The gold miners’ stocks are drifting listlessly in the summer doldrums, largely forgotten by investors and speculators. They are missing a fantastic opportunity to buy low in this barren sentiment wasteland when no one else wants to. The gold stocks remain exceedingly cheap relative to the metal which drives their profits, and they continue to establish a strong technical base. They are ready to soar as gold returns to favor.
Gold-stock investing feels pretty thankless these days, like an exercise in self-flagellation. Thus there aren’t many traders left in this realm. Week after week as gold stocks continue to drift on balance, the ranks of remaining investors and speculators dwindle. Interest in this sector is among the lowest I’ve ever seen in decades of actively trading gold stocks. They’ve been left for dead as contrarians vanish.
That’s rather unfortunate since multiplying wealth in the stock markets requires buying low before later selling high! Stock prices rarely get lower than when traders universally view their sector with apathy or even antipathy. So the best times to buy low are when it feels the worst, when everyone else thinks it is crazy to deploy capital. If you want to buy stocks dirt-cheap, you have to do it when it feels miserable to do.
Ironically gold stocks have always tended to perform poorly in the first halves of summers. Yet traders so quickly forget, getting depressed again each year when summer doldrums return like clockwork. There’s no hope of overcoming herd psychology which leads to buying high then selling low without some understanding of market cycles. June and early July have always been the weakest time of the year for gold stocks.
A couple weeks ago I published my latest research on gold’s summer doldrums in modern bull-market years. They are nothing to fear, offering the best seasonal buying opportunities of the year in gold, silver, and their miners’ stocks. This chart shows how gold stocks are tracking this summer compared to their past summers’ behavior, using the benchmark HUI NYSE Arca Gold BUGS Index since it has such a long history.
The yellow lines show individual summers’ gold-stock price action from 2001 to 2012 and 2016 to 2017 in indexed terms. Each year’s final May close of the HUI is set at 100, and then all subsequent movement is recast off that common baseline. An indexed level of 105 means the HUI is up 5% from May’s close. All these modern bull-market-year yellow lines are then averaged together in the red line rendered here.
This year’s summer indexed HUI action is shown in blue. Note that the gold stocks’ drift in recent weeks is merely closely tracking their usual summer-doldrums behavior. There’s nothing out of the ordinary at all here. So far this summer, the HUI has meandered in a trading range from 2.6% under to 1.2% above its May 31st close. That’s well within the center-mass summer trend shown above, which runs from +/-10%.
There’s no reason for traders to get depressed about gold miners’ stocks this time of year when they are only doing what they routinely do in market summers. A sideways-to-lower grind should be expected, as it’s no surprise at all. Investors and speculators need to study market cycles so they understand what’s likely coming and trade accordingly. Otherwise they are going to get battered around by irrational herd sentiment.
Because of these summer doldrums, it’s usually wise to realiztwo-and-a-half years or soe profits leading into summers. If the gold and silver miners’ stocks are relatively low in May, I usually exit the oldest third of my trades ahead of summer’s arrival. If this sector is relatively high and bullishness abounds, I’ll double that pre-June selling to 2/3rds of my trading book. But if super-overboughtness and euphoria reign, I take profits on the whole thing.
Freeing up capital by late Mays when gold’s strong season tends to peak is the best way to play gold’s summer doldrums, keeping it safe in cash while sentiment is eroded. That keeps powder dry to buy the resulting bargains around mid-summers before gold’s major autumn, winter, and spring seasonal rallies get underway. Summer seasonal ebbs should be eagerly anticipated to redeploy back in low, not fretted about.
We run two trading portfolios at Zeal, one each for our popular weekly and monthly newsletters. This year I sold 10 gold-stock and silver-stock trades in May and early June in anticipation of this summer-doldrums drift. Fully 8 had realized gains even in this flat gold-stock market, which averaged +24.3% annualized. The biggest win on these trades was an absolute gain of 62.7%, while the worst loss was only 8.0%.
I’m looking forward to redeploying that cashed-out capital in new trades, probably starting mid-summer and likely at lower prices. The gold stocks remain wound like a coiled spring ready for a massive new upleg, both technically and fundamentally. This next chart looks at the price action in the leading gold-stock trading vehicle, the GDX VanEck Vectors Gold Miners ETF, over the past two-and-a-half years or so.
While the summer doldrums are rarely happy psychologically, gold stocks have been ignored and hated long before this month. Since early 2017 they’ve been trapped in a vexing consolidation. Over the past 18 months or so, GDX has largely drifted sideways on balance between major lower support at $21 and major upper resistance at $25. The intra-trend rallies have been quite tradable, but not big enough to be exciting.
Gold stocks entered this summer in the lower half of that trading range, but still well off the bottom. The recent withering of sector volatility to unnaturally-low levels in recent months highlights ongoing attrition of weary investors and speculators. So far in all of Q2’18, GDX has traded in a super-tight and narrow range between $21.87 to $23.06. That’s just 5.4%, which is abnormally small for this usually-volatile sector.
With the gold miners so flat and dead, they simply can’t compete for traders’ mindshare. By the middle of this week, GDX had actually slumped 5.7% year-to-date. That was reasonable relative to gold, which was down 2.6% over that same span. Gold-stock prices generally leverage gold price moves by 2x to 3x due to the miners’ big inherent profits leverage to gold. But that really underperformed the red-hot stock markets.
The flagship S&P 500 broad-market stock index surged to an all-time high in late January, generating extreme euphoria. And it’s still up 3.5% so far this year despite the sharp-yet-shallow-and-short volatility-shock correction in early February. Some of the market-darling stocks have skyrocketed to astounding gains, like Netflix which is up 117% year-to-date! Never mind it is trading at a ludicrous 280.7x P/E ratio.
Gold itself has always been the leading contrarian investment, tending to rally when stock markets are weakening. So gold has fared the worst historically when stock markets are near major secular peaks. That’s when traders start to believe classic new-era myths, that stocks can rally indefinitely despite very-high valuations. Thus they feel little need to prudently diversify into counter-moving gold when stocks are euphoric.
But invariably overbought, super-expensive stock markets roll over into subsequent bears to rebalance away greedy sentiment and excessive valuations. That’s when gold really starts to shine again. And as goes gold, so go silver and their miners’ stocks. We got a dress rehearsal of that back in the first half of 2016. After a near-record 3.6 years without a single 10%+ correction, stock-market downside finally returned.
The S&P 500 suffered two back-to-back corrections in mid-2015 and early 2016, a 12.4% loss over 3.2 months followed by another 13.3% loss over 3.3 months. Hyper-complacent investors were stunned, once again realizing that stock markets rise and fall. So in the first half of 2016 they remembered gold and started diversifying their risky stock-heavy portfolios. Their big buying drove gold 29.9% higher in 6.7 months!
With gold finally returning to favor after extreme stock-market highs faded, GDX rocketed 151.2% higher in just 6.4 months in roughly the first half of 2016! When gold starts powering higher for long enough to convince traders its run is sustainable, they flock back to beaten-down gold stocks. And that massive gold-stock upleg kicking off a new bull was but a small foretaste of the great feast coming in the next stock bear.
The young gold and gold-stock bulls were oddly put on hold by the powerful stock-market rally following Trump’s surprise election victory in early-November 2016. That unleashed mania-grade buying fueled by euphoric hopes for big tax cuts soon, catapulting the stock markets to a seemingly-endless series of new record highs last year. With stocks relentlessly surging driving great complacency and greed, gold was forgotten.
That left gold stocks trapped in their surreal suspended-animation sideways drift over the past year and a half or so. Their bull is on ice, awaiting the return of gold investment demand which will ignite once these wild stock markets inevitably roll over decisively again. That’s probably coming much sooner than most think, with the major central banks increasingly strangling this epic stock bull their extreme easing fueled.
The Fed’s unprecedented quantitative-tightening campaign to start unwinding long years and trillions of dollars of quantitative-easing money printing started at a modest clip in Q4’17. But it is ramping up to a serious $50b-per-month pace in Q4’18! Meanwhile the European Central Bank is dramatically tapering its own colossal QE campaign which will fully end this December. So the stock markets’ long levitation is over.
Together these dominant central banks so critical to world stock-market fortunes are effectively tightening massively in 2018 and 2019 compared to recent years. A QE-conjured stock bull can’t persist when QE is slashed and reversed. 2018 alone will see the equivalent of $900b more Fed QT and less ECB QE than 2017 when stock markets surged. And in 2019 that number will swell to another $1450b less than 2017!
Today’s literal-bubble stock-market valuations are wildly unsustainable with around a staggering $2350b less liquidity from the Fed and ECB in 2018 and 2019 alone. Early February’s sharp correction was just a slight hint of what’s to come. The inevitable reckoning is nearing to pay the piper for this extreme central-bank-goosed stock bull. Stock markets are forever cyclical, and proportional bears always follow bulls.
As that unavoidable next bear gets underway, rest assured gold investment demand will return in a major way. As is typical after long stock bulls, investors are radically underinvested in gold today. They will have to do big buying for years to reestablish normal portfolio allocations. That will propel gold much higher, which in turn will drive an enormous bull market in the despised gold stocks. Gold-stock bulls are huge.
The last time this dynamic of weaker stock markets driving gold demand played out on a large scale was in the 2000s. Over 10.8 years between November 2000 and September 2011, the gold stocks per the HUI skyrocketed a life-changing 1664.4% higher! This sector was the king of wealth multiplication during that long span where the S&P 500 drifted 14.2% lower as part of a secular bear. Gold-stock upside is vast.
This sector’s sideways drift since early 2017 during the anomalous taxphoria stock-market rallies since is a giant basing pattern. Such technical bases form critical foundations for major bull markets, with base size often leading to proportional uplegs. Gold stocks have ground sideways on balance for a year and a half as weak-handed investors and speculators exited, selling their positions to strong-handed ones here to stay.
While gold is trapped in the low-investment-demand summer doldrums for a few more weeks, its major autumn rally is coming. That’s driven initially by Asian post-harvest buying and later by Indian-wedding-season buying. Western investors generally don’t play a material role. As gold starts powering higher again, gold stocks will catch a serious bid. A major breakout above GDX’s $25 resistance is likely later this year.
The fact gold stocks have held solid in their consolidation trading range throughout nearly all of the entire extreme taxphoria stock-market rally is a testament to their underlying strength. Even with this sector’s pervasive hopelessly-bearish sentiment, investment demand has remained strong enough to absorb all the selling. The resulting long technical base has perfectly positioned gold stocks for massive new upside.
This bullish technical picture and an inevitable sentiment mean reversion out of extreme bearishness are reason enough for gold stocks to surge dramatically higher. But supercharging that is the gold miners’ dirt-cheap fundamentals today. They remain radically undervalued compared to prevailing gold prices, not reflecting strong current profitability. That will greatly amplify capital inflows once investors start returning.
The classic fundamental proxy for gold-stock valuations is the HUI/Gold Ratio. It divides daily closes in that leading HUI gold-stock index by gold’s closes, charting the results over time. This reveals when gold stocks are expensive or cheap relative to the metal which drives their profits. All stocks must ultimately trade at reasonable valuations relative to their earnings, and gold stocks have rarely been more undervalued.
This week the HGR was way down around 0.138x, which is incredibly low historically. Even during the first stock panic in a century in late 2008, the lowest the HGR plunged was 0.207x. And that lasted a single day before gold stocks rebounded sharply higher relative to gold. The gold stocks are trading at levels today implying gold and their profits are radically lower, which is an unsustainable fundamental disconnect.
This week GDX and the HUI were way down at $21.92 and 175.4. The HUI first hit this level way back in August 2003, years before GDX was even born. Back then gold was only running $357, and had yet to trade over $380 in its entire young secular bull. Let the insane irrationality of this sink in. Today’s gold-stock prices were first seen 14.9 years ago when gold was merely trading in the $350s, far lower than today!
This week even with its latest summer-doldrums selloff, gold is still 3.6x higher near $1269. These far-higher gold prices should obviously be reflected in gold-stock levels. Yet this sector is still languishing at stock prices not much above the HUI’s extreme stock-panic lows back in October 2008. And back then gold was only trading in the mid-$700s. Today’s gold-stock price levels are truly fundamentally-absurd.
This makes no sense at all, and is only explainable by unjustified extreme bearish sentiment. If any other stock-market sector was trading at levels from a decade or more earlier despite the selling prices of its products doubling to quadrupling, investors would rush to aggressively buy up the bargains. That would rightfully be seen as a short-lived anomaly, a rare chance to buy deeply-undervalued stocks at decade-old prices.
The last quasi-normal years in the markets ran from 2009 to 2012. That 4-year span was sandwiched between 2008’s first-in-a-century stock panic and the era of extreme central-bank QE levitating the stock markets from 2013 on. The HUI/Gold Ratio averaged 0.346x then. Even at the depressed gold prices today, a mean reversion back up to those normal HGR levels would require a monster 150% gold-stock upleg!
But that’s really conservative for two key reasons. First, gold itself is likely to power dramatically higher as its on-ice bull market resumes when these bubble-valued stock markets inevitably roll over. Second, after HGR extremes the mean reversions don’t magically stop at the averages but tend to overshoot proportionally to the opposite extremes. Higher gold prices plugged into higher HGRs yield much-greater upside.
And while you wouldn’t know it from their emaciated stock prices today, the gold miners are faring fine fundamentally. The major gold miners of GDX reported their latest Q1’18 results in early May. They had average all-in sustaining costs of just $884 per ounce. That is what it really costs to operate gold mines as ongoing concerns, including replacing mined gold with new reserves to maintain production indefinitely.
Even at this week’s depressed summer-doldrums gold levels, that implies current fat operating profits of $385 per ounce in this industry. A 10% gold rally from here would boost these profits 33% to $511 per ounce, highlighting the miners’ great profits leverage to gold. And that’s not a stretch at all. After the previous 6 Fed rate hikes of this cycle before last week’s 7th, gold averaged 10.2% gains in subsequent months.
The gold stocks are truly a coiled spring today, ready to explode higher soon and trounce everything else. They are deeply out of favor, incredibly undervalued, and one of the only sectors that can rally sharply when general stock markets sell off. If you want to multiply your wealth by fighting the crowd to buy low then sell high, this small and forgotten contrarian sector is the place to be. Nothing else rivals it.
Gold stocks are basing technically and cheap fundamentally today. While this small contrarian sector has largely been forgotten, its past 18 months’ consolidation trading range continues to hold solid. The longer the basing, the greater the potential upleg when investors return. And despite trading at levels implying far-lower gold prices, the major gold miners are actually earning fat profits today.
Those earnings will surge dramatically as gold continues powering higher in its own bull market. It’s only a matter of time until investors see the extreme market-leading value inherent in the gold miners’ stocks. These lofty stock markets will soon get dragged lower by this year’s unprecedented tightening by the Fed and ECB, rekindling gold investment demand. And the dirt-cheap gold stocks will soar as gold returns to favor.