Gold Stocks Forge Higher

Adam Hamilton, CPA

The gold miners’ stocks are forging higher, just achieving their best levels in four years.  While advancing, their upside progress has certainly been labored.  Given gold’s monster upleg and dazzling record highs, gold stocks should be much higher.  And their record profits and epic earnings growth sure support way-better stock prices.  The main impediment is traders’ apathetic sector sentiment, but that is starting to shift.

The leading GDX gold-stock index has surged 7.2% at best this month, closing at $41.41 Tuesday.  That proved major gold stocks’ highest levels in 3.9 years.  And if GDX can best the $44.48 it hit a few months earlier in August 2020, we’d be looking at 11.7-year secular highs!  Since early October 2023, this GDX upleg has powered up 59.8%.  That’s trouncing broader stock markets, with the S&P 500 up 34.5% in that span.

With great performance like that over this past year, you’d think gold stocks would be growing popular.  But they really aren’t.  Mainstream investors still aren’t the least-bit interested in chasing this sector’s strong upside momentum.  They’re still enamored with the AI stock bubble, which continues to steal all the market limelight.  And contrarian investors like me who follow gold stocks are pretty disappointed in them.

Gold stocks are ultimately leveraged plays on the metal they mine.  The gold-mining business heaps big additional operational, geological, and geopolitical risks on top of gold price trends.  So gold stocks really need to outperform gold to justify deploying capital in them.  Historically the major-dominated GDX has generally leveraged material gold moves by 2x to 3x.  That kind of amplification makes gold stocks worth owning.

Unfortunately they’ve way underperformed long decades of precedent over this past year.  GDX’s 59.8% upleg sounds good, but gold itself has enjoyed a monster 46.3% upleg in that timeframe!  That means the major gold stocks have only clocked in with 1.3x upside leverage to their metal.  At that usual 2x to 3x, this GDX upleg should already be up 93% to 139% given gold’s massive gains!  Gold stocks are way behind.

That doesn’t mean they won’t catch up with gold, which can happen fast.  Compared to the vast pools of stock-market capital, this contrarian sector is vanishingly-small.  So even tiny shifts in capital flows can catapult gold stocks far higher in short order.  During gold’s last 40%+ upleg cresting in August 2020, that last time GDX was higher, GDX had rocketed up 134.1% in only 4.8 months!  Gold stocks aren’t out of the race.

After actively trading this high-potential contrarian sector publicly for a quarter-century now, I’ve seen plenty of times where gold stocks were mostly ignored.  Sooner or later investors always return, resulting in huge gains.  Doublings in under a year aren’t uncommon, gold stocks can really multiply wealth when they are running!  Another doubling or more is coming as gold stocks mean revert way higher to reflect gold.

That will be driven by a major bullish sentiment shift, resulting from gold’s massive gains and impressive parade of nominal record highs.  The gold miners’ colossal earnings generated at these high gold prices fundamentally justify way-higher stock prices.  Before we delve into all that, this chart puts GDX technical action in recent years into perspective.  The gold stocks’ latest secular high is marginal, they are forging ahead.

Interestingly despite vexingly lagging gold this past year, gold-stock doublings are still a thing.  Since this secular gold bull was born in late September 2022, GDX has powered up 89.3%.  That compares to gold’s +64.0% at best in that span, making for modestly-better 1.4x upside leverage.  Yet driven by gold-stock sentiment, sector performance can turn on a dime.  GDX would only need a couple months to fully catch up.

The dominant driver of gold-stock psychology is how gold is faring.  And that is awesome right now, achieving five new record closes in August followed by another seven so far in September!  Closing way up near $2,662 Tuesday, such fantastic gold levels were almost unimaginable just one year ago.  The longer and higher gold rallies, the more investors and speculators will want to chase it including with gold stocks.

New record highs in particular fuel virtuous circles of buying.  The higher gold goes, the more the financial media covers it and the more bullish their coverage gets.  That elevates gold and by extension its miners’ stocks onto more investors’ radars, including fund managers.  The more buying they do, the more gold and gold-stock gains mount.  That generates more bullish commentary attracting in widening circles of investors.

This clearly happened in gold in recent months, but not so much for the miners.  There are three primary reasons gold-stock psychology has actually remained quite-bearish despite gold’s monster gains.  First, sentiment remains damaged from gold and GDX plummeting 20.9% and 46.5% in mid-2022 on the most-extreme Fed tightening cycle ever!  That launched the US dollar stratospheric, driving huge gold-futures selling.

That extreme anomaly forced widespread capitulations among investors and speculators, and most have yet to return.  Some will, some won’t.  But thinning the ranks of previous gold and gold-stock traders isn’t catastrophic, as they will be more than replaced by first-time gold and gold-stock traders.  Those include legions of younger investors who haven’t yet experienced gold stocks quickly soaring to multiply their capital.

Second, this euphoric AI stock bubble has distracted everyone.  Led by market-darling NVIDIA which has been a moonshot, the promises of AI revolutionizing the future are really alluring.  The huge gains in it and other AI-connected stocks like Microsoft and Meta have captivated investors.  Everything else including gold stocks has largely fallen out of favor.  But sector sentiment is perpetually-cyclical, extremes never last.

Third, fewer people are paying close attention to stock markets.  They’ve bought into the bubble myth that all they need to do is buy the Magnificent 7 mega-cap techs and forget about it.  That’s certainly not a low-risk strategy though.  The S&P 500’s last bear was mild, suffering 25.4% losses from early January 2022 to mid-October that year.  Yet the Mag7 including NVIDIA averaged brutal 54.6% losses around that span!

Investors are also reading less in general, putting less time into understanding markets and stocks.  That extends well beyond bubble hype.  We live in an era with both endlessly-negative-and-depressing news flow and infinite entertainment at our fingertips.  So it’s easy and comforting to disconnect from the former and be consumed by the latter, including social media, short-form video, streaming TV, and video games.

But eventually gains grow so large they can’t be ignored, igniting popular speculative manias.  Gold may very well be nearing that crucial psychological tipping point, where it starts enthralling the mainstream.  Like NVIDIA over this past year, big-enough surges transform fast-rising assets into cultural phenomena.  Riding on gold’s coattails, gold stocks should also soon head down that bullish path of exploding popularity.

Gold continuing to power higher on balance will be the main driver, though healthy pullbacks are essential periodically to rebalance sentiment.  I suspect when gold climbs over $3,000 per ounce media coverage will soar.  But likely before that the major gold miners of GDX are going to report their fattest profits ever achieved, again!  This upcoming Q3 earnings season’s spectacular results should attract fund investors.

In mid-August I analyzed the GDX-top-25 gold miners’ astounding Q2’24 results.  Gold’s record quarterly-average price of $2,337 in Q2 fueled record $1,099 per-ounce profits among the major gold miners!  That skyrocketed 83.7% YoY, building on the prior three quarters’ magnificent annual unit-earnings growth of 93.8%, 42.3%, and 34.9%!  New Q3 results coming out mostly in early November will accelerate that trend.

With Q3 almost over, gold has averaged another epic record $2,469 per ounce so far!  That has soared an incredible 28.2% YoY, the biggest gold-price gains since Q3’20.  Meanwhile major gold miners have generally forecast higher production and thus lower mining costs in the second half of this year.  GDX-top-25 all-in sustaining costs averaged $1,258 per ounce in H1’24, so $1,250 in Q3 would be very conservative.

That implies sector unit profits soaring to another record $1,219+ in this nearly-finished Q3!  That would make for stupendous 96%+ YoY earnings growth, which would be the highest seen in the 33 quarters I’ve been advancing this deep-research thread!  Gold miners’ blockbuster results coming should really catch the attention of professional investors.  Huge earnings will also force valuations even lower, leaving more bargains.

Gold-stock psychology depends on traders’ engagement, which will grow as gold continues rallying and gold stocks report the best quarterly results in the entire stock markets.  That will replace apathy with mounting bullishness, which will eventually morph into greed then euphoria.  As investors and speculators get more motivated to chase gold and gold-stock upside, their capital inflows will accelerate those gains.

Rapidly-improving sentiment boosts gold-stock upside leverage to gold as major uplegs mature.  Gold’s last monster 40.0% upleg again crested in August 2020, and GDX ultimately amplified it by an awesome 3.4x with those huge parallel 134.1% gains!  Gold-stock leverage to gold could literally triple from upleg-to-date levels before the fat lady sings.  That implies 155% GDX gains, this leading sector ETF exceeding $66!

Rather fortuitously there’s a good chance for an excellent mid-upleg buying opportunity before that.  Gold itself increasingly needs a rebalancing selloff after surging so far so fast.  This week it soared to extremely-overbought levels 17.3% above its 200-day moving average!  And the gold-futures speculators who dominate short-term gold price action have largely exhausted their likely capital firepower to keep buying.

Their excessively-bullish bets on gold need to mean revert and normalize through major selling.  That will probably force gold into a larger-and-sharper pullback, which will still suck in gold stocks even though they have lagged gold’s monster upleg.  So that healthy mid-upleg pullback largely running its course will create a good gold-stock buy-lower opportunity.  Spec gold-futures positioning will illuminate the timing on that.

Since it is so darned important for gold’s and thus gold stocks’ fortunes, I analyze that in every issue of our weekly and monthly subscription newsletters.  They also recommend new gold-stock trades when appropriate, specializing in fundamentally-superior smaller mid-tier and junior miners.  Their stocks well outperform the GDX majors during gold uplegs.  Actively trading them has proven quite lucrative for decades.

As of the end of Q2’24, we’d realized 1,510 newsletter stock trades since 2000.  They all averaged 15.6% annualized realized gains over that long quarter-century span, roughly double the long-term stock-market average!  And as of early September, our newsletters have realized 54 stock trades in 2024 averaging 31.1% annualized gains!  This volatile high-potential contrarian gold-stock sector is eminently tradable.

While gold stocks forging higher so far in this monster gold upleg instead of soaring is disappointing, they are still on the right path.  Mounting gains in the metal and its miners’ stocks are shifting herd sentiment towards bullish.  Sooner or later that will hit a psychological tipping point and investors and speculators will start chasing upside momentum.  Then gold stocks will be off to the races again to catch up with gold.

The bottom line is gold stocks are forging higher.  Despite still really lagging gold’s monster upleg, they are achieving their best levels in years.  This sector’s dogged advance is slowly turning psychology bullish again.  That essential shift to attract back increasing capital inflows should accelerate on gold’s record-breaking surge.  And the gold miners will also soon report their fattest earnings ever, attracting fund investors.

Gold stocks returning to favor portends massive gains coming.  The major gold stocks dominating GDX could see their overall upside leverage to gold triple from poor to awesome levels.  And there’s likely a good mid-upleg buying opportunity nearing, with a larger gold pullback due.  Specs’ probable gold-futures buying is mostly exhausted and gold is extremely-overbought, so gold stocks can be added on gold weakness.

Adam Hamilton, CPA

September 27, 2024
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