Huge Gold-Stock Upleg Likely

By Adam Hamilton

2023.01.06

The gold miners’ stocks entered this young new year strong, surging to a major upside breakout!  Their latest upleg already looks powerful technically, with an ideal setup to ultimately grow to huge proportions.  After bottoming at exceedingly-oversold stock-panic-grade lows, the gold stocks have blasted higher and are nearing one of their best buy signals.  Sector sentiment is shifting bullish with gold also forging higher.

The GDX VanEck Gold Miners ETF remains gold stocks’ leading benchmark, and it has enjoyed quite a run lately.  As of midweek, GDX has soared 41.4% higher over 3.3 months since late September!  In this past week, it has rocketed well back above its key 200-day moving average in a decisive major upside breakout.  And GDX is on track to flash a powerful Golden Cross buy signal in the next couple weeks or so.

That will happen when GDX’s faster-moving 50dma crosses back above its slower-moving 200dma from below.  Golden crosses are the most bullish when they trigger after deep extremely-oversold multi-year lows.  That’s when they almost always signal strong accelerating uplegs with a long ways to run higher yet.  Lesser golden crosses occur in sideways-drifting consolidating markets not recovering from serious lows.

The former is certainly the case with GDX today, after a brutal mid-2022 plunge.  The major gold stocks dominating this ETF collectively cratered 46.5% over 5.3 months into late September.  GDX bottomed at $21.87, a deep 2.5-year secular low not seen since the dark heart of March 2020’s pandemic-lockdown stock panic!  Psychology was overwhelmingly bearish, with traders abandoning gold stocks leaving them for dead.

As a hardened contrarian speculator, I fought that at the time.  Just one trading day before GDX carved that dreadful low, I published an essay analyzing that “False Gold-Stock Panic”.  We were aggressively buying dirt-cheap gold stocks in the months surrounding that extreme low.  Their unrealized gains are already running as high as +75.0% this week!  My contrarian conclusion several months ago proved spot on…

“The bottom line is battered gold stocks are literally trading at panic levels today!  They haven’t been lower or more oversold since March 2020’s pandemic-lockdown stock panic, after which they violently mean reverted massively higher.  Today’s extreme lows are just as anomalous and unsustainable, based on a false premise that recent months’ big gold selloff was fundamentally-righteous.  But that simply isn’t true.”

“Gold-futures speculators fled unleashing enormous selling as the US dollar soared parabolic on the Fed’s most-extreme hawkish pivot ever.  That tainted gold psychology, leaving investors bearish enough to join in the selling.  But all that has mostly been spent, with speculators’ gold-futures positioning and investors’ gold-ETF holdings at major multi-year lows.  As all that reverses, gold will soar launching gold stocks way higher.”

The stunning technical and sentimental similarities between GDX’s performances during and after 2020’s stock panic and recently are a key reason this current upleg is likely to grow huge.  This chart shows gold-stock technicals during the last several years through that GDX lens.  The major gold stocks are ideally set up for another massive upleg, which the fundamentally-superior mid-tier and junior gold miners will amplify.

That March-2020 episode was brutal for gold stocks, as GDX crashed 38.8% in just 0.6 months!  But that wasn’t much worse than the general stock markets, as the S&P 500 cratered 33.9% in just over a month.  During those early COVID-19 weeks, fears soared as traders tried to figure out how lethal it was and how damaging governments’ lockdowns would be to underlying economies.  That spawned a rare panic-grade stampede.

Nearly 3/4ths of that stock-market collapse cascaded in its terminal couple weeks.  Traders rushed for the exits seeking the safety of cash, which catapulted the benchmark US Dollar Index 8.2% higher during that short span.  With the dollar soaring on flight-capital safe-haven buying, gold-futures speculators panicked too unleashing extraordinarily-colossal selling.  That slammed gold a vicious 12.1% lower in less than two weeks!

The gold miners’ stocks are ultimately leveraged plays on the metal they mine, since their earnings really amplify gold price trends.  So GDX crashed 28.7% in that same brief timeframe, plummeting to radically-oversold extreme lows.  This leading gold-stock ETF bottomed at $19.00, stretched all the way down to only 0.694x its 200dma!  Neither those extreme technicals nor suffocating herd bearishness could last long.

So I argued the contrarian side during and after that crash, betting heavily on a subsequent powerful V-bounce mean-reversion upleg.  That too came to pass, with GDX skyrocketing up a fantastic 134.1% in the next 4.8 months!  Gold-stock traders with the market experience and mental toughness necessary to fight the always-wrong-at-extremes thundering herd earned fortunes, with smaller miners way outperforming.

In addition to being exceedingly oversold during that stock panic, GDX exploded higher in short order to soon flash that same golden-cross buy signal.  It happened just 1.8 months after that bottoming.  While everything about that lockdown stock panic was more extreme and faster than gold stocks’ recent action, it is very similar.  That’s a major reason today’s young gold-stock upleg is likely to also eventually grow huge.

The GDX major gold stocks were doing fine into mid-April 2022, rallying 41.4% in 6.6 months in a growing upleg.  While it was more gradual emerging from more-normal lows, it also had a golden cross flash.  But that upleg was artificially truncated by an extreme event far rarer than a stock panic.  As inflation raged out of control, top Fed officials panicked and launched their most-extreme tightening cycle ever to try and fight it.

During seven FOMC meetings starting in mid-March, the Fed hiked its federal-funds rate an astounding 425 basis points in just 9.0 months!  With all that exploding out of a zero-interest-rate policy, it was the most-extreme hiking in the Fed’s 109-year history.  That included an epic streak of four monster 75bp rate hikes at four consecutive FOMC meetings!  The FFR underlying most interest rates literally exploded 35x higher!

In addition to that violent hiking, the FOMC simultaneously launched its biggest and fastest quantitative-tightening monetary destruction ever attempted by far.  That targeted $95b per month of bond selling to shrink its grotesquely-bloated balance sheet, the monetary base underlying the global US-dollar supply.  In just 25.5 months after March 2020’s stock panic, the Fed had ballooned that an insane 115.6% higher!

If you need to get up to speed on these wildly-unprecedented Fed actions, I analyzed them extensively in real-time as they unfolded.  I most recently discussed the FOMC’s record tightening in a mid-December essay on gold defying the hawkish Fed.  I looked at this raging inflation the Fed is attempting to tame and its likely impact on gold in another late-December essay.  All this is foundational for gold stocks’ bullish outlook!

As the Fed lurched epically hawkish in mid-2022, the US Dollar Index shot parabolic on the widening yield differentials being opened up with its major competitors.  Between mid-April to late September, the USDX skyrocketed an extraordinary 14.3% higher in just 5.5 months!  Since major currencies typically meander with glacial slowness, that extreme-Fed-tightening-driven dollar surge actually out-anomalized a stock panic.

For better or worse, the gold-futures speculators who often bully around short-term gold prices look to the US dollar’s fortunes for their primary trading cue.  Running with super-risky hyper-leveraged bets around 25x, they tend to inversely mirror whatever the USDX happens to be doing.  So as it soared stratospheric on the Fed’s record tightening, specs aggressively dumped gold-futures longs while dramatically ramping shorts.

I last analyzed mid-2022’s heavy gold-futures selling in yet-another late-December essay on gold’s upleg still being young.  It slammed gold 17.9% lower in that same span, which was the sole driver of GDX plummeting 46.5% into its deep late-September nadir.  The major gold stocks amplified gold’s downside by 2.6x, right in line with GDX’s usual 2x-to-3x range.  That again slammed GDX to panic-grade secular lows.

Languishing abandoned at $21.87 on September 26th, GDX again hadn’t been lower in 2.5 years since a week after March 2020’s panic bottoming.  And trading at just 0.703x its 200dma, GDX hadn’t been more oversold since the very day that panic climaxed!  The stock panic’s radical oversoldness merely exceeded that on a single trading day, hitting 0.694x at worst which was shockingly nearly matched several months ago.

The greater any market extreme, the more powerful the subsequent mean reversion and overshoot.  And there is no doubt late September’s exceedingly-oversold gold-stock levels hit very rare stock-panic-grade extremes.  Those brutal technicals drove equally-anomalous extreme bearishness, with traders wholesale walking away.  That crazy-lopsided sentiment also needs to mean revert and overshoot to proportional bullishness.

All that portends this current gold-stock upleg eventually growing huge.  Birthed at literal stock-panic lows in stock-panic despair, GDX has already blasted 41.4% higher in 3.3 months!  Its own Golden Cross buy signal is due to flash in mid-January, 3.7 months after bottoming.  As gold stocks’ upside momentum mounts and encourages speculators and investors to pile in to chase big gains, this upleg has enormous potential.

It should easily pass +100%, and will probably best that mighty post-stock-panic 134.1% GDX upleg.  It wouldn’t surprise me at all if this GDX run exceeds +150%, which the smaller fundamentally-superior mid-tier and junior gold miners will again well outperform.  Bigger gold-stock gains depend on gold’s upleg also powering much higher.  Encouragingly there is plenty of buying fuel in place to continue driving up gold.

Again speculators’ hyper-leveraged gold-futures trading often dominates gold’s price action.  In just five weeks during March 2020’s stock panic, speculators dumped 130.3k long contracts while adding 38.7k short ones to pummel gold 12.1% lower.  That added up to 169.0k contracts of selling.  Interestingly specs’ gold-futures dumping in mid-2022 proved way larger, with 145.9k longs and 87.8k shorts totaling 233.7k!

That is what slammed gold 17.9% lower over 5.5 months into late September.  But the gold-futures guys’ overall positioning and sentiment were also at unsustainable bearish extremes, just like gold-stock traders’.  So gold futures were also due for massive mean reversion and overshoot buying.  That is what already catapulted gold up 14.4% as of midweek, which GDX leveraged at a great 2.9x to parallel 41.4% gains.

But the amazing thing is specs have only bought back 91.6k contracts as of the latest-available reported gold-futures data in late December.  That is under 4/10ths of their total mid-2022 selling, implying the majority of gold-futures mean-reversion buying is still coming!  And the way-larger gold investment buying hasn’t even started yet per its best indicator, the combined holdings of the dominant GLD and IAU gold ETFs.

Reported daily, those offer a far-higher-resolution view of gold investment than the quarterly reports from the World Gold Council.  I also analyzed these in depth in that late-December essay on gold’s upleg still being young.  In a nutshell, GLD+IAU holdings plunged a major 16.7% or 271 metric tons between mid-April to early December.  And since then at best in late December, there has only been a trivial 12.8t build.

So over 19/20ths of probable minimum gold-investor buying is still coming.  And it will likely prove far bigger given this extraordinary backdrop of inflation raging out of control and general stock markets suffering a worsening bear.  During the last inflationary super-spikes of the 1970s, monthly-average gold prices skyrocketed nearly tripling during the first and more than quadrupling in the second!  Gold will reflect inflation.

Thus today’s young gold upleg has great odds of besting that +40.0% one emerging from March 2020’s stock panic.  Gold was also slammed to its own panic-grade 2.5-year low in late September, while those GLD+IAU holdings dropped to their own panic-level 2.7-year low too in early December.  There is vast potential buying to drive gold 40%+ higher again at some point in 2023, which will launch gold stocks stratospheric.

A 40% upleg off late September’s exceedingly-oversold low would carry gold way up near $2,275.  If GDX amplifies that by the usual 2x to 3x, that implies 80% to 120% overall gains in the major gold stocks.  But as gold stocks grow popular as one of the few or only sectors soaring while the rest of the stock markets burn, their gains could snowball much bigger.  Traders love throwing capital at soaring sectors to chase upside.

If GDX matches that post-stock-panic 134.1% upleg with today’s similar technical and sentimental setup, it would blast way up near $51.25.  That would mean this young gold-stock upleg so far has only enjoyed less than a third of its likely gains.  With at least two-thirds left to go, and maybe much more, traders still have time to add gold-stock portfolio allocations at still-low prices.  That buying window won’t last long though.

With GDX’s decisive 200dma upside breakout over this past week, and a fabled Golden Cross buy signal coming in a couple weeks, speculators and investors are going to increasingly realize this upleg is the real deal.  They will increasingly chase and rush to buy in, accelerating gold-stock gains.  Again the fundamentally-superior mid-tier and junior gold and silver miners we have long specialized in will way outperform.

The bottom line is this young gold-stock upleg will likely grow huge.  Its technical and sentimental setup is very similar to that which birthed mid-2020’s mighty post-stock-panic upleg.  That proved a massive mean reversion and overshoot emerging from similar radically-oversold lows, more than doubling the major gold stocks.  They are on track to do even better today, with technicals confirming this upleg is the real deal.

GDX just decisively broke out above its key 200dma, and will flash a powerful Golden Cross buy signal in the next couple weeks.  Traders will increasingly chase gold stocks’ strong upside momentum, which is fueled by gold’s own.  While inflation rages out of control and a stock bear deepens, over two-thirds of likely gold-futures buying remains along with almost all of investment buying.  Gold stocks are heading way higher!

Adam Hamilton, CPA