Gold Stocks Catching Up / Commodities / Gold & Silver 2024

After getting off to aslow start in this upleg, gold miners’ stocks are beginning to catch up withtheir metal.  Gold stocks laggeddreadfully early on, but are increasingly outperforming in gold’s remarkablebreakout surge of recent months.  Thesemounting gold-stock gains are boosting bullish sentiment, attracting in moretraders accelerating the upside.  Thisvirtuous circle of capital inflows still has a long way to run.

If gold stocks can’tleverage gold’s gains, they aren’t worth owning.  While miners have high potential to soar withtheir metal, they bear big additional risks. Those include all kinds of operational, geological, regulatory, and geopoliticalchallenges and problems.  And they areall heaped on top of the biggest risk of all, gold price trends!  Yet that’s the only risk in gold bullion, sominers’ stocks really need to outperform.

If they don’t,speculators and investors are much better off sticking to gold itself.  Historically the leading GDX gold-stock ETF hasamplified material gold moves by 2x to 3x.  This range’s lower end is probably theminimum acceptable to compensate traders for gold stocks’ big additionalrisks.  And the upper end is where thishigh-flying sector can quickly multiply wealth. Unfortunately much of gold’s latest upleg saw neither.

This mighty upleg wasborn in early October at a deep low near $1,820.  Gold V-bounced sharply out of that anomalous nadir on heavy gold-futures short-covering buying.  By early December gold had already surged13.8% to $2,071, its first recordclose in fully 3.3 years!  Yetdespite the growing excitement and bullishness that generated, GDX’s parallelearly-upleg gains merely ran 22.8% making for weak 1.7x leverage.

After hitting a secondmarginally-higher record in late December, gold rolled over into apullback.  That really proved mild, withgold slumping just 4.2% at worst into mid-February.  Yet confidence remained so darned low in goldstocks that GDX collapsed 19.1% on that, for horrendous 4.6x downside leverage!  Then even though gold soon rebounded 2.1% bylate February, GDX ground another 0.4% lower to $25.79.

Shockingly that was marginallyunder early October’s $25.91 when this upleg was born!  Gold’s young upleg remained strong then,still up 11.7%.  But the major goldstocks of GDX somehow still edged down 0.5% in that entire span.  This sector was a total disaster, not onlynot leveraging gold but completely ignoring a strong upleg!  That miserable anomaly was murder onsentiment, leaving bearishness running rampant.

I wrote an essay on gold stocks languishing that very week, concluding then “These seriously-oversold gold stocks riddled withcapitulatory bearishness is an anomaly that will prove short-lived.  They are due to soon mean revert sharplyhigher with gold. ... gold’s bull advance will soon resume on big gold-futureslong buying.  Incredibly all that fuelinggold’s young upleg has been reversed, fully reloading spec-long buying.”

I continued, “After similar past excessively-bearish longs,mean-reversion buying has catapulted gold about 12% higher in roughly sixweeks.  The battered gold stocks will flyas that drives gold deep into record territory.”  I caught a lot of flak for that hardcorecontrarian essay, which used this same chart. At that time, GDX was way down at its latest deep low labeled here“Crazily Retreats to Pre-Gold-Upleg Lows”.

With gold stocks atabsurd lows relative to gold then, we were aggressively adding cheap trades tofill up our newsletter trading books. All that was a great call, as what happened since proved.  We didn’t have to wait long either.  As March dawned, a top Fed official gave aspeech hinting at monetizing more US Treasuries.  That indeed triggered epic gold-futures longbuying, and gold was quickly off to the races again.

Speculators’gold-futures holdings are only published weekly in the famous Commitments ofTraders reports.  In the CoT week alonestraddling that Fed surprise, gold rocketed a monster 4.9% higher!  The specs bought an astounding 55.0k longcontracts, the fourth highest on record out of all 1,314 CoT weeks sinceearly 1999 then!  GDX blasted up 10.2%during that CoT week, returning to normal 2.1x leverage.

Gold has powered higheron balance since, achieving 21 more nominal-record-high closes in recent months!  Interestingly thatcolossal gold-futures buying quickly petered out, yet gold continuedrallying.  That made its breakout surge remarkable,not fueled by its usual drivers of speculators’ gold-futures short-covering,their larger long buying, and American stock investors pouring capital intomajor-gold-ETF shares.

The gold-buying batonhad been taken by Chinese investors and global central banks, as I’veanalyzed in depth in our newsletters. The former have been plagued by a long and deep bear market in stocks ontop of a real-estate bust, leaving gold exceptionally attractive.  The latter are prudently paring theirexcessive US-dollar reserve exposure, as the federal government’s extremeoverspending is rapidly devaluing that currency.

While gold stocks stunkup the first half of this mighty upleg, they are increasingly outperforming in this recent second half.  Frommid-February to mid-May, gold blasted up 21.8% in that powerful breakout.  Such consistent gains to so many new recordhighs started rebuilding traders’ confidence in battered gold stocks, rampingbullishness.  So GDX powered 43.9% higherin that span, achieving 2.0x upside leverage!

Again that’s theminimum acceptable given gold stocks’ big additional risks, the bottom of thathistorical 2x-to-3x range.  But it’s aheck of an improvement, and gold-stock outperformance tends to mount as golduplegs mature.  So 3x+ amplification isusually only seen late in major uplegs, when greed increasingly morphs intoeuphoria attracting in legions of new traders buying into toppings.  Odds are that is still coming.

While gold stocks arefinally catching up with gold, their overall leverage across this entire uplegremains quite poor.  Between earlyOctober to mid-May, gold blasted 33.2% higher. That’s already a mighty upleg that is challenging monster status at 40%+gains!  But GDX’s parallel gains throughoutgold’s entire upleg are only 43.8% at best. So the major gold stocks have only amplified gold’s upside by apathetic 1.3x so far!

That’s no longerdreadful like the brutal mid-upleg lagging, but it’s still seriously bad.  Several factors explain why gold stocks havedramatically underperformed.  Leading theway is festering bearishness spawned by mid-2022’s extreme anomaly.  GDX plummeted a brutal 46.5% then on goldplunging 20.9% in 6.6 months!  That inturn was driven by huge gold-futuresselling as the US Dollar Index rocketed parabolic.

The primary trading cuefor gold-futures speculators, the USDX soared an epic 16.7% then to an extreme20.4-year secular high!  That was fueledby the Fed’s most-extreme rate-hike cycle in its entire century-plus history,including 375 basis points in just 7.6 months!  Neither that blistering hiking nor theresulting US-dollar moonshot were sustainable, which meant that exceedingly-anomalousdollar-gold shock would reverse.

And it did, birthingthe major gold-stock uptrend still persisting today.  But gold and gold stocks’ mid-2022 plummetingas inflation raged out ofcontrol wreaked tremendous sentiment damage, countless traders lostfaith in this sector.  Restoring that isa slow process, requiring lots of time and rallying.  The second factor has really drawn out thatpsychological normalization, general stock markets’ massive AI bubble.

From late October tolate May, the flagship S&P 500 stock index has soared 29.2% achieving 24new record closes of its own!  That wasled by AI market-darling NVIDIA’s stock skyrocketing 184.7% at best since!  These red-hot stock markets have stolen allthe market limelight, leaving gold and its miners’ stocks forgotten.  Also super-anomalously, identifiableAmerican-stock-investor gold demand has been zero.

That’s evident in thecombined physical-gold-bullion holdings of the huge American GLD and IAU, whichdominate the world’s gold ETFs. Astoundingly during gold’s powerful 33.2% upleg, those still slumped4.5% lower!  In early March as goldblasted to seven new record closes in a row, GLD+IAU holdings fell to a shocking4.5-year secular low!  Midweek theyare still limping along merely 0.8% above those levels.

It’s wildlyunprecedented for American stock investors to totally ignore a mighty goldupleg.  They have been distracted,enthralled by this AI stock bubble.  Butthat is overdue to burst and deflate, as valuations are extreme.  When that inevitably happens, investors willremember the wisdom of prudently diversifying their stock-heavy portfolios withgold and gold stocks.  Investmentdemand surges when stock markets weaken.

Finally gold stocksthemselves share some of the blame, particularly the super-major minersdominating GDX.  Operating at vastscales, these giant gold stocks have been unable to overcome depletion for long years.  Their mining costs arerising, impairing their earnings growth. I analyzed all this in depth in the last couple weeks’ essays digginginto the GDX gold majors’ and GDXJ gold mid-tiers’ latest quarterly results.

As a professionalgold-stock speculator and newsletter guy for a quarter-century now, I wouldnever buy about a dozen top GDX stocks that command over half this ETF’sweighting!  There are simply too manyexcellent fundamentally-superior smaller mid-tier and junior miners well worth owning.  They’ve been able to consistently grow theirproduction while mining at lower more-profitable costs, unlike deadweightsupermajors.

Again our newslettertrading books are full of great smaller gold stocks.  In mid-April when GDX was up 43.8% at bestduring gold’s upleg, we had actual trades added since early October thatalready soared to big unrealized gains as high as +111.8%!  Despite GDX being this sector’s leadingbenchmark, it really isn’t representative of gold stocks as a whole.  Most of the majors dominating it are burdenedwith inferior fundamentals.

But most investorsaren’t aware GDX is seriously hobbled, and most with gold-stock holdings havetoo much capital allocated to perpetually-poor-performing majors.  Lately I’ve been doing plenty of portfolio consulting, evaluatinginvestors’ gold-stock holdings.  Researchingand analyzing those and explaining the results and my recommendations in atelephone call usually costs under $1,000, really boosting future returns.

Yet despite GDX’slimitations, it still has lots of ground to regain to reflect these recordprevailing gold prices.  Today’s mightygold upleg is the biggest by far since a pair of monsters crested in 2020, athuge 42.7% and 40.0% gains!  Those werealso gold’s last uplegs achieving new record highs, which creates apowerful record-momentumdynamic.  That is well underway intoday’s upleg, and continues to strengthen.

The more record closesgold hits, the more the mainstream financial media covers it and the morebullish that coverage grows.  That buildsawareness among speculators and investors who don’t usually follow gold.  They get interested and start payingattention, then eventually deploy capital to chase those gains.  The more buying they do, the faster andhigher gold rallies to more record closes bolstering this virtuous circle.

This record-momentumdynamic catapulted GDX to 105.4% average gains during 2020’s last monster golduplegs, amplifying their 41.4% average gains by 2.5x.  Gold’s second upleg that year really fueledbig greed and euphoria, catapulting GDX 134.1% higher for fantastic 3.4xupside leverage to gold!  With goldbreaking out to so many dazzling records in today’s upleg, we should see 3x+before it gives up its ghost.

At 40% goldmonster-upleg gains, 3x translates into 120% GDX gains.  Getting there today would require GDX toblast way up near $57, another 62% higher from mid-week levels!  And that’s just for the majors, withfundamentally-superior mid-tiers and juniors well outperforming.  Plenty of those great gold stocks could stilldouble, triple, or more from current levels. So gold stocks lagging their metal is a buying opportunity.

The recent best timesto go heavily long gold stocks were back in October and February when they wereuniversally forgotten or loathed, deeply out of favor.  That’s indeed when we added most of ourtrades for our newsletter subscribers, buying in really low.  But necessary mid-upleg selloffs to rebalancesentiment offer additional buying opportunities for traders late to the upleg party.  Another one could be coming soon.

Gold has been tradingat extremely-overboughtlevels, which is why it has been mostly consolidating high sincemid-April.  But gold is heading into the summer doldrums, itsweakest time of the year seasonally mostly in June.  That natural demand lull this time of year mayforce a bigger pullback, which gold stocks will amplify.  So if you want to get deployed in goldstocks, do your homework and get prepared for that.

This timing is evenbetter ahead of gold miners’ coming Q2 earnings season, which will almostcertainly prove their best ever by far. Q2s usually see global gold production surge from Q1s, driving downmining costs proportionally.  And thisquarter-to-date’s stunning $2,342 average gold prices way surpassed the higheston record.  So from mid-July tomid-August, smaller gold miners should be reporting blowout earnings!

Successful trading demands always staying informed on markets, tounderstand opportunities as they arise. We can help!  For decades we’vepublished popular weekly and monthly newsletters focused on contrarian speculation andinvestment.  They draw on my vastexperience, knowledge, wisdom, and ongoing research to explain what’s going onin the markets, why, and how to trade them with specific stocks.

Our holistic integrated contrarian approach has proven verysuccessful, and you can reap the benefits for only $10 an issue.  We extensively research gold and silverminers to find cheap fundamentally-superior mid-tiers and juniors with outsizedupside potential.  Sign up for free e-mail notifications when we publish newcontent.  Even better, subscribe today to our acclaimednewsletters and start growing smarter and richer!

The bottom line is gold stocks are starting to catch up withgold.  Although their upleg leverageremains weak, their gains are accelerating as traders grow more bullish.  That essential sentiment normalization ismounting as gold remains near nominal record highs.  The more normal gold-stock outperformancerelative to gold resumes, the more speculators and investors will deploy morecapital to chase those gains.

This mighty gold upleg is gradually reversing festering psychologicaldamage from mid-2022’s extreme Fed rate hikes. And while the AI stock bubble has stolen limelight from gold, that isincreasingly likely to burst soon.  Sostill-lagging gold stocks have great potential to power much higher in comingmonths, perhaps after a typical summer-doldrums pullback.  That might prove the next solid mid-uplegbuying opportunity.

Adam Hamilton, CPA

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