Gold-Stock Upleg Rebound

The gold miners’ stocks are still grinding sideways after last month’s Fed-rate-hike scare. This technical basing is laying the foundation for this interrupted gold-stock upleg to rebound. Today’s low gold-stock prices relative to the metal they mine will amplify that coming upside. The leading gold-stock index was just slammed back down to the support of its secular valuation uptrend, portending a big mean reversion higher.

The gold stocks were consolidating high, digesting sharp young-upleg gains, just a month ago. Then the latest FOMC meeting spawned a sharp gold plummeting, which the gold stocks leveraged like usual. The Fed didn’t do anything, keeping its hyper-easy zero-interest-rate policy and $120b of monthly quantitative-easing money printing in place indefinitely. There were no hints at all of rate hikes or tapering QE bond-buying.

But top Fed officials’ individual projections of future federal-funds-rate levels, which the Fed chair himself warned to ignore, were slightly more hawkish than expected. Just a third of these guys thought the Fed might need two quarter-point rate hikes way out into year-end 2023. Who cares, right? That may as well be an eternity away in financial-market terms. Yet it still scared gold-futures speculators into selling hard.

In just three trading days after that nothing burger FOMC decision, gold plummeted 5.2%!In the week including that hawkish Fed dot plot, specs dumped an enormous 24.0k gold-futures long contracts while adding 4.9k new short ones. That made for the equivalent of 89.7 metric tons of gold selling, far too much too fast to absorb. So the leading GDX VanEck Vectors Gold Miners ETF collapsed 9.2% in that same span.

That whole episode was a crazy anomaly, that Fed gold-futures purge wasn’t sustainable given specs’ positioning leading into it. Their panicked exodus quickly exhausted itself as expected, leaving gold’s near-term outlook far more bullish with the vast majority of potential gold futures selling spent. But that gold drop had an ugly impact on gold-stock psychology, unleashing widespread bearishness still festering.

Traders fretting or fleeing don’t realize how unusual this gold-stock walloping was. This chart is updated from my latest gold-summer-doldrums essay of a couple of weeks ago. It individually indexes the gold stocks’ summer performances during all modern gold-bull-market years to May’s final close, rendering them all in perfectly comparable percentage terms. Gold stocks’ hawkish-Fed-dots swoon was super-anomalous.

Solely because gold-futures speculators feared distant-future rate hikes, GDX suffered its worst June of all modern gold-bull years with a brutal 13.8% thrashing! That’s why sector psychology has cratered, and traders have either abandoned the gold miners or remain too wary or scared to move more capital in. But such a severe deviation from early-summer norms portends an imminent big mean-reversion rebound.

Gold stocks only plummeted in sharper early-June selloffs in 2006 and 2009. But both those happened in necessary corrections right after massive uplegs. GDX was only born in mid-May 2006, which is why we have to use the older HUI gold-stock index for this longer-term seasonality analysis. Both the HUI and GDX are dominated by the same major gold miners. In 6.6 months into May 2006, the HUI had soared 82.5%!

A few years later in spring 2009, GDX was increasingly usurping the HUI’s role to become this sector’s most-widely-followed benchmark. In 7.2 months leading into early June that year, this dominant gold-stock ETF skyrocketed a staggering 172.1%! So extremely weak early-summer gold-stock performance isn’t just rare, it usually only happens after huge uplegs roll over into healthy corrections to rebalance sentiment.

There was definitely no need for that this summer before that hawkish-Fed-dots scare. The major gold stocks had recently finished a big 30.5% correction in GDX terms that bottomed in early March. That paved the way for the next bull-market upleg, but that only climbed 28.4% at best over 2.5 months by mid-May. Gold stocks consolidated high after that, digesting their gains. There was no need for a correction.

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