Gold Stocks Bull Breakout! / Commodities / Gold and Silver Stocks 2020
The gold miners’ stockssurged to a major bull-market breakout this week! Powering decisively above their years-oldsecular resistance is a hugely-important technical event. It proves this gold-stock bull is alive andwell, greatly improves sentiment, and puts this high-flying sector on countlessmore traders’ radars. New bull highs fuelself-feeding bullish psychology, as speculators and investors love chasingwinners.
The gold miners’ stocksare essentially leveraged plays on gold, since its price overwhelmingly drivestheir earnings and thus ultimately stock prices. So gold-stock bulls and bears mirror andamplify gold’s own major market cycles. Today’s secular gold bull began marching in mid-December 2015, birthedfrom choking despair. Gold stocks’ parallelbull arose from the ashes about a month later in mid-January 2016.
The GDX VanEck VectorsGold Miners ETF is this sector’s most-popular benchmark today. It plunged to a fundamentally-absurd all-time-record low of $12.47 at that terrible nadir. This major gold miners’ ETF had collapsed81.3% during the previous 4.4 years in an exceedingly-brutal bear market! Left for dead, virtually everyone hated thissmall contrarian sector. But suchshocking extremes forge new secular bulls.
This gold-stock bull’smaiden upleg proved massive, with GDX skyrocketing 151.2% higher in just 6.4months! In early August 2016 this leadingsector ETF peaked at $31.32. Naturally therewas much gold-stock excitement after such an epic run, even though they hadstretched to dangerously-overbought levels. That’s the time to be wary, as secular bulls are an alternating series ofmajor uplegs then corrections.
GDX plunged 39.4% over thenext 4.4 months, the gold stocks’ downside seriously exaggerated by gold’s oddbehavior then. That November, Trump wonthe presidency while Republican lawmakers retained their majorities in bothchambers of Congress. Traders were ecstaticTrump’s surprise victory greatly upped the odds for big tax cuts soon, so stockmarkets soared on those hopes. Investorsfled gold to chase stocks.
Gold stocks’ resultingoutsized correction seriously damaged sector psychology, ushering in a darkcouple of years or so for this sector. GDX mostly ground sideways in a long consolidation between $21 to $25,way under its original $31 bull-market peak. So traders fled gold stocks in droves, there wasn’t much excitement to motivatethem to deploy more capital. Apathy grewand choked out most sector interest.
Most traders entirelyforgot about gold stocks, they were too busy chasing the surging US stock marketsfirst on tax-cut hopes and later on the actual tax cuts themselves. This GDX chart shows how the major gold minershave fared throughout this entire secular bull. And from the late summer of 2016 to the early summer of 2019, only stalwartcontrarians still believed in their potential. Everyone else was long gone.
Poor sentiment was galvanizedinto raging bearishness heading into autumn 2018, when gold stocks plummeted ina brutal forced capitulation as stop losses were sequentially tripped. But man, what a time to buy when conventional wisdom assumed the majorgold miners were doomed to drift lower indefinitely! The gold stocks soon started recovering, butremained trapped in that vexing $21-to-$25 consolidation zone.
But late last June amajor gold event finally catapulted GDX decisively above $25, breaking out fromthat long-oppressing sideways drift. Goldbroke out to its first newbull-market highs in several years, lighting a fire under its miners’stocks! So GDX blasted higher in anotherstrong upleg last summer, which peaked at a hefty 76.2% gain over 11.8 monthsin early September 2019. This leadingETF crested at $30.95.
That was tantalizinglyclose to secular-bull-market breakout territory, challenging early August 2016’s$31.32. But after nearly rocketingvertically in the wake of gold’s major bull-market breakout, this sector was seriously overbought whilegold itself faced an ominous record gold-futures-selling overhang. So the metal and its miners’ stocks startedcorrecting, with the latter denied a years-in-the-making bull breakout.
That healthy sentiment-rebalancingcorrection was prematurely truncated early this year by shocking events. First the US and Iran plunged into militaryconflict, then a novel viral outbreak started ravaging China. Deep fear spread with COVID-19, which grew toglobal-pandemic proportions. That pushedGDX up to $31.05 by late February. Butthat third time wouldn’t prove the charm for new gold-stock bull-market highs.
In mid-February withGDX again nearing bull highs, I warned about the stalling gold stocks. The growing exuberance in this sector wasmisplaced, and I concluded “caution is wise given gold’s situation, withselling much more likely than buying. ... All that leaves gold and thus itsminers’ stocks continuing to face risks for sizable selling. Wait until that runs its course to buy.” That generated a firestorm of flak and ridicule!
But the data is thedata, as traders we can choose to suppress our emotions and bet on the most-likelyoutcome or succumb to greed and fear which leads to foolishly buying high then sellinglow. The gold stocks not only corrected,but plummeted during March’s extreme COVID-19-fear-fueled stock panic. In an epic blitzkrieg correction, GDX crashed38.8% in just 0.6 months! Thecarnage was breathtaking.
I certainly didn’t expecta stock panic, which are exceedingly-rare and inherently-unpredictable. But we’d been all-out gold stocks in our newslettersfor other reasons articulated in my Februaryessays. Instead of only sitting in cash,we actively traded the likely downside through gold-stock-ETF put options and inverse-leveragedETFs. Then GDX’s shocking crash fiercelyexpended all potential gold-stock selling pressure!
That left major goldstocks ludicrously oversold and ridiculously undervalued at mid-March’sextreme stock-panic lows, which was quickly confirmed by a violent V-bounce higher. We’d realized our big gains on bearish gold-stockbets earlier in the panic, and started redeploying aggressively in fundamentally-superiorgold stocks right after that V-bounce started. Their unrealized gains have already grown big since.
But despite their massivepost-stock-panic gains, many gold-stock skeptics and bears still believed thissector’s last bull failed in early August 2016. GDX’s initial bull-upleg peak of $31.32 on a closing basis then stillhadn’t been eclipsed. Early September2019’s $30.95 then late February 2020’s $31.05 challenged new-bull-highterritory, but ultimately fizzled. Afteryears of no new bull highs, sector enthusiasm fades.
All stock-marketsectors have interested speculators and investors that closely follow their upsand downs no matter what. I’ve spentdecades intensely studying and actively trading gold miners’ stocks, and allthat experience fuels profitable trades regardless of prevailing trends. But in order for any sector to really getmoving, to experience huge gains, its reach has to expand beyond the regularsto entice in way more traders.
Big gains require bigcapital inflows from the broadest-possible pool of speculators and investors. And nothing catapults a sector onto their collectiveradars faster or more thoroughly than major new secular highs. They drive much interest and coverage fromthe mainstream financial media, leaving traders that don’t frequent thatparticular sector intrigued. They start migratingin since everyone loves chasing winners.
Gold itself is a greatcase in point. During this secular bull’smaiden upleg in largely the first half of 2016, gold blasted 29.9% higher to$1365 in early July that year. But for fully several years after, gold couldn’t regain that initial peak. $1350 became a major resistance zone, agraveyard in the sky. Every time that goldneared $1350 excitement mounted, but each time it failed to break out moretraders totally lost interest.
But once gold finally brokeabove $1365 in late June 2019, everything changed psychologically forthis long-ignored metal! Capital floodedback in, despite near-record-high stock markets which usually retard goldinvestment demand. Yet major new secularhighs motivated speculators and investors alike to buy gold. That bull-breakout winner-chasing upsidemomentum blasted gold 32.4% higher by early September.
So mostly in less thana few months, gold went from languishing in apathy to powering higher in thebest upleg of its entire secular bull! Major new bull-market highs greatly expand interest among traders that don’tnormally follow a particular sector. Andtheir buying begets buying. The morecapital they deploy, the higher that pushes prices. The more prices rally, the more traders wantto buy to ride that upside.
Early last June, gold headingmaterially above $1350 was widely considered unthinkable. Yet thanks to that subsequent decisivebull-market breakout, by early September it was over $1550! By late February this year before the stockpanic, gold had regained $1650. Bearishpsychology nurtured over several years under $1350 radically changed withinmonths after major new highs started enticing traders to return.
Nothing attractsmomentum traders like major new secular highs, and nothing drives prices higherfaster than deluges of new capital from traders who weren’t materially participatingin that sector before. Thus there’s noreason to think a major bull-market breakout in gold stocks will prove any lessbullish for them than it did for the metal they mine. That made this week one of gold miners’ most-excitingin a long time!
GDX’s post-stock-panicV-bounce mean-reversion surge had great potential to grow into something muchlarger, but only new bull highs could confirm that. Late last week GDX climbed to $30.92, butpulled back sharply right at that 3.7-year-old ironclad bull-market resistancenear $31. The gold stocks tried again tobreak through this Monday, with GDX hitting $30.74. But they were still repelled that day rightaround $31.
But everythingchanged for gold stocks this Wednesday, which certainly wasn’t remarkable comparedto the wild market swings and crazy news of the last couple months. After suffering a pullback, gold enjoyed astrong 2.0% rebound rally to surge back over $1700. That gold buying began overnight in Asia, graduallypushing gold higher which extended into the US trading day. There was no catalytic gold-moving news.
But seeing gold headingnorth again emboldened traders, who poured into major gold stocks. Again they are ultimately leveraged plays ongold, and GDX tends to amplify material gold moves by 2x to 3x. By the time the dust settled, GDX had blasted6.4% higher to $32.51 on close! That wasthis gold-stock bull’s first new bull-market high in 3.7 years. And it was the best kind of major-bull-breakoutday we could hope for.
Plenty of biggold-stock up days amplify big gold spikes driven by surprising news. That can come in the form of geopoliticalflarings or Fed actions. But the problemwith news-driven gold spikes is they tend to be fleeting. In this frenetic information age, surprisingnews seems to have a half-life of a few days at best. Traders quickly process new developments andmove on, so news-driven gold spikes often soon fade.
I’ve carefully watched thegold markets all day everyday for decades. And there was nothing gold-moving on Wednesday. Gold simply rallied due to ongoing massive investment capital inflows,which I analyzed in depth a couple weeks ago. The leading GLD gold ETF’s holdings surged 0.9% higher that day on big differential-GLD-sharedemand. That was its 19th build day outof the last 22 trading days, a continuing trend.
Closing at $1717 that day,gold itself remained shy of the prior week’s 7.4-year secular high of$1728. So there was no new-high excitementin gold that day. Wednesday was a fairly-normaltrading day for gold, with big investment-buying-driven gains on no news. So gold psychology wasn’t unduly enthusiasticcontributing to GDX’s bull-market breakout. And that surge to new bull highs also proved incredibly strong.
GDX rocketing 6.4% higherthat day was a powerful breakout on sizable volume. It was also decisive technically, meaningexceeding the old high by 1%+. GDX’s $32.51close that day wasn’t just a new 7.0-year secular high, but it exceeded August2016’s previous one by a whopping 3.8%! Bigger breakouts really attract in new traders, as half-hearted ones sneakingover old highs by pennies often prove false.
The leading and dominantgold-stock sector benchmark just surged powerfully to major new bull-markethighs for the first time in 3.7 years! Just like a similar event did for gold last summer, this huge breakoutis going to radically improve gold-stock psychology. Legions of speculators and investors who aren’tusually interested in gold stocks will see them breaking out. They will rush to buy in and chase thismomentum.
And despite their blisteringpost-stock-panic V-bounce, gold stocks’ upside potential from here remainsvast. As of Wednesday’s GDX-breakoutclose, this gold-stock bull had powered 160.7% higher over 4.3 years. While that sounds impressive absolutely, it isstill nothing for this high-flying sector. The previous secular gold-stock bull wildly dwarfed this, and revealswhy contrarian traders want to own gold stocks.
That prior mighty bullran for 10.8 years from November 2000 to September 2011, straddling GDX’s birthin May 2006. So it can’t be measured inGDX terms, but by the older and comparable benchmark HUI NYSE Arca Gold BUGSIndex. During that decade-plus span, theHUI skyrocketed 1664.4% higher! Riding the large majority of a secular gold-stock bull of that magnitudegenerates life-changing wealth for traders.
Gold stocks remaincheap absolutely too despite their violent V-bounce over the past 5 weeksor so. Back in mid-December I explainedthe core fundamental relationship between gold stocks and the metal which drives their earnings and hence stockprices. That can be expressed throughratios including with a construct called the GDX/GLD Ratio. It simply divides the daily GDX close by theGLD gold ETF’s one.
This Wednesday as GDXsurged to that major bull-market breakout, that GGR was running 0.201x. In other words, a single share of this leadingGDX gold-stock ETF was worth about 20.1% of a single share of that dominant GLDgold ETF. That gold-stock-to-gold ratioremains really low historically. During the four years after the last stock panic in late 2008 forexample, this GGR averaged a much-higher 0.381x.
For the major goldstocks merely to mean revert back up to that last post-stock-panic secular meanat this week’s prevailing gold prices, GDX would have to soar to $61.62! That’s another 89.5% higher than itsbreakout close on Wednesday, and certainly not an unreasonable level. It is still well below GDX’s all-time high of$66.63 in early September 2011, and it would make for a relatively-smallpost-stock-panic bull.
GDX’s total gains frommid-March’s latest extreme stock-panic low would only hit 224.3% at$61.62. After that previous late-2008stock panic, GDX more than quadrupled with a 307.0% gain over 2.9 years! A similar huge run today would carry it all theway up to $77.33. Much-higher gold-stockprices are sure fundamentally-justified too, as the major gold miners’ Q1’20earnings coming soon are likelyto soar radically.
So odds are gold stocks’major bull run after this latest stock panic is just getting started. The gold stocks should run higher foryears with gold. It is going to seesustained capital inflows driven by lingering stock-market fear, governmentCOVID-19 shutdowns’ devastating impact on economies, and the extreme moneyprinting by the Fed and other major central banks to fight that. Gold couldn’t ask for a more-bullish outlook!
While GDX enjoys excellent gains in major gold-stockuplegs, they are dwarfed by those seen in smaller fundamentally-superiormid-tier gold miners. As explained in mylatest essay on their Q4’19results just over a month ago, the mid-tiers far-outperform the majors with their superior production growth and smaller market capitalizations enablingbigger ultimate gains. A big gold-stockupleg is a stock pickers’ paradise!
We do all that hard and tedious fundamentalwork at Zeal, winnowing the gold-stock field to uncover the likely bigwinners. And we’re currently still redeployingin these fundamentally-superior gold stocks as their latest upleg grows, whichare recommended in our popular weekly and monthly newsletters. The unrealized gains in our new gold-stocktrades deployed since mid-March are already running up to 55% this week!
To profitably trade high-potentialgold stocks, you need to stay informed about the broader market cycles that drivegold. Our newsletters are a great way,easy to read and affordable. They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks. Subscribe today and take advantageof our 20%-off sale! Get onboardso you can mirror our great new trades being layered in for gold stocks’ next mightyupleg.
The bottom line is majorgold stocks surged to their first bull-market breakout in well over severalyears this week! Despite no gold-drivingnews, their leading GDX benchmark blasted up to decisive major new secularhighs. That is super-bullish for gold stocksgoing forward, as new bull highs radically improve sector sentiment. They will thrust gold stocks back onto mainstreamtraders’ radars, enticing them to return.
Broadening gold-stock interest will unleash massively-outsized capitalinflows into this small contrarian sector. The more traders buy, the faster gold stocks will rally. The higher they are propelled, the moretraders want to buy them. This powerful self-reinforcingvirtuous circle fuels huge gains after major new bull-market highs are seen, asgold itself proved since last summer. This is the best news for gold stocks in years!Adam Hamilton, CPA
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