Gold-Stock Tipping Point

By Adam Hamilton, CPA

The gold miners’ stocks look to be nearing a crucial psychological tipping point.  After years of mostly being ignored, this small contrarian sector seems on the verge of roaring back into favor.  When gold stocks grow popular and traders increasingly chase them, their gains grow massive.  More than doubling in individual uplegs isn’t unusual, and total bull-market returns can easily exceed an order of magnitude.

For a quarter-century now, I’ve been studying, trading, and writing newsletters primarily about gold and its miners’ stocks.  Since 2000 I’ve penned 1,132 of these weekly web essays, 1,107 weekly subscription newsletters, and another 289 monthly subscription newsletters!  The latter two have recommended and closed fully 1,510 individual mostly-gold-stock trades, which have all averaged 15.6% annualized realized gains.

That’s a great record spread across 25 years, roughly twice the long-term stock-market average!  The key to that is staying informed, always following gold stocks no matter how they are faring.  That’s the only way to consistently buy lower then later sell higher.  Sadly the vast majority of traders miss most opportunities because they only pay attention when sectors are hot, after big gains have already been won.

That natural human tendency has been the most-frustrating part of the newsletter business for me.  The most-important times for traders to be interested in gold stocks are when they are beaten-down and deeply out of favor.  Those are the best buy-relatively-low opportunities, the easiest times to multiply wealth.  Yet around those pivotal lows, interest and sales wither as bearishness reigns and traders capitulate.

Gold stocks’ last couple major lows weren’t long ago, early October 2023 and late February 2024.  Then the leading GDX gold-stock ETF and benchmark plunged to just $25.91 and $25.79.  I pounded the table on the incredible opportunities in this sector around both lows, and we filled our newsletter trading books with cheap fundamentally-superior mid-tier and junior miners.  Only diligent traders paying attention participated.

That latest week languishing gold stocks bottomed, I wrote a whole essay explaining why that was such a fantastic buying opportunity in late February.  Traders need to stay informed and engaged when sectors are unloved and deeply oversold after just selling off substantially.  That’s why I’ve subscribed to excellent financial newsletters covering various sectors since high school, and later went into this business myself.

Staying abreast of markets professionally requires great expertise painstakingly forged over decades of full-time work.  Few analysts attain this to greater degrees than seasoned newsletter writers.  Rather than putting in all that work myself for other sectors, I can reap their experts’ awesome wisdom in little time for trivial subscription fees.  But newsletters are only valuable if you consistently digest them through all cycles.

On the last day of February my essay concluded “Excessive selling has slammed GDX way back down to early-October levels when today’s gold upleg was born.  Yet that makes zero sense fundamentally with gold remaining about 12% higher.  These seriously-oversold gold stocks riddled with capitulatory bearishness is an anomaly that will prove short-lived.  They are due to soon mean revert sharply higher with gold.”

Naturally that proved correct, as you’d expect after a quarter-century of studying a sector.  Over the next 4.6 months into mid-July, GDX blasted 52.3% higher.  Our newsletter trades added around those lows have fared even better, with unrealized gains running as high as 97.2% then!  There’s no magic in that, just time on task.  The more years anyone devotes to studying anything, the more their knowledge on it grows.

Our innately-human herd psychology works alike across all markets, from mega-cap tech stocks to crypto to physical commodities to gold stocks.  When prices are low after major selloffs, bearishness and apathy lead traders to abandon sectors.  Right when they should be diligently engaged looking for opportunities to buy in relatively-low, they flee.  That’s why most speculators and investors ultimately fail in the markets.

Then later when those same perpetually-cyclical sectors inevitably rebound soaring to lofty heights, traders flock back.  They get caught up in the popular greed and euphoria stoked by increasing and more-bullish financial-media coverage.  As their interest soars they flood into sector newsletters, then end up buying in relatively-high after the lion’s share of gains have already been won.  Way late, they usually ride down selloffs.

Sector psychology follows prevailing price levels, slowly swinging like a giant pendulum between greed and fear.  The reason I’m writing today’s essay is gold-stock sentiment sure seems to be nearing the halfway point at the bottom of that arc!  This sector is no longer mired in fear like in late February when traders should’ve been aggressively buying.  But despite their surge, gold stocks aren’t yet drenched in greed.

This chart reveals GDX’s mounting bull market over the past couple years.  Gold stocks have achieved higher lows and higher highs on balance, carving an indisputable secular uptrend.  From this sector’s last major bear-market low in late September 2022 to mid-July 2024, GDX has powered 79.6% higher.  Yet this young bull remains super-small by sector standards, with much-larger gains coming as traders return.

Gold stocks are ultimately leveraged plays on the metal they mine, which overwhelmingly drives their profits and hence stock prices.  GDX’s bull is mirroring gold’s underlying one over this same span, where the yellow metal climbed 51.9% at best.  The major gold stocks have actually only amplified gold by 1.5x in this bull, still way under their usual 2x-to-3x range!  Sector psychology has remained stubbornly bearish.

That resulted from a pair of crazy anomalies.  First gold and especially gold stocks collapsed in mid-2022, as the Fed’s most-extreme hiking cycle in its history launched the US dollar stratospheric.  That fueled excessive gold-stock bearishness taking longer than normal to work off.  Second the US stock markets have been soaring in their latest AI bubble led by mega-cap tech, distracting traders from all other sectors.

But all that is changing, with gold enjoying a remarkable breakout to many new nominal records this year!  Incidentally on that experience front, I predicted that in my early-January essay “Gold’s 2024 Breakout Upleg”.  With gold still at $2,043, I concluded “gold’s breakout upleg into nominal record territory is set to accelerate in 2024.  New records generate bullish financial-media coverage putting gold back on investors’ radars.”

Even American stock investors who have ignored gold’s entire upleg are starting to take notice as the AI stock bubble looks to be bursting.  The combined gold-bullion holdings of the mighty American GLD and IAU gold ETFs grew 1.7% or 20.2 metric tons in July, their biggest monthly build since March 2022!  Capital inflows into gold have grown as the flagship S&P 500 stock index pulled back 4.7% in seven trading days.

Today’s gold upleg is already up 35.5% at best since early October, despite no net buying from American stock investors who normally fuel major ones.  During that exact span, GLD+IAU holdings actually fell 4.5% or 57.2t!  This gold upleg is so remarkable because it has mostly been fueled by Chinese investors and central banks buying.  With American stock investors only starting to return, gold is heading much higher.

Nothing drives and widens interest in any sector like new record highs, with bitcoin and mega-cap tech stocks being great recent examples.  The more new records achieved, the more the financial media covers a sector and the more-bullish that coverage.  That stokes popular greed attracting in increasing numbers of traders to chase those gains.  This dynamic forms powerful virtuous circles of self-feeding buying.

Gold’s last two uplegs achieving new record streaks both crested in 2020, at monster 42.7% and 40.0% gains!  Their dominant drivers were American stock investors flooding into the major gold ETFs to chase gold’s momentum.  GLD+IAU holdings soared 30.4% or 314.2t during the first and skyrocketed 35.3% or 460.5t in the second!  Today’s gold upleg can grow much larger yet as American stock investors reallocate back.

But gold doesn’t need to push deeper into nominal-record territory for gold stocks to soar.  Again gold is up 35.5% at best since early October, a mighty upleg.  Yet GDX has merely climbed 51.6% during that timeframe, the major gold stocks only leveraging gold by 1.5x.  They will almost certainly again amplify that by 2x to 3x before gold’s upleg gives up its ghost, implying overall GDX gains growing to 71% to 106%.

The higher gold’s own upleg ultimately powers, the bigger gold stocks’ proportional upside potential.  The higher they rally, the more interested traders will become and the more capital they’ll deploy.  That will force this sector’s sentiment pendulum back through the middle of its arc towards the greed side.  With gold stocks nearing a major secular breakout, that key psychological tipping point is likely coming soon.

GDX just hit $39.28 at best in mid-July.  But at normal 2x-to-3x leverage to gold’s upleg gains so far, that boosts GDX to about $44.25 to $53.50.  That entire range is well above GDX’s last major secular peak of $40.87 in mid-April 2022, before that extreme-Fed-rate-hike-driven anomaly!  Popular greed will definitely balloon as major gold stocks carve new secular highs, and a more-spectacular secular breakout unfolds.

Prior to that April-2022 high-water mark, GDX crested at $44.48 in early August 2020.  Astoundingly GDX hasn’t traded above there since way back in late January 2013, well over a decade ago!  Forging above there only requires another 17.3% of rallying from mid-week levels, which is nothing with gold stocks so lagging gold.  You better believe bullish financial-media gold-stock coverage will explode when that happens!

Circling back to financial newsletters, since my job is analyzing gold and its miners’ stocks I don’t have time to dig deeply into mega-cap techs or bitcoin or crude oil.  So I rely on expert newsletter analysts who have long studied those realms full-time.  I can absorb their decades of knowledge and wisdom applied to current markets with some brief reading.  I trust their judgment on their specialized sectors’ sentiment cycles.

In my line of work, I always have CNBC or Bloomberg on in my office.  I also listen in the hours before the markets open when I exercise early in the mornings.  Bullish mainstream financial-media coverage of both gold and gold stocks is definitely growing.  I’m hearing and seeing both discussed more often, with interviewed analysts bullishly seeing higher prices coming.  That record-momentum-chasing dynamic is mounting.

This is one key reason that gold-stock psychological tipping point is nearing.  The more traders who don’t normally follow this sector become aware of its growing gains, the more interested they will get and the more capital they will deploy.  The higher gold stocks rally, the more traders will want to buy them.  That will boost gold-stock gains, driving even more bullish financial-media coverage and increasing trader inflows.

Gold stocks’ sentiment pendulum swinging back through the bottom of its arc toward the greed side will proportionally overshoot.  I wrote a whole essay analyzing this a couple weeks ago.  Back in late February at GDX’s latest low, major gold stocks hadn’t been more undervalued relative to gold since a single day in March 2020’s pandemic-lockdown stock panic!  After extremes reversions don’t stop at means.

That portends a dazzling GDX upside target way up over $59.25 at mid-July gold levels!  That’s nearing GDX’s all-time high of $66.63 in early September 2011.  That was the end of a gargantuan secular gold and gold-stock bull born in April 2001.  Gold soared an epic 638.2% during that, but GDX wasn’t born until the middle.  Yet the similar HUI gold-stock index skyrocketed a life-changing 1,664.4% during that bull!

Today’s gold-stock upleg also remains relatively anemic by recent years’ standards.  Again gold’s last uplegs achieving new-record-high streaks both crested in 2020, averaging 41.4% gains.  GDX averaged 105.4% gains during them, doublings making for better-than-2.5x upside leverage!  Today’s 51.6%-at-best GDX upleg with gold’s up 35.5% is atypically limp, gold stocks have big catch-up rallying left to do.

Another important reason it looks like gold stocks’ psychological tipping point is imminent is the fantastic earnings the gold miners are now reporting.  For this sector as a whole, Q2’24 is going to prove the most-profitable on record by far!  Gold stocks’ fat profits are going to attract plenty of institutional investors who haven’t been paying attention.  Substantial inflows of fund capital should accelerate gold stocks’ upleg.

While it would’ve been better to get deployed when our newsletter subscribers did at recent major lows, it isn’t too late.  Odds are gold stocks’ young bull market has years left to run, and today’s upleg is likely only halfway done.  If you’re interested in learning about this high-flying sector, subscribe to our newsletters and reap my decades of experience and wisdom.  Their trading books are currently full of great gold stocks.

We’ve long specialized in fundamentally-superior mid-tier and junior gold and silver miners, which tend to well outperform the GDX majors in gold uplegs.  With smaller bases, mid-tiers and juniors are better able to consistently grow their production.  They are usually more profitable too, operating fewer lower-cost mines.  Their lower market capitalizations also make their stocks much easier to be bid way higher.

The bottom line is gold stocks seem to be nearing a crucial psychological tipping point.  While they have lagged gold’s mighty upleg so far, their gains are increasingly being noticed.  Financial-media coverage is mounting as GDX nears a major secular breakout.  This sector’s sentiment pendulum is on the verge of pushing through the bottom of its arc towards the greed side, where it is due for a huge proportional overshoot.

Traders should increasingly start chasing high-potential gold stocks, accelerating their upleg gains.  They are reporting record quarterly earnings while American stock investors are only starting to return to gold.  So it’s not too late to get informed and get deployed before this sector becomes hot again.  The earlier gold-stock allocations are made, the greater the gains when the herd roars back in to chase this upleg.

Adam Hamilton, CPA

August 2, 2024
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