Gold Stocks Surge Higher

The gold miners’ stocks surged strongly this week, blasting to new upleg highs. The mounting gains are naturally driving more interest in this small contrarian sector, shifting sentiment towards bullish. Despite their accelerating rally, gold stocks still remain fairly low technically and deeply undervalued relative to gold. So their strengthening upleg likely has plenty of room to run considerably higher in coming months.

The gold miners’ stocks are ultimately leveraged plays on gold, which overwhelmingly drives their profits. The much-maligned yellow metal has enjoyed a strong upleg since mid-August, when record gold-futures short selling pounded it to a deep 19.3-month low of $1174. Gold has been gradually powering higher on balance ever since, surging near $1341. That makes for 14.2% gains over 6.1 months, an excellent run.

Gold miners’ earnings are amplifying these higher gold prices, driving this parallel gold-stock upleg. This is readily evident in the most-popular gold-stock benchmark, the GDX VanEck Vectors Gold Miners ETF. Launched back in May 2006, GDX has an insurmountable first-mover lead. This week its net assets of $11.1b were a whopping 50.6x larger than the next-biggest 1x-long major-gold-miners-ETF competitor!

The gold stocks as measured by GDX have certainly capitalized on gold’s advance. Between its own brutal 2.6-year low in early September and this week, GDX has surged 33.0% higher in 5.3 months. That works out to gold stocks leveraging gold’s gains by 2.3x in recent months. That is right in line with the 2x to 3x usually seen historically in the major gold miners. Many smaller gold miners are doing even better.

As this upleg was being born and growing, I wrote multiple essays explaining what was happening and why it was important to get heavily long gold stocks. We filled the trading books in our newsletters with great smaller gold and silver miners with superior fundamentals to the majors. Our unrealized gains this week were already running 60%+ on multiple trades! This young gold-stock upleg is even now quite lucrative.

While it is always better to buy in earlier than later, GDX’s 33.0% upleg to date remains relatively small. In essentially the first half of 2016, GDX soared 151.2% higher in just 6.4 months in its last major upleg! Really-big uplegs are par for the course in the volatile gold-stock sector. Gold stocks’ last secular bull ran from November 2000 to September 2011. Half of that was in the pre-gold-stock-ETF era before GDX’s launch.

During that long 10.8-year span, the classic HUI NYSE Arca Gold BUGS Index skyrocketed an incredible 1664.4% higher! That life-changing secular bull consisted of 12 separate uplegs. One was an anomaly, the mean reversion out of 2008’s first stock panic in a century. Excluding that behemoth, the 11 normal ones averaged hefty gains of 80.7% over 7.9 months. So GDX’s recent run is nothing by this sector’s standards.

At this stage, all gold stocks have really done is regain their sharp late-summer losses. This GDX chart over the past few years or so illuminates the gold-stock technicals. The major gold miners’ stocks have merely climbed back up into their multi-year consolidation basing trading range. The lion’s share of this upleg’s gains are most probable as GDX breaks out above longstanding resistance, likely in coming months.

(Click on image to enlarge)

For fully 21.5 months leading into August 2018, GDX consolidated in a well-defined trading range from $21 lower support to $25 upper resistance. That sideways grind bled away bullish psychology, leading many traders to abandon this drifting sector. By late last summer, not many were left, and most of them were soon driven out too. August’s extreme record gold-futures short selling spawned a washout in gold stocks.

Because this sector is so volatile, running loose trailing stops is essential for managing risk. The lower gold was hammered, the more selling pressure mounted in its miners. That forced them to stop losses, unleashing more mechanical selling and fueling a vicious circle. Gold stocks cascaded lower in a brutally forced capitulation into mid-August, and a secondary echo capitulation bashed them lower still in early September.

GDX’s $21 support was shattered as this benchmark ETF plunged to $17.57 by mid-September. Several days later I published an essay Gold-Stock Forced Capitulation explaining all this right in those depths of bearish despair. I concluded “...the aftermath of capitulations is exceedingly bullish. ... The technicals and sentiment spawned by capitulations are so extreme they usually birth massive uplegs and entire bull markets.”

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