  Seasonal tailwinds will soon turn favorable again too.  Gold tends to suffer a seasonal pullback from late September to late October, before its biggest seasonal rally powers higher into late February.  That has averaged 8.4% over 20 of the last 23 years, which were gold’s bull-market ones.

If gold’s early-October pullback low holds and this year’s winter rally merely proves average, gold would shoot over $2,825 in coming months!  And as goes gold, so go its miners’ stocks.  They ultimately act like leveraged plays on gold, with the majors dominating GDX usually amplifying their metal’s upside by 2x to 3x.  Indeed GDX has rallied with gold recently, achieving another bull-market high of $41.64 in late September.

GDX has powered 60.7% higher over this past year, a good upleg.  But it remains quite weak relative to gold, with mere 1.3x amplification.  That’s way behind historical precedent.  Gold’s last similar monster uplegs both peaked in 2020, averaging 41.4% gains.  GDX averaged great 105.4% uplegs during those, doublings-plus at 2.5x leverage!  GDX should already be up 95% to 140% in today’s monster gold upleg.

So gold stocks have lots more mean-reversion normalization rallying left to do even at today’s gold levels, let alone where this bull is heading.  And GDX just has to inch a little higher to achieve a major technical breakout, which will hasten that crucial psychological tipping point arriving.  Forging decisively above $42 ought to fuel increasing and enthusiastic financial-media gold-stock coverage, building greed-driven momentum.

When GDX hit $41.64 in late September, those were gold stocks’ best levels in 4.0 years.  As I’m writing this draft midday Thursday, GDX is trading even higher at $41.86.  The last time GDX closed over $42 was in mid-September 2020, six weeks after a powerful gold-stock upleg catapulted GDX 134.1% higher to $44.48.  Exceed that, and this leading gold-stock benchmark will be at its best levels since January 2013!

Traders love chasing winners, and the financial media love to cover them.  Decade-plus gold-stock highs less than 9% above midweek levels should be achieved soon, really boosting popular awareness of gold miners’ upside momentum.  That dynamic can quickly become self-feeding, ultimately culminating in a popular speculative mania.  It really feels like that process is accelerating, that sentiment tipping point is nearing.

In my line of work, I’m deeply immersed in the markets all day every day.  I turn on Bloomberg and CNBC early in the morning when I hammer the elliptical and lift weights, and always have them on in my office.  While usually muted so I can work, when gold or gold-stock coverage catches my eye I listen in.  The frequency and bullishness of gold analyses have been mounting recently, and gold-stock mentions are growing.

And after spending a quarter-century in the financial-newsletter business serving tens-of-thousands of paid subscribers, they offer a fantastic window into prevailing sentiment.  I’ve always been blessed with lots of feedback, endless e-mails reflecting how traders are feeling about and acting on gold stocks.  The overall tenor of those is definitely growing more bullish as gold and GDX continue powering higher on balance.

And that should accelerate over the next month or so as the gold miners share their new Q3’24 financial and operational results.  They are about to report their fattest and richest quarterly earnings ever by far!  My essay last week dug into these imminent epic Q3 earnings, which should increasingly attract back institutional investors.  Amazingly gold stocks’ fantastic fundamentals are more bullish than their lagging technicals!

All this makes gold stocks’ crucial psychological tipping point look closer than ever.  In financial markets, buying begets buying.  The faster and higher anything rallies, the more interested traders grow so the more capital they deploy to chase that upside momentum.  The more buying they do, the more that accelerates.  This powerful self-fueling dynamic is born as long-neglected gold stocks start getting popular again.

While that herd sentiment shift is inexorably nearing, specific timing is always uncertain.  Big gold-futures selling could still flare anytime, slamming gold and thus its miners’ stocks into rebalancing selloffs.  Gold stocks can temporarily get sucked into sufficiently-violent general-stock-market selloffs, like when this AI stock bubble decisively bursts.  So that tipping point may tarry, but eventually gold stocks must reflect gold.

All stock-market sectors ultimately normalize at some reasonable stock-price multiple of its companies’ underlying corporate profits.  And gold-stock prices need to power way higher to align with the massive and still-fast-growing earnings these miners are spinning off!  To reap these coming big gains, traders need to do their homework.  You need to get informed about and stay abreast of this high-potential sector.

Our popular and acclaimed newsletters are an easy, efficient, and inexpensive way.  If you’ve benefitted from my essays over the years, subscribing also finances our research work to keep them coming.  While you can’t spend a quarter-century forging great expertise in markets, trading, gold, and miners, you can actively learn from all that for mere pittances of time and money.  I share hedge-fund-grade analyses and trading!

The greatest gains as gold stocks continue mean reverting higher and normalizing with gold certainly won’t come from GDX.  It is dominated by dead-weight super-majors perpetually struggling to grow their outputs and lower costs.  The smaller mid-tiers and juniors well outperform majors during gold uplegs, as they are better able to consistently boost production and develop.  These are the gold stocks we specialize in.

The bottom line is gold stocks’ crucial psychological tipping point is nearing, where they start returning to favor.  That is well underway in gold, which is defying high selloff risks to continue powering higher on balance.  Overextended gold-futures speculators aren’t dumping despite Fed-hawkish key economic data, and investors are starting to return.  This mounting bullishness for gold will inevitably spill into it miners’ stocks.

They are nearing a major upside breakout to their best levels in over a decade, which will generate more and more-bullish financial-media coverage.  Gold stocks returning to traders’ radars should be hastened by their imminent epic Q3 results.  These lofty prevailing gold prices are generating huge record earnings for the miners, so gold stocks need to mean revert way higher.  Herd psychology shifting to bullish will fuel that.

Adam Hamilton, CPA

October 18, 2024
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