Gold remains largely forgotten, off the radars of most investors.  But that’s likely to change soon as this leading alternative investment is nearing a major bull breakout.  Once gold climbs to decisive new bull-market highs, sentiment will turn and investors’ interest will surge.  Their resulting buying will rapidly drive gold higher, attracting in more capital inflows. Gold is only a couple modest up days away from that key breakout.

Universally in all markets, traders’ psychology is completely dependent on price action and levels.  When prices are high and rising, speculators and investors alike eagerly buy in. They love chasing winners, so buying begets buying.  This creates powerful self-reinforcing virtuous circles, with rising prices helping to entice in ever-more traders. In recent years this dynamic catapulted the market-darling FANG stocks higher.

With capital inflows following performance, investments that aren’t high and rallying naturally see waning popularity.  That’s the story of gold over the past couple years or so. Gold’s last new bull-market high came way back in early July 2016, when it hit $1365. That was 21.3 months ago, which may as well be an eternity in terms of sentiment.  In most traders’ minds, gold has effectively been dead and buried ever since.

While contrarian investors always follow gold, most mainstream investors don’t.  They only get interested when gold is powering up to major new highs. This psychology holds true everywhere in the markets, it’s certainly not unique to gold.  A handful of mega-cap tech stocks have soared since Trump’s election win in November 2016, but other mega-cap tech stocks have lagged far behind. Traders always pursue performance.

This first chart looks at gold’s technical price action over the past couple years or so.  A mighty new bull market erupted out of deep despair, blasting higher with steep gains. But the gold-investment-driving force behind it soon reversed, so this young bull stalled out. Gold hasn’t been able to best those initial bull highs ever since. So with no new highs to spark excitement, gold has slipped off investors’ radars.

Gold prices are heavily influenced by gold-futures speculators.  The extreme leverage inherent in futures trading enables these traders to punch way above their weight in bullying the gold price around.  There is nothing these guys fear more than Fed rate hikes, even though history proves that’s absolutely irrational.  So heading into the Fed’s first hike of this cycle in December 2015, gold slumped to ugly 6.1-year secular lows.

But such extreme bearishness made no sense, as gold has thrived in past Fed-rate-hike cycles.  So once that initial rate hike came and gold didn’t plunge, speculators rushed to buy back in to gold futures after that $1051 low.  They were soon joined by investors with their huge pools of capital. They were spooked by the first stock-market corrections in 3.6 years, which boost gold demand to diversify stock-heavy portfolios.

Thus gold soared 29.9% higher in just 6.7 months in essentially the first half of 2016, easily crossing that classic +20% new-bull-market threshold.  Gold’s $1365 bull peak in early July 2016 was closely tied to stock-market fortunes, coming the very day before the flagship US S&P 500 stock index achieved its first new record close in 13.7 months.  With stock markets off to the races again, gold investment demand waned.

Gold had been very overbought after such a blistering rally, and speculators had record long positions in gold futures which is a contrarian indicator.  But gold still consolidated high in the summer of 2016 until it was hit by two anomalous events.  First gold-futures stops were run as gold fell below $1300, driving a sharp drop to its 200-day moving average.  Gold recovered quickly from that until Trump’s surprise win.

Very few traders expected Trump to stage a colossal underdog upset and win the presidential election in early November 2016.  It was an extreme contrarian position, seen as madness. Interestingly as I wrote the very weekend before that voting, a powerful stock-market indicator predicted Trump would indeed win!  That soon came to pass, shocking speculators and investors into greatly reevaluating their outlooks.

With Republicans soon to control the presidency and both chambers of Congress, traders’ euphoria flared to eye-searing brilliance.  They were captivated by hopes for big tax cuts soon, and rushed to buy stocks with reckless abandon.  As the stock markets surged first on Trumphoria and later taxphoria, gold fell deeply out of favor.  Investors abandoned it since they felt no need to prudently diversify their soaring portfolios.

Thus a normal healthy gold correction after a strong upleg cascaded into a 17.3% plunge over 5.3 months ending in December 2016.  Such sharp losses naturally devastated gold psychology among traders. The bull market was still alive and well technically, as gold didn’t cross that -20% new-bear trigger.  But gold was still left for dead as the levitating stock markets sucked in most capital. Traders had largely moved on.

But gold still looked really bullish in mid-December 2016, as I explained within days of that correction low.  Investors were radically underinvested in gold after fleeing in the election’s wake.  And the truly incredible psychology unleashed by the Republican sweep wasn’t sustainable or repeatable.  It’s pretty rare where nearly everyone gets presidential and congressional elections so wrong! So gold was overdue for some buying.

Ever since that post-election anomaly it has indeed powered higher on balance in the solid uptrend you can see in this chart above.  Gold has been relentlessly carving a series of higher lows and higher highs, which made for a 20.4% upleg over the next 13.3 months.  That’s actually big enough to qualify as a new bull market, but again gold never entered a bear. Such strong price action should’ve improved sentiment.

But it really didn’t.  The extreme taxphoria last year made 2017 one of the most-extraordinary years on record for the US stock markets.  The S&P 500 ceaselessly levitated to a massive 19.4% gain in the first year of the Trump Administration, accompanied by record-low volatility.  With big US stocks powering higher so dramatically and painlessly, who needed gold?  It tends to rally when stock markets are selling off.

While contrarians were rightfully impressed with gold’s strong bull-market uptrend since those anomalous post-election lows, mainstream investors didn’t know or care.  Everything was rainbows and unicorns for them, despite dangerous bubble valuations in the stock markets.  While gold’s 13.2% rally in 2017 would command attention normally, the 35% to 57% gains in the FANG stocks overshadowed it and stole the limelight.

There’s no doubt over a year of gold seeing higher lows and higher highs is very-bullish price action.  All students of the markets would recognize this viewing gold charts. But climbing support and resistance lines are lost on the financial media and mainstream investors.  Investments only start garnering talk and mindshare when major new highs are hit.  Popular psychology is totally dependent on that one technical aspect.

Futures speculators view the horizontal $1350 line as key technical resistance.  Gold has tried and failed to break out above it from several to nearly a dozen times since the summer of 2016 depending on how you slice such attempts.  These guys need to see a decisive $1350 breakout to really motivate them to buy again. I define decisive as 1%+ beyond an old technical extreme, or about $1364 in gold’s case today.

That’s just a stone’s throw away, very close.  Last week gold closed near $1352, and this week it was still up at $1349.  All gold needs to see is a couple modest up days of 0.6% to push it back over $1365 for the first time in 21.3 months!  That would work wonders for sentiment, rapidly turning it to bullish which would fuel much gold-futures buying.  And the speculators currently have lots of room to buy gold futures.

As of the latest Commitments of Traders report before this essay was published, total spec gold-futures longs are only running 25% up into their past year’s trading range.  That means 3/4ths of these traders’ likely capital firepower remains available to buy back in.  Believe me, if they think gold is going to break out above $1350 resistance they will flood in with a vengeance.  These elite traders follow charts by necessity.

Every gold-futures contract controls 100 troy ounces of gold, worth $134,900 this week. Yet these only require traders to keep $3,100 of cash per contract in their accounts. That works out to absurdly-extreme 43.5x maximum leverage!  The legal limit in the stock markets has been 2x for decades.  Traders running at that crazy limit would lose 100% of their capital risked if gold merely moves 2.3% against their futures bets.

At 20x leverage that risk is still suffocating, with a 5% adverse move necessary to wipe out capital risked.  So when gold looks to be breaking out above $1350, these traders will rush to buy to cover shorts and add new longs.  They are well aware gold has formed a giant ascending-triangle chart pattern over the past couple years or so.  That’s defined as rising lower support compressing a price into horizontal upper resistance.

When ascending triangles resolve, it’s usually with a sharp-to-explosive upside breakout. Once that long-vexing overhead resistance fails, traders rush back in catapulting the price higher.  When gold breaks out of such a massive ascending triangle, technically-oriented traders are going to get the heck out of the way if they are short and rush to ride the breakout on the long side.  Futures speculators live and breathe technicals.

Their coming buying will fuel a far-more-important breakout.  To the financial media and investors, new bull highs are the only thing that will draw their interest.  Before July 2016’s $1365 bull-to-date peak, the last time gold closed over $1365 was way back in March 2014.  So a $1365+ close right now would be a major new 4.1-year high. You better believe that will catch investors’ attention, getting gold back on radars!

A 1% decisive breakout above $1365 requires $1379 on close.  That sounds lofty since it’s been so long since gold challenged $1400, but it is merely 2.2% above this week’s levels! When investors start getting excited about gold again, it takes months or even years to reestablish meaningful portfolio positions.  The vastly-larger pools of capital they control overpower and dwarf whatever the futures speculators are doing.

As I explored a couple months ago, investors are radically underinvested in gold today. They will have to shift capital into gold for a long time to come to reverse this major anomaly.  New gold bull-market highs all alone will prove a powerful motivator for them. But that will likely be amplified greatly by the ongoing stock-market correction.  Stock selloffs ignite big investment demand for counter-moving gold to diversify portfolios.

If either speculators buy gold futures or investors buy gold and its major ETFs led by GLD SPDR Gold Shares in any significant quantities, gold will absolutely see these major breakouts.  And there’s actually a good probability of that coming to pass in the next month or so.  Gold tends to enjoy a major seasonal rally from late March to late May.  That ought to be plenty big to drive gold decisively over $1350 and $1365.

This should really excite contrarian speculators and investors.  While the gains in gold will be nice, they will be trounced by the accompanying surge in the gold miners’ stocks.  This sector’s leading benchmark is the GDX VanEck Vectors Gold Miners ETF.  Its technical price action over this same gold-bull span is shown in this second chart.  While gold is nearing new bull highs, the gold stocks are lagging far behind.

With little interest in gold since Trump’s election victory, the gold miners’ stocks have been abandoned and left for dead.  They’ve been drifting sideways in a vexing consolidation between $21 to $25 in GDX terms since late 2016. That’s despite their very-strong fundamentals.  In their latest-reported quarter of Q4’17, these leading gold miners reported collective all-in sustaining costs averaging just $858 per ounce!

That’s far below prevailing gold prices, showing this industry is earning fat operating profits.  In Q4’17 gold averaged about $1276 per ounce. In the latest Q1’18 which the gold miners will soon report on, that surged 4.1% quarter-on-quarter to a $1329 average.  That implies profits of $471 per ounce, which is up 12.7% QoQ from Q4’17’s results!  The gold miners are thriving which stock prices haven’t recognized yet.

In Q1’18 GDX’s average price of $22.57 was actually 0.8% lower than Q4’17’s $22.76!  This highlights how deeply out of favor the gold miners are. But that psychology will reverse dramatically on that coming major gold breakout.  Once gold starts hitting new highs again, traders will flock back to gold stocks since their mining profits leverage and amplify gold’s gains. That will drive a parallel big breakout in major gold stocks.

This week GDX was languishing near $23, dead-center in its 15.6-month-old consolidation between $21 support and $25 resistance.  It would have to surge to $25.25 for a decisive breakout that would attract in a deluge of new capital. That’s 9.9% higher from this week’s levels, which actually isn’t much at all for this small volatile sector.  Once gold stocks start rallying, they tend to move fast making for huge gains.

Since gold’s bull market began in mid-December 2015, GDX has actually seen 55 trading days with 3%+ gains!  That’s nearly 1 out of every 10 trading days over that entire 2.3-year span. The gold stocks are truly less than a week of decent rallying away from a decisive breakout of their own.  And once they start moving, traders will rush to buy back in to ride their explosive upside. When gold is in favor, this sector soars.

In roughly the same span of this gold bull’s first upleg in the first half of 2016, GDX skyrocketed 151.2% higher in 6.4 months on the parallel 29.9% gold upleg.  That made for awesome wealth-multiplying 5.1x upside leverage to gold!  While gold stocks are abandoned and forgotten when gold isn’t on traders’ radars, once they get interested again the gold stocks stage massive catch-up rallies.  The next one is nearing.

The major gold miners’ early-2016 upleg wasn’t extreme at all considering the fundamentally-absurd prices gold stocks were trading at back then.  GDX actually slumped to an all-time low, while the major gold stocks as measured by their HUI index were at a 13.5-year low.  They were trading at levels last seen in July 2002 when gold was near $305. So they needed to soar to mean revert out of that crazy anomaly.

Another massive mean reversion higher is certainly needed today.  Gold first hit this week’s $1350 levels in mid-October 2010. Since this metal was carving new all-time highs, investors were eager to buy in for the ride.  Back then GDX was trading over $57, or 150% higher than today’s levels with these same prevailing gold prices!  GDX’s bull-to-date peak in early August 2016 was $31.32, or just 36% higher from here.

So there’s a high chance the gold-stock upleg driven by the coming gold breakout will easily catapult the gold stocks to new bull highs too.  During the last secular bull in gold stocks between November 2000 to September 2011, the HUI skyrocketed 1664% higher.  There were 11 major uplegs during that span that averaged 81% gains over 7.9 months each!  So seeing gold stocks rally 40% or 50% from here is nothing.

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 this year 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.

While investors and speculators alike can certainly play gold stocks’ coming powerful upleg with the major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals.  Their upside will far exceed the ETFs, which are burdened by over-diversification and under-performing gold stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.

At Zeal we’ve literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when.  As of the end of Q4, this has resulted in 983 stock trades recommended in real-time to our newsletter subscribers since 2001.  Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +20.2%!

The key to this success is staying informed and being contrarian.  That means buying low before others figure it out, before undervalued gold stocks soar much higher.  An easy way to keep abreast is through our acclaimed weekly and monthly newsletters.  They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  For only $12 per issue, you can learn to think, trade, and thrive like contrarians. Subscribe today, and get deployed in the great gold and silver stocks in our full trading books!

The bottom line is gold is nearing a major bull breakout above $1365.  That will turn psychology bullish and bring traders back in droves. Gold is rallying ever closer to new bull-market highs as evidenced by its massive multi-year ascending-triangle chart pattern now nearing a bullish climax.  Today gold is only a couple percent below that decisive breakout, which will finally blast it back onto the radars of investors.

That’s likely coming soon, with gold in the midst of its major spring seasonal rally. Speculators have lots of room to add gold-futures longs, while investors remain radically underinvested.  And once gold comes back into favor, the abandoned gold miners’ stocks are going to soar. Their prices are far below where they ought to be based on their fundamentals and prevailing gold levels.  Their upside from here is enormous.

Adam Hamilton, CPA

April 20, 2018

Copyright 2000 – 2018 Zeal LLC (www.ZealLLC.com)

The world’s leading gold-stock ETF is nearing a major upside breakout from key technical levels.  GDX is getting closer to challenging and powering above $25.  That would accelerate the sentiment shift in this deeply-undervalued sector back to bullish, enticing investors to return.  Good operating results from the major gold miners in their upcoming Q4’17 earnings season could prove the catalyst to fuel this GDX $25 breakout.

The classic way to measure gold-stock-sector price action is with the HUI NYSE Arca Gold BUGS Index.  But the HUI benchmark is being increasingly usurped by the GDX VanEck Vectors Gold Miners ETF as the gold-stock metric of choice.  GDX is used far more often than the HUI in gold-stock analyses these days, both online and on financial television.  I haven’t seen the HUI mentioned on CNBC for years now.

GDX does have major advantages over the HUI.  Most importantly it is readily tradable as an ETF and with options.  GDX’s component stocks and their weightings are also regularly updated by elite gold-stock analysts, keeping it current.  The HUI is rarely if ever updated to reflect company-specific changes in the ranks of the world’s top gold miners.  GDX is dynamic where the HUI is effectively static and outdated.

GDX also has limitations as a gold-stock metric though.  It was only born in May 2006, so that’s the limit of its price history available for analysis.  And because its managers are paid 0.51% of its assets each year to maintain this ETF, GDX is not as pure of measure of gold-stock performance as a normal index.  Over a decade that adds up to a substantial 5% difference.  Nevertheless GDX’s popularity continues to grow.

This week GDX had $7.7b in assets under management, dwarfing its direct competitors.  That was 21x larger than the next-biggest 1x-long major-gold-stock ETF!  GDX’s sister GDXJ Junior Gold Miners ETF weighed in at $4.7b, but that generally includes smaller gold miners.  GDX is the undisputed king of the gold-stock ETFs.  As a contrarian speculator, I watch GDX’s price action in real-time all day every day.

For an entire year now, GDX has meandered in a relatively-tight trading range between $21 to $25.  As gold stocks periodically fell even deeper out of favor, this ETF slumped down near $21 lower support.  Then as they inevitably rallied back out of those lows, GDX climbed back up near $25 resistance.  That made for a roughly-20% gold-stock price range, certainly narrow by this sector’s standards and tough to trade.

This GDX chart over the past couple years or so highlights 2017’s gold-stock consolidation.  With this unloved sector neither rallying nor falling enough to get interesting, investors mostly abandoned it over the past year.  So gold stocks largely drifted sideways on balance, which certainly proved vexing for the few remaining contrarian speculators and investors.  A GDX $25 breakout would greatly improve psychology.

Last year’s gold-stock performance per GDX was very poor.  This ETF’s price climbed 11.1% in 2017, which is better than a kick in the teeth.  But gold’s impressive 13.2% gain last year well outpaced the gold stocks’ performance.  Normally the major gold miners’ stocks amplify gold advances by 2x to 3x, so GDX should’ve powered 26% to 40% higher in 2017.  Gold stocks are only worthwhile if they outperform gold.

That’s because gold miners face many additional operational, geological, and geopolitical risks compared to just owning gold outright.  So if the gold stocks don’t outperform gold, they simply aren’t worth owning.  Seeing them lag the metal which drives their profits for essentially an entire year is extremely anomalous.  It’s a reflection of the entire global markets proving extremely anomalous in 2017, an exceedingly-weird year.

Gold stocks normally perform much more like 2016 than 2017.  A couple years ago GDX rocketed 52.5% higher in one of the best major-sector-ETF performances in all the stock markets.  That greatly amplified 2016’s underlying 8.5% gold advance by 6.2x.  All those gains rapidly accrued in that year’s first half, as GDX skyrocketed 151.2% higher in 6.4 months on a parallel 29.9% gold upleg!  Gold stocks can really move.

But last year as extreme record-high stock markets and the even-more-extreme bitcoin popular speculative mania stole the spotlight from gold, gold stocks were largely left for dead.  Speculators and investors alike wanted nothing to do with classic alternative investments when everything else proved much more exciting.  Thus GDX hasn’t been able to decisively break out above its $25 upper resistance, despite trying.

GDX did power 34.6% higher in 1.8 months early last year, peaking on a closing basis at $25.57 in early February 2017.  But that rally fizzled with gold’s when stock markets started surging to new records on hopes for big tax cuts soon from the newly-Republican-controlled US government.  By early March GDX had retreated back down to $21.14, right at its $21 support line.  At least that held strong throughout 2017.

The gold stocks soon rebounded into another rally, but that topped at $24.57 in GDX terms in mid-April.  Again gold had stalled out amidst epic general-stock euphoria.  Gold is the key to gold-stock fortunes, as traders only think about the gold miners when gold itself catches their attention.  GDX was repelled right at its 200-day moving average, which can prove both major support or resistance depending on market direction.

By early May GDX was right back down to $21.10 again, increasingly establishing the clear consolidation trend seen in this chart.  The gold stocks couldn’t rally significantly heading into their summer-doldrums lull, and GDX was soon right back down to $21.21 in early July.  That very day I published an essay on gold stocks’ summer bottom, predicting a new upleg once those usual weak summer seasonals passed.

And that indeed happened, with GDX rebounding and then accelerating to power 20.2% higher to $25.49 by early September.  That was right at its early-February peak, a critical level technically to see a major upside breakout.  But once again gold didn’t cooperate, selling off sharply as general stock markets yet again blasted to another series of record highs on renewed hopes for big tax cuts soon.  Taxphoria was huge!

Thus the gold stocks slumped again, falling back down near GDX’s strong $21 support as this ETF hit $21.42 on close in mid-December.  That was the day before the Federal Reserve’s fifth rate hike of this cycle, so gold-futures speculators were scared.  They irrationally fear Fed rate hikes are bearish for gold, even though history has long proven just the opposite.  Gold and gold stocks surged after that hike as I predicted.

From the day before that latest FOMC meeting to this week, GDX rallied 13.8% to $24.37.  Wednesday morning when I decided to pen this essay, GDX was nearing $24.50.  So the long-awaited decisive $25 breakout is in easy reach.  Gold stocks are a volatile sector, with 3%+ daily swings in prices relatively common.  So all it will take to propel GDX above its $25 resistance is a few solid-to-strong sector up days.

The upcoming Q4’17 earnings season for the major gold miners in the next few weeks could prove the catalyst to spark serious gold-stock buying. Because gold stocks are so deeply out of favor, the small fraction of traders that even think about them assume they are struggling operationally. Throughout all the markets, traders wrongly attribute prices stretched to anomalous levels by extreme herd sentiment to fundamentals.

A month ago bitcoin skyrocketed near $20k as many traders believed such extremes were fundamentally righteous due to the underlying blockchain technology.  Yet it was a popular speculative mania, extreme greed sucking people in.  In early December I warned “Once this mania bitcoin bubble bursts, and it will, the odds are very high that bitcoin will lose 50% to 75% of its value within a few months on the outside!”

This week just over a month later bitcoin has indeed been cut in half, falling to $9k intraday.  Extreme prices are the result of irrational and ephemeral herd sentiment, not fundamentals.  Gold stocks are now stuck on the other end of the psychology spectrum, plagued with extreme fear.  Since their prices have been so weak, traders think poor fundamentals must be the reason.  But that’s simply not true at all.

As a contrarian speculator and market-newsletter writer for the past couple decades, few people are more deeply immersed in the gold-stock realm than me.  Every quarter just after earnings season I dive into the actual operating and financial results of the major GDX gold miners.  I’m eagerly looking forward to doing that again with their new Q4’17 results, which will be reported between late January and mid-February.

So now the latest quarterly results available from the major gold miners are Q3’17’s.  I explored them for the top 34 GDX gold miners, representing almost 92% of its total holdings, back in mid-November.  In Q3’17 these elite gold miners reported average all-in sustaining costs of $868 per ounce.  That’s what it costs them not only to produce gold, but to explore for more and build new mines to maintain production levels.

Q3’17’s average gold price was $1279, which means the major gold miners were collectively earning profits around $411 per ounce.  That made for hefty 32% profit margins, revealing an industry actually thriving fundamentally instead of struggling as herd-sentiment-blinded traders wrongly assume.  Gold miners make such excellent investments because their mining costs generally don’t follow gold prices.

Gold-mining costs are essentially fixed during mine-planning stages, when engineers and geologists work to decide which ore to mine, how to dig to it, and how to process it.  Once mines’ necessary infrastructure is built, their actual mining costs don’t change much.  Quarter after quarter generally the same levels of equipment, employees, and supplies are needed to mine gold.  So all-in sustaining costs hold pretty steady.

In the four quarters leading into Q3’17, the top-34 GDX gold miners’ all-in sustaining costs averaged $855, $875, $878, and $867.  That works out to an annual average of $869, virtually identical to Q3’17’s $868 per ounce.  Those flat AISCs happened despite the gold price varying greatly in that five-quarter span, with this metal slumping as low as $1128 and surging as high as $1365.  Gold-mining costs are static.

So as long as prevailing gold prices remain well above all-in sustaining costs, mining gold remains very profitable and spins out big positive operating cashflows.  And relatively-flat mining costs generate big gold-miner profits leverage to gold.  These core fundamental truths about gold-mining stocks are what could help their upcoming Q4’17 results ignite the buying necessary to propel GDX above $25 for a major breakout.

These new Q4 results aren’t going to be spectacular, as gold’s $1276 average price last quarter was just under Q3’s $1279 average.  But assuming flat all-in sustaining costs as usual, $868 in Q4 would still yield fat profit margins of $408 per ounce.  That too is virtually unchanged from Q3’s $411.  So the major gold miners as a sector shouldn’t see collective downside surprises in earnings in Q4, avoiding damaging sentiment.

It’s not the Q4’17 results that should spark major gold-stock buying, but their implications for the current Q1’18 quarter.  While Q1 is young, gold is averaging nearly $1323 so far as of the middle of this week.  That is already 3.6% above Q4’s average, which is a big move higher.  If these gold levels hold and the major gold miners’ all-in sustaining costs hold, they are looking at Q1’18 profits way up at $455 per ounce!

That’s a whopping 11.5% higher quarter-on-quarter!  Not many if any sectors in all the stock markets can even hope for such massive earnings gains.  And if gold continues powering higher in the coming months in a major new upleg, Q1’s average gold price will be pulled higher accordingly. That means even larger major-gold-miner profits growth.  These super-bullish prospects ought to rekindle material gold-stock demand.

Investors usually buy stocks not because of current earnings, but because of what they expect profits to do over the coming year or so.  Rising gold prices coupled with flat costs give gold-mining profits growth in 2018 some of the greatest upside potential in the entire stock markets.  Institutional investors should take notice of this as Q4’17 results are released, leading to funds upping their tiny allocations to gold stocks.

On top of that January tends to be a big news month for the gold miners, as many publish their cost and production outlooks for the new year.  These reports tend to be bullish on balance, with the major gold miners forecasting higher production and lower costs tending to garner the most attention.  So there’s good odds of positive newsflow over the coming weeks as well, drawing investors’ focus back to gold stocks.

All this shows why the gold miners’ stocks have usually enjoyed strong seasonal rallies in January and most of February.  So GDX now has its best chance in a year of decisively breaking out above $25 in the coming weeks.  That would work wonders for bearish gold-stock psychology.  The more gold stocks rally, the better herd sentiment, and the more traders want to buy them.  And GDX’s potential upside is huge.

This last chart encompasses nearly all of GDX’s entire history going back to early 2007, a half-year after it was birthed.  Gold stocks remain wildly undervalued today, so GDX $25 and even its $31.32 seen at gold stocks’ latest major interim high in early August 2016 are super-low in longer-term context.  GDX is actually still down near stock-panic levels, highlighting vast upside as gold stocks inevitably mean revert higher.

The shaded area in the lower right encompasses the last couple years.  Despite GDX seeing one heck of a bull-spawning upleg in early 2016, the gold stocks remain very low.  GDX itself actually hit an all-time low in January 2016.  The gold stocks were trading at fundamentally-absurd prices as I pointed out that very week.  That extreme anomaly was the product of fleeting herd sentiment, it had nothing to do with fundamentals.

So far in young 2018, GDX is averaging $23.66 on close.  That’s actually worse than Q4’08’s $25.13, which was during the most-extreme market-fear event of our lifetimes.  For the first time since 1907, the general stock markets suffered a full-blown panic in late 2008.  Everything else including gold and its miners’ stocks were sucked into that epic maelstrom of fear.  Traders were terrified, fleeing in horror from everything.

So GDX plummeted as low as $16.37 in late-October 2008, climaxing a devastating 71.0% drop in just 7.5 months.  In that panic quarter of Q4’08, gold averaged just $797.  While industry costs were lower then, the major gold miners were still earning much less in both profit-margin and absolute terms than they are today.  Yet the average GDX share price was much higher in Q4’08 than it’s been over the past year!

The fact GDX could trade around $25.13 during a stock-panic quarter with $797 gold highlights the sheer madness of today’s gold-stock prices.  Since 2017 dawned, GDX has averaged just $22.99 with $1261 average gold levels.  Seeing gold-stock prices 8.5% lower despite strong profits and average gold prices being a whopping 58.2% higher makes zero sense!  The gold stocks have to mean revert far higher from here.

That’s what happened after the extreme pricing anomalies of that late-2008 stock panic too.  Over the next 2.9 years, GDX more than quadrupled with a 307.0% gain!  Another proportional mean-reversion bull out of early 2016’s all-time GDX low would catapult this ETF back up near $51.  That’s still more than another double from today’s levels.  And with gold mining so profitable, this new bull’s gains should be far larger.

While investors and speculators alike can certainly play gold stocks’ powerful coming upleg with major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals.  Their upside will far exceed the ETFs, which are burdened by over-diversification and underperforming gold stocks.  A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.

At Zeal we’ve literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when.  As of the end of Q4, this has resulted in 983 stock trades recommended in real-time to our newsletter subscribers since 2001.  Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +20.2%!

The key to this success is staying informed and being contrarian.  That means buying low before others figure it out, before undervalued gold stocks soar much higher.  An easy way to keep abreast is through our acclaimed weekly and monthly newsletters.  They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  For only $12 per issue, you can learn to think, trade, and thrive like contrarians.  Subscribe today, and get deployed in the great gold and silver stocks in our full trading books!

The bottom line is the leading GDX gold-stock ETF looks to be on the verge of a major breakout.  The upcoming Q4’17 results from the major gold miners along with Q1’s higher prevailing gold prices ought to catch investors’ attention.  The gold miners should prove very profitable in Q4, with prospects for big and fast earnings growth in Q1 and all of 2018 as gold powers higher.  This should help GDX get bid well over $25.

Once gold stocks power decisively above that vexing upper resistance level of the past year, the shift in trader psychology back to bullish will really accelerate.  Gold stocks should enjoy relatively-large capital inflows from institutional investors looking for undervalued sectors in an extremely-overvalued stock market.  The forgotten gold miners’ stocks have a good chance to outperform everything again this year like in 2016.

Adam Hamilton, CPA

January 19, 2018

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