Gold-Stock Reversion Due

 The gold miners’ stocks are still languishing deeply out of favor, largely left for dead. Their low prices are collateral damage from this past summer’s anomalous pair of extreme gold-futures-selling episodes on Fed-tightening fears. But this bombed-out sector is due for a major mean reversion higher. Gold stocks’ technicals, sentiment, and fundamentals are all aligned to fuel a strong resumption of their interrupted upleg.

The leading gold-stock benchmark, the GDX VanEck Gold Miners ETF (GDX), was set up for a good summer. Between early March to mid-May, it powered 28.4% higher in a solid young upleg. With its four previous uplegs during this secular gold bull averaging massive 99.2% absolute gains over 7.6 months each, the gold stocks had great upside potential. But their mounting fifth upleg was torpedoed in a surprise attack.

In mid-June the Fed’s Federal Open Market Committee met, as it does eight times per year. The FOMC didn’t do anything that day, neither slowing its colossal quantitative-easing money printing nor hiking its federal-funds rate off the zero-lower-bound. The Fed didn’t even hint at any coming QE tapering or a new rate-hike cycle. Yet unofficial distant-future rate projections by top Fed officials came in slightly-hawkish.

Just a third of those guys expected to maybe see two quarter-point rate hikes way out into year-end 2023, about 2.5 years into the future! That somehow freaked out hyper-leveraged gold-futures speculators, who fled in a torrent of long selling. That hammered gold sharply lower, which the gold stocks leveraged like usual really damaging sentiment. Normally GDX amplifies gold’s significant price moves by 2x to 3x.

Gold soon resumed grinding higher on balance out of that Fed-tightening-fears anomaly, and gold stocks eventually followed. Then unbelievably in early August another extreme episode of gold-futures selling erupted! A modest upside surprise in monthly US jobs ignited a US-dollar rally as traders expected the Fed to start slowing its QE money printing sooner. Some large trader seized that for a manipulation op.

In super-illiquid Sunday-evening trading, they slammed gold by short selling an enormous amount of gold futures all at once. Brazen manipulation is the only explanation for such a huge slug of shorting unloaded instantly at such an odd low-volume time. That rare gold-futures shorting attack was an attempt to run long-side stops, unleashing cascading selling. It wasn’t too successful, but still hit gold and its miners’ stocks hard.

When the dust settled on that reporting week, speculators’ gold-futures shorting had skyrocketed near an all-time record! With gold anomalously bludgeoned for a second time in just 7 weeks, gold-stock sentiment continued to deteriorate. Bearishness exploded, which soon climaxed in heavy capitulation washout selling in mid-August. The gold stocks were wholesale abandoned, with contrarian traders fleeing in droves.

The technical damage in this sector was severe, as seen in gold stocks’ summer seasonals. This chart is updated from my summer-doldrums research thread. It looks at sector performance during all modern gold-bull years during market summers. The older HUI gold-stock index is used since GDX’s history is insufficient for this longer study. All summers are individually-indexed in perfectly-comparable percentage terms.

May’s final close is set at 100, then gold-stock price action is recast off that common baseline. Incredibly those two anomalous bouts of extreme gold-futures selling pounded gold stocks into one of their worst summers ever! That implies this sector is way oversold, and due to mean revert much higher back into more-normal territory. There’s a massive deviation from where gold stocks are and where they ought to be.

The gold stocks were consolidating high in early June before that FOMC-dot-plot hawkish surprise ignited the first round of extreme gold-futures selling. That crushed this sector well under the lower support of its normal summer trading range, which runs +/-10% from May’s final close. Gold stocks finally started to recover soon before early August’s US-jobs upside surprise provided cover for that gold-futures shorting attack.

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