Gold Green-Lights Miners
Adam Hamilton December 11, 2020 2736 Words
The gold minersí stocks are finally perking up again, after spending months slogging through a grinding correction. Contrarian traders are taking notice, starting to redeploy capital in this high-potential sector. Gold minersí earnings and thus stock prices are overwhelmingly driven by goldís fortunes. And the yellow metalís recent technicals are signaling a mature correction, green-lighting gold stocksí next major upleg.
Bull markets are an alternating series of uplegs followed by corrections, for every few steps forward there is always one step back. These periodic selloffs are essential for bullsí health and longevity, rebalancing sentiment and technicals before they get too overheated. Popular greed growing too extreme early in bulls will prematurely slay them. All available near-term buying is sucked in, exhausting capital inflows and upside.
The most-important times to trade during bull markets are correction bottomings and upleg toppings. The mission is to buy in relatively-low at the former, then sell relatively-high at the latter. Thatís the lowest-risk and fastest way to multiply wealth in ongoing secular bulls. But executing on this strategy is challenging in real-time, because these tradable major lows and highs arenít definitive until well after theyíve passed.
When bull uplegs are topping, greed and euphoria are rampant and traders assume big gains will keep on coming. Selling high requires fighting the herdís rush to buy near peak excitement. Then later when the subsequent corrections are bottoming, popular fear and despair scare traders into worrying the big losses will persist indefinitely. Buying low necessitates deploying capital when most fret a sector will spiral much lower.
While tradersí collective sentiment driving major toppings and bottomings is ethereal and impossible to measure, it can be inferred through technical price action. Indicators reveal when price levels are getting too overbought or too oversold, flagging likely upleg crests and correction troughs. Goldís price behavior in recent weeks was very consistent with the latter, a major correction bottoming preceding its next upleg.
Goldís necessary and healthy correction after its last upleg shot parabolic looked to finally reach maturity as November ended, both in size and duration. All that selling hammered goldís price back to oversold levels. This doesnít guarantee goldís correction is over, but reveals high odds for that eventually proving to be the case. This first chart shows goldís newly-bullish tidings within the context of this entire bull.
Goldís technicals are superimposed over my favorite indicator of overboughtness and oversoldness, a tool called Relativity Trading. It looks at gold price levels relative to their own trailing 200-day moving average, using a multiple simply calculated by dividing goldís daily close by its 200dma. When charted over time, this metric tends to form horizontal trading ranges. This Relative Gold or rGold is back into buy territory.
This secular gold bull was stealthily born back in mid-December 2015, when gold sunk to a deep 6.1-year low. The journey higher since has seen four uplegs and four corrections. Goldís latest upleg that peaked in early August at an all-time-record high proved a monster. This metal soared 40.0% higher in only 4.6 months out of Marchís pandemic-lockdown-spawned stock panic! That was an exceedingly-big and -fast run.
As gold shot parabolic in the terminal weeks of that upleg, it soared to extraordinarily-overbought levels of 1.260x its 200dma! That rGold indicator hadnít seen such crazy extremes since September 2011, only a couple weeks after goldís last secular bull peaked. I warned about goldís mounting overboughtness in late July. Such stretched technicals and overheated bullish sentiment meant an imminent correction loomed.
That indeed soon came to pass, as the exceptional popular greed fueled by those big gains sucked in and exhausted all-available near-term buying. So sellers soon gained the upper hand and forced gold lower, rapidly at first. Gold plunged 7.5% in just three trading days out of its early-August peak of $2062, rapidly collapsing back to $1906! But corrections arenít fast and linear, they surge and retreat much like bull uplegs.
The mission of corrections is to rebalance sentiment, to eradicate widespread greed by stoking popular fear to smother it. A few days of selling isnít enough to break tradersí wills to force them to capitulate. It takes sustained, sizable downtrends to shift prevailing psychology from bullish back to bearish. Since corrections usually take their sweet time to accomplish this, they trap traders lulling them into complacency.
After goldís initial plunge in this bullís fourth correction, it generally ground sideways consolidating high until mid-September. With this metal meandering around $1948 which is still very high, the great majority of traders and analysts assumed its correction was over. I wrote some contrarian essays arguing the opposite, that much more selling was still coming since gold remained so overbought. Traders scoffed at that.
But sure enough gold suffered another sharp plunge in late September, blasting it 4.7% lower in just three trading days to $1859. That finally established goldís correction downtrend, another major lower low to accompany the lower highs. That big leg lower naturally rekindled correction fears, but traders have short memories. So once gold started grinding sideways on balance again into late October, they fell back asleep.
Gold retested its correction low late that month, which held. Then gold started surging into the elections, on pollstersí universal blue-wave-sweep predictions implying another huge pandemic-stimulus-spending bill. Then when Democrats didnít win the Senate and saw their House lead seriously dwindle, gold blasted higher again on hopes that would force the Fed to step in with more quantitative-easing money printing.
The day that fanciful rationalization took root a couple days after the voting, gold surged 2.5% to $1949. That looked like a breakout above both the upper resistance of goldís correction downtrend and its 50-day moving average! That proved the hardest day psychologically of this entire selloff, as a technical case could be made that it had ended. But gold had yet to revisit oversold conditions, so I suggested staying wary.
In financial markets, absolute price levels usually donít matter very much. The important thing is how fast they got to wherever they are. If they recently moved too far too fast, they are likely going to soon mean revert to reverse some of those excessive moves. When gold hit $1859 in late September and $1869 in late October, that rGold indicator was running 1.085x and 1.060x. Gold never got close to falling under its 200dma.
These 200-day moving averages are the strongest support zones in ongoing bull markets, the bottoming levels for major corrections. When all three of this secular gold bullís previous corrections bottomed, they were all under goldís 200dma. The rGold reads at those best buying opportunities of this bull came when gold was pummeled way down to 0.885x, 0.908x, and 0.984x its 200dma. 1.060x remained way too high.
Indeed goldís breakout surge on Fed-QE hopes soon collapsed, with this metal plummeting 4.4% back to $1866 in a single trading day shortly after that election spike! It had proven to be false, another sharp headfake rally which arenít uncommon during corrections. Goldís necessary corrective work to rebalance sentiment and technicals hadnít been finished yet. But once again many traders refused to believe that.
Gold started grinding sideways again, averaging $1875 for the next two weeks into mid-November. But with this bullís fourth correction still small compared to bull precedent, and gold having yet to even revisit its 200dma support, I continued to fear the selling wasnít over. We still hadnít added any long gold-stock trades in our newsletters since early July before gold shot parabolic, as gold corrections pummel gold stocks.
The necessary and healthy gold selling resumed at the end of November during Thanksgiving week. That Monday and Tuesday gold plunged 1.9% and 1.5%, finally retreating all the way back to $1808 and challenging its 200dma. That selling pressure continued cascading on Black Friday, when gold plunged another 1.1% to $1787. That finally dragged it back under that key support zone for the first time in this correction!
On the following Monday wrapping up November, gold slumped another 0.6% to $1775. That extended its total selloff to 13.9% over 3.8 months, and pushed rGold down to 0.989x. Technically that was enough to imply this gold bullís fourth major correction had finally reached maturity. Goldís selloff had fallen deep enough and lasted long enough to eradicate the extreme greed and overboughtness of the early-August peak.
That total selloff was right in line with precedent set by this bullís first three corrections. They averaged 14.3% losses over 4.1 months, just slightly worse than the latest 13.9% over 3.8 months. And that earlier average was skewed lower than it shouldíve been, as two of those previous corrections were seriously exacerbated by anomalous and unrepeatable circumstances. Mid-Marchís extreme stock panic was one of them.
Another greatly intensified this bullís first correction towards the end of 2016. Gold was bludgeoned with merciless selling after Trumpís surprise election win unleashed a euphoric deluge into stock markets on hopes for big tax cuts soon. Without that, gold wouldíve bottomed higher after a shallower selloff. So the case can be made that goldís latest correction actually proved a bit larger than any typical one would have.
If goldís correction is indeed over, then this secular bullís next upleg has already begun marching higher. Again major correction bottomings are the best times to redeploy in fundamentally-superior gold stocks. The major gold miners of the leading GDX VanEck Vectors Gold Miners ETF tend to have stock prices amplify goldís moves by 2x to 3x. And the better mid-tier gold stocks even outpace those gains during uplegs.
This secular gold bullís four uplegs averaged strong 33.3% gains. If its fifth one merely conforms to that precedent, the major gold stocks should rocket between 67% to 100% higher during it! The prospects of doubling our capital in less than a year are super-alluring. When gold resumes marching higher on balance, massive gold-stock gains accrue. So this sector should be aggressively bought early in gold uplegs.
But donít forget that important caveat that major bottomings are impossible to guarantee in real-time. The probabilities certainly argue that goldís correction has matured, carving such excellent buyable lows. But bottomings donít always take the form of sharp V-bounces. Sometimes gold prices can grind along near lows for a spell before the next upleg starts gathering momentum. Gold could even sink back to fresh lows.
Several major risk factors remain which could unleash more gold selling. The primary one is a rally in the really-low US Dollar Index, which would motivate leveraged gold-futures speculators to sell en masse. That would likely snowball given their current positioning which remains heavily long gold. Another big risk is ongoing differential selling pressure in the shares of the leading and dominant gold ETFs, GLD and IAU.
But even if gold soon revisits its $1775 correction low from late November, or plumbs new depths and extends this total selloff, odds are the lionís share of the selling is behind us. With goldís latest correction mature, the gold-stock redeployment for goldís next upleg can commence anyway. New trades are gradually layered in over time, minimizing overall portfolio risk while attempting to straddle the ultimate bottom.
This last chart shows gold stocksí performance through the GDX lens during goldís secular bull. They have corrected with gold in recent months, and have also been dragged back down under GDXís own 200dma. So like gold, sentiment and technicals in the minersí stocks have also been rebalanced in this vital selloff. That paves the way for gold stocks to surge higher amplifying the gains in goldís next upleg.
The latest gold-stock upleg paralleling goldís rocketed 134.1% higher in 4.8 months into early August in GDX terms! And that wasnít even the biggest of this bull, with its initial one hitting +151.2% in roughly the first half of 2016. When gold powers higher on balance, gold-stock prices soar due to the minersí big profits leverage to gold. GDX just corrected with gold like usual, falling 24.9% in 3.6 months into late November.
Interestingly GDXís latest major interim low was carved a week before goldís, on that Tuesday leading into Thanksgiving. Shrewd contrarian gold-stock traders try to anticipate major trend changes in the yellow metal, and at that point it was becoming apparent goldís correction was maturing. That was the very day we started layering into new fundamentally-superior gold-stock trades in our subscription newsletters.
The bullish case for gold stocks in coming months is strong. While goldís next bull-market upleg is the essential linchpin, the gold minersí fundamentals continue to rapidly improve really bolstering their upside potential. When bearish sentiment and oversold technicals combine with strong fundamentals, the moves higher can be massive! Consider a quick proxy for the GDX gold minersí earnings I analyzed in mid-November.
They had just finished reporting their Q3í20 operational and financial results then, including averaging all-in sustaining costs of $1028 per ounce. That was far below last quarterís record $1912 average gold price, fueling huge sector profitability of $884 per ounce! That had soared an awesome 49.7% year-over-year from Q3í19 levels. And that stunning earnings growth for the gold miners is going to persist into Q4.
While gold has been correcting this quarter, its Q4í20-to-date average price as of the middle of this week is still running way up at $1879. No matter what gold does in the next few weeks, that is going to prove the second-highest ever witnessed well above Q2í20ís $1714. Even if goldís average price this quarter is dragged down to $1850, gold-mining profits are going to skyrocket based on the GDX majorsí likely AISCs.
They averaged $969 per ounce over the last four reported quarters. If that holds into Q4, the gold miners could again earn $881 per ounce nearly equaling that Q3 record! That would make for another enormous 59.7% YoY gain. So it is not just bearish sentiment and oversold technicals in both gold and the gold stocks arguing for big upside, but the wildly-bullish fundamentals both major and mid-tier gold miners are enjoying.
Even if goldís correction isnít quite over yet, its maturing has green-lighted aggressively redeploying in fundamentally-superior gold stocks. That process occurs over a couple months or so, gradually adding new positions attempting to straddle goldís ultimate correction bottoming. That layering in of new trades over time lowers portfolio risks while upping the odds of buying in relatively-low to ride goldís next major upleg.
So thatís exactly what weíve been doing in our subscription newsletters over the last couple weeks or so, slowly redeploying in great new trades. Buying low and selling high can only be accomplished if there is still plenty of uncertainty when those trades are being executed. By the time major correction bottomings and upleg toppings are readily apparent to all well after the fact, the best gains have already been won.
At Zeal we walk the contrarian walk, buying low when few others are willing before later selling high when few others can. We overcome popular greed and fear by diligently studying market cycles. We trade on time-tested indicators derived from technical, sentimental, and fundamental research. Thatís why all 1178 stock trades recommended in our newsletters since 2001 averaged superb +24.0% annualized realized gains!
To multiply your wealth trading high-potential gold stocks, you need to stay informed about whatís going on in this sector. Staying subscribed to our popular and affordable weekly and monthly newsletters is a great way. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain whatís going on in the markets, why, and how to trade them with specific stocks. Subscribe today and take advantage of our 20%-off sale! Thereís no better time than around a correction-bottoming buying opportunity.
The bottom line is this gold bullís latest correction looks to be mature sentimentally and technically. This selloffís total size and duration at goldís late-November lows was right in line with averages from this bullís prior three corrections. Gold also fell back under its 200-day moving average, the strongest support zone for bull-market corrections. All this argues that the lionís share of goldís correction is behind us, if not finished.
That green-lights redeploying aggressively into fundamentally-superior gold stocks to ride goldís next bull-market upleg. That should be done gradually over time, attempting to straddle goldís ultimate correction bottoming. In addition to bearish sentiment and oversold technicals, the gold miners continue to enjoy super-strong fundamentals. Their earnings are continuing to soar with these still-high prevailing gold prices.
Adam Hamilton, CPA December 11, 2020 Subscribe at www.zealllc.com/subscribe.htm