Another Gold-Stock Upleg

The gold miners’ stocks suffered a rocky start to 2021, rolling over into an extended correction after a young upleg prematurely failed. The resulting deeper lows left sentiment overwhelmingly bearish, with this contrarian sector deeply out of favor. But over the last five weeks or so, gold stocks have powered higher again in another young upleg. This one has a far stronger foundation given the underlying gold setup.

The leading and dominant gold-stock benchmark and trading vehicle remains the GDX VanEck Vectors Gold Miners ETF. It held $14.2b in net assets in the middle of this week, a massive 30.6x bigger than the next-largest 1x-long major-gold-miners-ETF competitor! Several weeks ago I analyzed the top 25 GDX gold miners’ latest quarterly results, which revealed this sector now enjoys incredibly strong fundamentals.

While gold averaged $1,876 per ounce in the recently-reported Q4’20, the big GDX gold miners reported average all-in sustaining costs of $1,038 per ounce. That implied stellar $838-per-ounce profit margins! That fantastic profitability fueled record revenues, adjusted earnings, operating cash flows, and treasuries at the GDX-top-25 gold miners. That was their sixth quarter in a row of soaring mid-double-digit earnings growth!

But you sure wouldn’t know the gold miners are thriving mightily by looking at GDX’s technical action in recent months. Traders wanted nothing to do with gold stocks in January and February, leaving them for dead. This dirt-cheap high-potential contrarian sector was hated, choked by overpowering universal bearishness. This GDX chart over the past couple of years or so highlights this sector’s wild and violent ride.

Last March’s brutal stock panic on economic fears from government lockdowns to slow COVID-19 slammed gold stocks to radically-oversold levels. GDX’s mean-reversion rebound out of that extreme anomaly was neck-snappingly sharp, ultimately growing into a huge upleg. Over just 4.8 months into early August, GDX skyrocketed 134.1% higher! That parabolic surge left gold stocks extremely overbought.

So a healthy correction was necessary to rebalance sentiment, and that’s exactly what happened. Over the next 3.6 months into late November, GDX fell 24.9%. That was a sizable retreat, and this key sector benchmark knifed well under its 200-day moving average. Those usually prove strong support zones in ongoing bull markets. Gold-stock technicals and sentiment looked to be bottoming ahead of a new upleg.

Gold’s own situation buttressed that thesis, green-lighting more gold-stock upside. Since gold miners’ earnings are highly leveraged to prevailing gold levels, their stock prices act like leveraged plays on gold. The major gold miners of GDX tend to amplify material gold moves by 2x to 3x. And by late November, gold itself had corrected 13.9% over 3.8 months. That was right in line with this bull’s prior corrections’ average.

Gold’s three earlier corrections in recent years averaged 14.3% losses over 4.1 months. And gold was also oversold below its own 200dma, dogged by widespread bearishness. That was a great setup for a new bull-market upleg, and indeed one soon got underway. Over the next 1.3 months into early January, GDX powered 15.2% higher in a textbook-perfect series of higher lows and higher highs defining a young upleg.

That even surged to decisive major upside breakouts above both GDX’s 50-day moving average and its correction-downtrend resistance! That young gold-stock upleg looked rock-solid, set up beautifully to keep rallying on balance. But then the markets threw a spanner into the works, ultimately causing gold stocks’ young upleg to fail. While that was a strange low-probability event, it devastated sector psychology.

Gold stocks were nicely consolidating high during 2021’s opening week, until Friday, January 8th. Gold plummeted 3.5% out of the blue that day when gold-futures selling cascaded after the key technical level of $1,900 failed overnight. GDX collapsed 4.8% that day, weathering gold’s plunge relatively well at just 1.4x downside leverage. But that day’s extreme selling started inexorably eroding precious metals sentiment.

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