Gold Stocks’ Futures Ride

The gold miners’ stocks continue to vex contrarian traders, toying with herd psychology. They blasted higher to a key technical breakout in early November, building bullishness. But that was soon dashed on the rocks as they plunged into late November, fueling bearishness. While such schizophrenic action seems capricious, it is all driven by how gold-futures speculators are trading to bully around the yellow metal.

Gold miners’ earnings amplify changing gold prices, making their stocks leveraged plays on the metal they produce. That leaves gold stocks overwhelmingly dependent on gold’s fortunes. Traders flock into this little high-potential sector when they expect higher gold prices. That bullish psychology comes from upside momentum in this leading alternative investment. When gold is climbing, traders want to own its miners.

But the other side of that sentiment coin is traders flee gold stocks when gold weakens. The more they fall, the more they are shunned. Gold stocks are forever slaved to gold, exaggerating its price trends. So gaming gold miners requires understanding what is moving gold and why. Investment capital flows are its dominant primary driver. But when investors are sitting on the sidelines, gold-futures speculators take over.

While these futures specs command vastly less capital than the investors, they punch way above their weights in gold-price impact. That’s mostly due to the extreme leverage inherent in futures trading. Each gold-futures contract controls 100 troy ounces of the yellow metal, worth $180,000 at $1,800 gold. Yet this week traders are merely required to keep cash margins in their accounts of $7,500 per contract.

That enables them to run maximum leverage of 24.0x, which is actually on the lighter side historically! Still, that greatly amplifies the influence of gold-futures trading on gold prices. Each dollar deployed at that limit has 24x the price impact on gold as a dollar invested outright! Adding to futures’ big influence over gold, its world reference price is that gold-futures-trading-driven one. That really affects popular psychology.

Gold stocks’ wild ride in recent months was almost entirely driven by gold-futures trading blowing gold to and fro. This high-potential sector is almost untradable if you aren’t watching specs’ gold-futures action! That is what moves gold prices when investors are missing in action. And gold stocks simply amplify the prevailing trends in the metal they mine. So spec gold-futures trading is often the key to gold-stock fortunes.

The leading gold-stock benchmark and trading vehicle remains the GDX VanEck Gold Miners ETF. It contains the world’s biggest gold miners, which recently finished reporting good Q3’21 operational and financial results. GDX has certainly had a wild ride in the last several months, all attributable to how spec gold-futures trading was affecting gold. Understanding those trends is essential to gaming coming action.

GDX fell sharply in September before rebounding strongly in October. Then in November, it surged again before collapsing! Those were big moves that really altered herd psychology. But it is always important to consider the recent price action that dominates popular greed and fear in broader perspective. As this chart shows, the gold-stocks have resumed grinding higher on balance after suffering a major correction.

Price trends are best understood by analyzing the news and events driving them in chronological order. I’ve long framed the analyses in our popular newsletters on the skeletons of how things unfolded. Event A leads to B leads to C leads to D. If you don’t understand A, B, and C, you’re going to have a tough time anticipating D. The seeds for recent months’ gold-stock action started to be sown in a mid-summer gold plunge.

Since my past essays have covered gold-futures speculators’ anticipatory QE4-taper tantrum extensively, we’re going to start at the tail end of it today. GDX was recovering in early September, rallying back to $33.29 which was right near its key 50-day moving average. Things were looking up in gold-stock land after a rough summer. But gold-selling flared again after a big US retail sales beat was considered Fed-hawkish.

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