Gold Stocks’ Secular Breakout

The gold miners’ stocks just achieved a rare secular breakout.  This huge technical milestone fueled by record gold levels reflects sector sentiment growing more bullish.  That is pushing gold stocks closer to the crucial psychological tipping point where more-mainstream traders increasingly chase their strong gains.  Multi-year highs generate broader interest, attracting more capital inflows accelerating gold-stock upside.

The GDX VanEck Gold Miners ETF has long been gold stocks’ leading sector benchmark and trading vehicle.  This was the original pioneering gold-stock ETF, born way back in May 2006.  GDX’s first-mover advantage has grown into an insurmountable lead, commanding net assets of $16.8b midweek.  That nearly doubles the 13 next-largest gold-stock ETFs’ combined net assets!  GDX is this sector’s juggernaut.

It just enjoyed a rather-remarkable nine consecutive trading days of rallying, blasting 13.7% higher in mid-October!  That was fueled by a parallel big 5.3% gold surge, which the major gold stocks dominating GDX amplified by a good 2.6x.  Historically GDX has usually leveraged material gold moves by 2x to 3x.  While certainly an impressive win streak, it was only its last few days that proved important technical milestones.

Gold rapidly surged to extremely-overbought levels in late September, dramatically upping the odds for a rebalancing selloff.  I analyzed gold’s high selloff risk in-depth in an early-October essay.  That pullback indeed got to work, although it was retarded by soaring geopolitical risks after Iran lobbed hundreds of ballistic missiles into Israel!  Still gold retreated a modest 2.4% over a couple weeks into early October.

That dragged GDX a proportional 6.8% lower, for larger 2.9x downside leverage.  That selloff started from this sector ETF’s upleg-to-date peak of $41.64, leaving GDX well lower.  But gold stocks were quick to claw back their losses, with GDX rallying back to $41.49 last Thursday the 17th.  Both levels remained barely decisively above GDX’s last major peak of $40.87 in mid-April 2022, yet still in that resistance zone.

A decisive breakout is exceeding an old closing high by 1%+, which happened on September 24th when GDX closed over $41.28.  But technical analysis is subjective, with most support and resistance lines on charts drawn by hand.  So from a visual standpoint on a multi-year chart, gold stocks still looked to be near major upper resistance around GDX $41.  They could easily still retreat, forming a double topping.

This gold-stock-technicals chart of recent years illuminates that $41 resistance zone.  In order for that minor breakout mathematically to become major psychologically, GDX had to blast considerably higher into new chart territory.  New highs had to look visually-striking, which finally happened a week ago on Friday the 18th.  GDX soared a huge 4.0% higher that day, indisputably achieving a major secular breakout!

It was the best kind too, happening despite no real news.  Gold did rally 1.1% to its third record high in a row of $2,721, but there was no Fed-dovish key economic data to drive that.  Mounting geopolitical fears heading into a weekend likely played a role, as the world anxiously awaited Israel’s crippling retaliation against Iran for that ballistic-missile barrage.  GDX’s big 4.0% up day amplified gold’s by a huge 3.7x.

Precious-metals sentiment lurched sizably to shifting bullish, thanks to gold’s defiant October rally and that big, round, psychologically-important $2,700 level being exceeded.  Gold really should have sold off considerably this month.  Leading into October, gold was not only extremely-overbought but speculators’ gold-futures longs had hit their 5th-highest levels on record!  So massive mean-reversion selling was likely.

And recent weeks’ market conditions have been pretty bearish for gold.  The AI stock bubble continued to greatly distract investors, as the flagship S&P 500 stock index melted up to several new record highs of its own.  Major economic-data releases including monthly US jobs, CPI inflation, PPI inflation, and retail sales all deviated from Wall Street expectations in Fed-hawkish directions, lowering expected Fed rate cuts.

Entering October futures implied traders were expecting the FOMC to cut another 69 basis points at its two remaining meetings in 2024, on top of its emergency-grade 50bp initial cut in mid-September.  Then another 104bp was expected in 2025.  All that was the equivalent of fully nine quarter-point cuts by the end of next year, aggressive easing!  That outlook was quite-bearish for the US dollar but bullish for gold.

Fast-forward to midweek, and a big jobs upside surprise, hotter-than-expected CPI and PPI inflation, and better retail sales had crunched those expected rate cuts back down to 38bp more in 2024 followed by another 86bp in 2025.  That would total seven quarter-point cuts, slashing two off the table in just several weeks.  The US Dollar Index reflected fewer probable cuts, soaring 3.5% higher month-to-date as of midweek!

Normally speculators look to the USDX’s fortunes for their primary cues to trade gold futures, then do the opposite.  And specs’ extreme longs and very-low shorts left them big room to sell as the dollar soared.  Yet very unusually that didn’t happen.  Instead of falling an inversely-proportional 3.5% to the USDX’s October rally, gold somehow blasted 3.2% higher during it!  That reflected and fueled way-more-bullish sentiment.

Naturally gold-stock traders love seeing the metal that drives the miners’ profits continue achieving new highs.  And the big round numbers generate more trader excitement and financial-media buzz.  We’ve been blessed with lots of those this year.  In late March when gold bested $2,200 for the first time in history, GDX surged 2.1% on top of the prior day’s +3.8%!  A week later when gold hit $2,300, GDX shot up 3.2%.

Gold’s first-ever close above $2,400 arrived in mid-May, which was celebrated with a big 3.4% GDX up day.  Then $2,500 fell in mid-August, catapulting GDX up 3.2% that day and 1.9% the next!  $2,600 was broken in late September, and GDX surged 2.0% that day after +1.7% the day before.  So there is certainly plenty of recent precedent for GDX’s big 4.0% surge last Friday when gold first exceeded $2,700.

That particular big gold-stock up day was very important technically, since it erupted just under GDX’s upleg-to-date peak.  That shot GDX up to $43.15 on close, the highest seen since early August 2020.  That was the visually-striking $41-resistance-zone breakout GDX needed to generate more gold-stock excitement among traders and the financial media!  Then it got better, as GDX surged 2.0% to $44.09 this Tuesday.

Gold stocks have largely been out of favor for a long time, over a decade now.  While there have been plenty of strong uplegs for speculators to trade for big gains, there hasn’t been enough accumulating upside progress for investors.  Before this week, GDX only closed above $44 on three trading days in the entire span since late January 2013!  That was a three-day streak in early August 2020 as a monster gold upleg topped.

Gold uplegs have to achieve 40%+ gains with no 10%+ corrections to achieve monster status, and the last one before today’s emerged out of March 2020’s pandemic-lockdown stock panic.  Gold soared exactly 40.0% higher over 4.6 months in that, which the major gold stocks of GDX amplified 3.4x to a huge 134.1% gain!  GDX crested at $44.48, one day before gold.  That makes for a critical technical juncture.

Just this Tuesday, GDX closed merely 0.9% under surpassing that last monster-gold-upleg peak.  A close above there would be an 11.8-year secular high for this leading gold-stock benchmark!  Seeing decade-plus breakouts is exceedingly-rare in markets, so those have big psychological impacts.  The gold stocks are within spitting distance of a massive secular breakout that will drive much interest and enthusiasm.

I suspect that’s coming soon.  Both gold and gold stocks have pulled back in recent days, which is totally normal after the metal rocketed up to extremely-overbought levels and the miners enjoyed an exceptional up-day streak.  Uplegs and bull markets are never linear, taking two steps forward before one step back.  Periodic selloffs are essential to bleed off excess greed and rebalance sentiment, extending uplegs’ longevity.

At best since early October 2023, gold’s current monster upleg has soared an extraordinary 51.0% higher!  Remember that GDX has historically amplified major gold moves by 2x to 3x, implying major gold stocks should be up 102% to 153% by now.  Yet at its latest interim high this week, GDX had “only” rallied 70.2% over the last 12.6 months during gold’s huge upleg.  Festering apathy and bearishness forced this lagging.

But as gold itself powers up to more nominal records, and GDX achieves rare decade-plus highs, sector bullishness is going to continue growing.  Gold stocks’ secular breakout will fuel more bullish coverage in the financial media, which will make more traders aware of their upside and deploy capital to chase their gains.  This bullish dynamic becomes self-feeding, the faster gold stocks rally the more traders rush to buy.

If GDX merely recovers to 2x upside leverage to gold’s gains so far, we’d be looking at $52.33 which would be the best gold-stock levels since late October 2012!  That eternity ago gold was only running near $1,725, and gold miners’ earnings were radically lower.  If GDX gets to 3x before gold’s upleg gives up its ghost, that would catapult it to $65.54!  Nothing like that has been witnessed since early September 2011.

That was one day after GDX’s all-time-record high of $66.63, which happened soon after gold challenged $1,900 for the first time ever.  Normal gold-stock gains relative to gold have a real shot at launching GDX to new all-time highs in coming months!  That would really accelerate coverage, awareness, bullishness, and buying.  When traders reawaken to this sleeper sector, the epic gains they drive can be life-changing.

Case-in-point is gold’s last mighty secular bull, which ran from April 2001 to August 2011 yielding epic 638.2% gains.  The end of that was when GDX hit that record high.  As GDX was born during that bull, it doesn’t have total gains through it.  But the older and very-similar HUI gold-stock index comprised of most of the same component stocks skyrocketed 1,664.4% higher during that bull!  Talk about multiplying wealth.

Today’s secular gold bull was born in December 2015 at $1,051.  While it took awhile to get going and moved in fits and starts, gold has powered 161.4% higher so far as of this week.  GDX’s best gains during this span are only 253.6%, for very-weak 1.6x upside leverage.  That’s way under the 2.6x achieved in gold’s last secular bull, implying massive catch-up rallying left to do.  Gold stocks’ epic fundamentals support this.

The gold miners are just starting reporting their best quarterly earnings ever by far, fueled by awesome record gold prices.  I wrote an entire essay a couple weeks ago analyzing gold stocks’ imminent epic quarterly results.  In a nutshell, GDX-top-25 miners’ unit earnings are on track to skyrocket over 100% YoY to a dazzling new record $1,247 per ounce!  And that immense profits growth is nothing new for this sector.

In the last four reported quarters ending in Q2’24, the GDX top 25 have already seen unit earnings soar 94%, 42%, 35%, and 84% YoY!  That has driven gold-stock valuations dramatically lower, to low double-digit and even single-digit trailing-twelve-month price-to-earnings ratios.  So fundamentals fully justify gold stocks soaring much higher to reflect their enormous profitability with these record prevailing gold prices.

It’s unfortunate investors have mostly abandoned gold stocks, but understandable after a dozen years of grinding sideways.  But this sector’s big uplegs and corrections provide great opportunities for active trading.  I’ve been recommending specific gold-stock trades as opportunities arise for a quarter-century now in our subscription newsletters, totaling 1,531 as of Q3’24 averaging great +16.0% annualized realized gains!

That’s roughly double the long-term stock-market average, in a neglected contrarian sector!  Gold-stock gains are going to grow much larger once investors start returning en masse.  And that psychological tipping point is nearing with gold stocks’ secular breakout building steam.  With gold stocks still lagging gold’s monster record-shattering upleg, now is the time to do your homework and add gold-stock allocations.

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The bottom line is gold stocks just achieved a major secular breakout to four-plus-year highs.  And just a little more rallying will lift GDX to its best levels in nearly a dozen years.  Such long-term breakouts are very rare in markets, and generate much interest and bullishness.  They greatly expand awareness of the breaking-out sectors, enticing wider groups of traders to chase those mounting gains with aggressive buying.

And way-more gold-stock upside from here is highly-probable and fully-justified.  The major gold stocks have really lagged gold’s monster upleg over this past year, an anomaly needing to mean revert to normal upside leverage.  And the gold miners will soon report epic record Q3 earnings, extending their trend of massive year-over-year growth.  Rampant undervaluation remains despite this sector’s secular breakouts.

Adam Hamilton, CPA

October 25, 2024

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