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Gold reversed hard last week after blasting higher for a month, leaving traders wondering why and what that portends. The answers are found in gold’s dominant short-term driver, speculators’ collective trading in gold futures. Their positioning has grown excessively bullish, they are essentially all-in betting on more gold upside. That spawned a massive and ominous gold-futures-selling overhang, which needs to be normalized.

Since gold-futures trading is so esoteric, most investors and speculators ignore it. That’s a big mistake, as gold’s near-term price action is overwhelmingly driven by what speculators are doing in gold futures. Their buying and selling heavily impacts gold, and those moves are amplified in both silver and the stocks of precious-metals miners. Trading anything in this realm without watching gold futures is like flying blind.

The reason gold, silver, and their miners’ stocks soared between early August to early September was heavy spec gold-futures buying. That exhausted these traders’ sizable-but-still-limited capital firepower, which is why gold’s powerful upleg stalled out last week. Then gold began falling as specs started to unwind some of their excessively-bullish bets. Gold’s recent action is largely a tale of spec futures trading.

Despite being relatively small compared to the broader gold market, gold futures exert disproportional outsized impacts on gold prices. Unfortunately the gold-futures tail usually wags the gold dog, mostly due to a couple key factors. Gold-futures trading allows extreme leverage far beyond anything seen in normal markets, and the resulting gold-futures price is gold’s global reference one that heavily influences sentiment.

Investors normally buy gold outright, so $1 of capital allocated exerts $1 of price pressure which makes for no leverage at 1.0x. Since 1974, the legal maximum allowed in the US stock markets has been 2.0x. So an investor using maximum margin could buy the world’s leading gold exchange-traded fund, the GLD SPDR Gold Shares, at 2.0x. That would effectively double the price impact of $1 of capital deployed to $2.

But gold futures are in an extreme league of their own for leverage. Each COMEX gold-futures contract controls 100 troy ounces of gold, which is worth $150,000 at $1500 gold. Yet this week the maintenance margin required to hold each contract is only $4,500. That’s all the cash traders are required to have in their accounts, enabling crazy maximum leverage as high as 33.3x! $1 of capital can exert $33 of price pressure.

Gold-futures speculators punch way above their weights in moving gold prices because the price impact of their trading is amplified by up to 33.3x! That juiced gold-futures capital radically outguns investors over short periods of time. Traders can choose to use less leverage, and many do. But even at 10x or 20x, significant spec gold-futures activity drowns out everything else. This has big negative side effects.

At 33.3x, traders can’t afford to be wrong for long or risk catastrophic losses. A mere 3.0% gold move against their bets would obliterate 100% of their capital deployed! That forces these guys into extreme myopia. Their gold outlook isn’t measured in weeks and months, but in hours and days. All they can care about bearing such ridiculous risks is piling on and riding gold’s immediate momentum. Nothing else matters.

The extreme leverage inherent in gold futures also enables gold-price-manipulation attempts. Relatively-small amounts of capital can be blitzed into gold futures at full amplification in very-short timeframes to artificially move gold prices. Often these huge buy and sell orders are rapidly placed then cancelled before they can be executed, which is known as spoofing. This fraud is finally leading to criminal convictions.

Gold prices would be far-less volatile, and vastly more reflective of underlying global supply and demand, without that 30x+ gold-futures capital bullying them around. Gold futures’ impact is multiplied even more since that COMEX gold-futures price is the world reference one. That is what investors and speculators watch around the globe, heavily influencing their own gold sentiment and outlooks which affects their trading.

So what speculators are doing in gold futures changes how investors perceive gold in real-time. They love chasing performance, tending to add gold positions on strength while selling on weakness. Thus heavy gold-futures selling amplified through extreme leverage hammering the gold price lower curtails investment buying and spawns selling. The psychological impact of that reference gold-futures price is sweeping!

There’s no doubt gold would be far better off without hyper-leveraged futures trading, which ought to be banned. These speculators should be bound by the same 2x that has served stock markets well for nearly a half-century. The crazy risks and perverse incentives of running 10x, 20x, 30x+ leverage are really contrary to the core mission of futures markets, which is enabling actual physical users to hedge prices.

But we must trade the markets we have, not the ones we want. And gold futures’ current wildly-outsized price impact on gold makes watching speculators’ trading activity essential for gaming gold’s near-term price action. Every week the collective spec trading in gold futures is summarized in the CFTC’s famous Commitments of Traders reports. They are current to Tuesdays closes, but not published until late Fridays.

This chart superimposes the current gold bull over speculators’ total long and short positions in gold-futures contracts. The green long line shows their total upside bets each CoT week, while the red short one tracks their downside ones. Gold powers higher when these leveraged traders are buying, and falls when they are selling. Gold, silver, and their miners’ stocks can’t be successfully traded without following this.

This secular gold bull was born in mid-December 2015, and its maiden upleg was powerful and exciting. Gold soared 29.9% in just 6.7 months, a sea change after languishing in the prior bear market for years! Heavy spec gold-futures buying was the key driver of that mighty move. During that relatively-short span, speculators bought 249.2k gold-futures long contracts while buying to cover another 82.8k short ones.

That added up to a huge 331.9k contracts of total buying in largely the first half of 2016! That is the equivalent of 1032.3 metric tons of gold, or almost 2/3rds of the world’s total mined gold supply that half-year. The other primary driver of gold is investment demand, which was dominated by GLD in that upleg. But GLD’s holdings merely grew 352.6t in that same upleg span, just over a third of gold-futures buying.

The vertical blue lines divide this gold bull into its major uplegs and corrections. Note that uplegs require the green spec-gold-futures-longs line to rise and their red shorts line to fall. Gold can’t consistently rally when these guys aren’t buying. And when they are selling as evidenced by falling longs and rising shorts, gold heads lower in corrections. Speculators’ leveraged gold-futures trading dominates gold’s price action!

Fast-forward to today, where gold has powered 32.4% higher over 12.6 months in its biggest upleg of this bull so far. This move was largely driven by massive spec gold-futures long buying and short covering. This upleg was born last August when these traders were exceedingly bearish on gold. Their longs were relatively low, and their shorts had soared to an all-time-record high of 256.7k contracts. That was super-bullish!

I explained this at the time, writing an essay on specs’ record gold-futures shorts just over a year ago as gold traded under $1200. I concluded then “…gold and silver soon soared on short-covering buying following all past episodes of excessive and record short selling. There’s nothing more bullish for gold and silver than extreme shorts! … Record futures shorts are the best gold and silver buy signals available.”

Because of the extreme risks inherent in gold futures, the group of traders willing to bear these is always fairly small. The capital they collectively command is finite and relatively minor by market standards. So though their price-moving firepower is greatly amplified by radical leverage, their buying and selling soon exhausts itself. Once specs have bought or sold all the gold futures they are able to, gold is going to reverse.

All-time records in spec longs or shorts are easy to identify as extremes not likely to be sustainable for long. Spec longs hit their record high of 440.4k contracts in early July 2016, as this gold bull’s powerful maiden upleg peaked. Spec shorts crested at that 256.7k contracts in late August 2018, which is what birthed today’s strong upleg. But how can we decide what is relatively high or relatively low outside of records?

We want to aggressively buy gold and gold stocks when speculators’ gold-futures positioning grows too bearish, when their longs are low and shorts high. And we need to prepare to sell the resulting winning trades when their collective bets get excessively bullish, evidenced by high longs and low shorts. I’ve tried various approaches to analyzing this over the years, and finally developed a simple one that works.

Every week I game the near-term outlook in gold, silver, and their miners’ stocks by looking at how spec gold-futures longs and shorts are trading relative to their own bull-market-to-date trading ranges. These are expressed as percentages. When gold bottomed in mid-August 2018, total spec longs were 28% up into that range while total spec shorts were at 100% of their own. There was way more room to buy than sell.

The most-bullish-possible gold-futures positioning is specs being all-out, represented by 0% longs and 100% shorts. That means about all they can do is buy, both by adding new longs and buying to cover and close existing shorts. The lower spec longs and higher spec shorts, the more bullish gold’s near-term outlook and the bigger the coming gains as these traders buy to normalize their excessively-bearish positions.

Indeed gold’s latest upleg was driven by massive spec long buying and short covering over the past year or so. During that entire 12.6-month span ending last week where gold climbed 32.4%, total spec longs soared 172.9k contracts while total spec shorts collapsed 157.5k. That adds up to 330.4k contracts of gold-futures buying, the equivalent of 1027.7t. That’s nearly identical to the 331.9k bought in this bull’s first upleg!

Today’s upleg’s latest interim gold high of $1554 came last Wednesday September 4th. The latest weekly CoT report available before this essay was published was current to the previous day’s close. At that point before gold reversed hard and started falling, total spec longs were running 96.3% up into their gold-bull-market trading range since mid-December 2015. Total spec shorts were just 7.6% up into their own range.

The most-bearish-possible gold-futures positioning is specs being all-in, which happens at 100% longs and 0% shorts. Their capital firepower is exhausted, they are tapped out and just can’t materially add to their excessively-bullish bets any more. At that point all they can do is sell, beginning to normalize their lopsided positioning. And gold-futures selling quickly cascades due to the extreme leverage in these trades.

Last Tuesday as gold exuberance mounted, total spec longs ran 431.0k contracts. That was the third-highest on record, after the prior CoT week’s 433.0k and early July 2016’s 440.4k! There wasn’t much room for material new buying with longs so excessive. No matter how excited traders get after a strong gold run, the ranks of gold-futures speculators won’t swell much since the risks they bear are so extreme.

Gold not only faced virtually no more spec long buying last week, but little potential short-covering buying. The total spec shorts of 93.3k contracts weren’t much above their lowest levels seen in this gold bull just a couple CoT weeks earlier. Spec shorts never go to zero, there’s always a floor no matter how big and fast gold rallies. In this bull that has run around 90k or so. This upleg’s huge short covering was out of steam.

When gold-futures speculators’ potential buying exhausts itself, gold has to stall and top out. There’s just no more high-octane leveraged fuel to keep driving it higher. And at that point with specs essentially all-in longs and all-out shorts, it’s only a matter of time until some catalyst sparks selling. Early last Thursday it happened to be news the US-China trade talks are back on and better-than-expected US private-sector jobs.

Neither headline would’ve moved gold much had spec gold-futures positioning not been so extreme. But the only thing these traders could do was sell, and that soon snowballed. Again at 33.3x leverage, gold only has to move 3.0% against speculators’ bets to wipe out 100% of their capital risked. So they have to sell fast or risk ruin. And the more they sell the quicker gold falls, triggering still more selling by other traders.

Now that this gold-futures selling is underway, the extreme gold-futures-selling overhang that led into it has to be largely wiped out. That is likely to take at least a couple months coming from such near-record extremes. That portends a major correction in gold as specs dump their excessive longs and ramp up their barely-existent shorts. This gold bull’s own precedent is certainly ugly, as we saw after its maiden upleg.

In early July 2016 after gold soared 29.9% in 6.7 months, total spec longs and shorts were running 100% and 7% up into their bull trading ranges. By the time the necessary gold-futures selling to rebalance those positions ran its course, gold plunged 17.3% over the next 5.3 months! Just last week specs’ total longs and shorts stretched a similar 96% and 8% up into their bull-market trading ranges, which is menacing.

While gold is in for a major correction, thankfully it isn’t likely to challenge that H2’16 extreme. That was really exacerbated by an exceptional one-off anomaly. Trump’s surprise election win goosed the stock markets on hopes for big tax cuts soon, leading to extraordinary gold selling. Before Trump won, gold had decisively bottomed down just 8.3% before rallying again for weeks. That’s about what’s probable this time.

Speculators’ gold-futures positioning is so important to follow that I always discuss it in our weekly and monthly newsletters for subscribers. Since they graciously fund our business, they get this critical data and analysis well before I consider writing essays on it. I warned about all this in our new September newsletter published early on August 31st. That was before gold cracked on the inevitable gold-futures selling.

My conclusion then was “Gold is overextended, due for a healthy bull-market correction over the near-term. Its technicals are way too overbought, and its sentiment way too greedy. Too many buyers have flooded in too quickly, exhausting gold’s near-term upside potential. My best guess is a 6%-to-12% gold selloff, which the major gold stocks will leverage like usual by 2x to 3x.” That works out to 12% to 36%.

Gold-futures-selling overhangs can’t be taken lightly, as extreme spec positioning never lasts for long. The resulting gold corrections are very healthy for bulls, restoring balance to sentiment and technicals. But there’s no need to get trapped in them and see big prior-upleg gains in gold stocks just evaporate. When gold stocks are very overbought like last week, stop losses should be tightened to protect gains.

To multiply your capital in the markets, you have to trade like a contrarian. That means buying low when few others are willing, so you can later sell high when few others can. In the first half of 2019 well before gold’s breakout, we recommended buying many fundamentally-superior gold and silver miners in our popular weekly and monthly newsletters. We’ve recently realized big gains including 109.7%, 105.8%, and 103.0%!

To profitably trade great gold stocks, you need to stay informed about speculators’ positioning in gold futures which drives gold. Our newsletters are a great way, easy to read and affordable. 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. Subscribe today and take advantage of our 20%-off sale! Get onboard now so you can mirror our coming trades for gold’s next upleg after this correction.

The bottom line is gold stalled and reversed hard because speculators’ leveraged gold-futures bets had grown too excessively bullish. Their longs were way up just under all-time-record highs, and their shorts were way down just over bull-market lows. These gold-dominating traders were effectively all-in longs and all-out shorts, leaving them little room to keep buying but vast room to sell on the right catalyst hitting.

Such gold-futures-selling overhangs resulting from specs waxing too bullish need to be normalized before gold bulls can resume. That only happens through heavy selling, both jettisoning exaggerated longs and ramping up meager shorts. This forces gold into major corrections, which are both necessary and healthy between major bull-market uplegs. They lead to the best buying opportunities seen within ongoing bulls.

Adam Hamilton, CPA

September 16, 2019

The gold miners’ stocks have grown very overbought after soaring dramatically higher in recent months. Blasting really far really fast has left this sector really stretched technically and sentimentally. Excessive gains and greed always soon lead to major corrective selloffs, which are necessary to restore balance. All bull markets, even the most powerful, flow and ebb. Big uplegs are inevitably followed by corrections.

With gold and gold stocks plunging hard Thursday morning, the timing of this research thread is certainly lucky. My weekly-web-essay workflow is well-defined, this happens to be the 877th I’ve written. I have to decide on each week’s topic by early Wednesdays, to do the research and build necessary spreadsheets and charts that day.

Even before this latest bout of selling erupted, the serious downside risks facing overbought gold stocks were readily apparent. According to virtually every technical indicator out there, this sector was looking ever-more extreme in recent weeks. The longer and farther gold stocks surged, the greater the odds for a selloff. I warned about this Saturday morning in the conclusion to our latest monthly newsletter for subscribers.

Before the selling hit I wrote, “Gold is overextended, due for a healthy bull-market correction over the near-term. Its technicals are way too overbought, and its sentiment way too greedy. Too many buyers have flooded in too quickly, exhausting gold’s near-term upside potential. My best guess is a 6%-to-12% gold selloff, which the major gold stocks will leverage like usual by 2x to 3x.” That works out to 12% to 36%!

Stock prices can’t soar higher without material interruptions indefinitely. Even strong uplegs eventually burn themselves out, attracting in all interested buyers over the near-term. They rush to buy to ride the upside momentum, basking in the warm greed. But once their capital firepower is exhausted, price gains stall and peak. That leaves nothing but sellers, and their resulting downside momentum feeds on itself.

The massive gains gold miners’ stocks enjoyed in recent months have truly been extraordinary, stoking widespread greed. This first chart is a seasonal one, rendering this sector’s price action in like indexed terms during every summer in modern bull-market years. Normally gold and gold stocks face seasonal drifts to slumps in market summers, the dreaded summer doldrums. This summer’s monster rally defied that.

Traders use two major benchmarks to measure gold-stock prices, the popular GDX VanEck Vectors Gold Miners ETF and the venerable HUI NYSE Arca Gold BUGS Index. Both of these track the major gold miners’ stocks. While GDX has gradually usurped the HUI in prominence, it remains too young for long-term studies. GDX was born in May 2006, roughly halfway through the last secular gold and gold-stock bull.

So the HUI has to be used to distill all gold-stock summer action from 2001 to 2012 and 2016 to 2019, the modern gold-bull-market years excluding intervening bear years. Every summer is individually indexed to its final May close, which is set at 100. Then its June, July, and August price action is recast from that common baseline. All these individual-summer indexes averaged together show the summer-doldrums drift.

The center-mass trend of this spilled-spaghetti chart is a sideways grind, within 10% either direction of the final May close. This summer’s breakout gold-stock rally is rendered in dark blue, and it proved an utter monster. By the end of August, the HUI had skyrocketed 45.3% higher during the three calendar months of the market summer! The seasonal average in modern gold-bull-market years before 2019 was a 3.2% gain.

The gold miners just soared to their best summer performance in recent decades! The only comparable year was 2016, making its example important for gaming today’s overboughtness. The gold stocks spent the last few months racing higher neck-and-neck with the summer of 2016, trading the lead back and forth multiple times. It wasn’t until the last couple weeks that 2019 injected the nitrous and screamed past.

By the end of July 2016, the HUI had soared 36.3% summer-to-date compared to 2019’s considerably-smaller 26.9% gains in that same span. But by the end of August 2016, those had collapsed back down to +10.1% over that entire summer. This summer’s strong finish after a powerful multi-month rally is truly in a league of its own. Only 2003 rivaled it with 36.9% summer gains, but those started well later mid-summer.

Overboughtness is a relative thing, it can’t be defined absolutely since prevailing price levels gradually change over time. But the biggest summer gold-stock rally in modern history certainly raises concerns of running too far too fast. Gold stocks soaring by about half in several months is a huge move even by their wild standards! This mighty gold-stock surge looks even more extreme considered in longer-term context.

This next chart encompasses the current gold-stock bull since early 2016, which was driven by gold’s own parallel secular bull. Professional institutional investors have often gamed this bull with that leading and dominant GDX ETF, so it is used here rather than the older HUI. While the gold miners’ stocks achieved much technically this summer, there’s no doubt they soared to super-overextended levels which is ominous.

As of this past Wednesday’s close, the data cutoff for this essay, GDX had powered up 76.2% in 11.8 months. Interestingly that’s right in line with the last secular gold-stock bull’s average upleg gain. From November 2000 to September 2011, the HUI skyrocketed 1664.4% higher over 10.8 years! Those gains accrued in 12 separate uplegs. Excluding an anomalous post-stock-panic-recovery one, they averaged 80.7% gains.

It’s hard to believe now, but back in early May GDX languished at $20.17 and you could hardly give away gold stocks! Traders didn’t want anything to do with them when they were universally despised and easy to buy incredibly low. I was pounding the table on buying the dirt-cheap gold stocks last spring, when this sector still had massive near-term upside potential. Near-record gold-futures shorting portended a major upleg.

Near the end of April in an essay on gold futures, I explained why. “Speculators’ big bearish shift in gold-futures positioning will have to be normalized, resulting in big buying that will push gold higher. That upside momentum could really grow… The biggest gains as gold mean reverts back higher will come in the stocks of its miners. They’ve proven resilient as gold swooned, and are poised to surge again.”

The out-of-favor gold stocks ground along near demoralizing lows for most of May, giving traders plenty of opportunities to buy relatively low before they ran again. We took advantage of that then to aggressively load up on fundamentally-superior gold miners and silver miners in our subscription newsletters. Trump of all things proved the catalyst to awaken gold and thus its miners’ stocks. That happened at the end of May.

Gold and gold stocks started surging after Trump threatened Mexico with tariffs, in an attempt to force it to stem the flood of illegal immigration into the U.S. Tying trade tariffs to other issues stunned traders, which unleashed safe-haven buying in gold. That helped the gold stocks rally strongly though much of June, with bullish momentum. But they really didn’t start soaring until late that month on a momentous gold milestone.

While gold technically remained in a bull market, it hadn’t made a new bull-market high since right after this bull’s maiden upleg way back in early July 2016. After 2.9 years with zero new highs, traders had long since lost interest in this sector. But in late June after the Fed shifted its future-rate-hike outlook from hiking to cutting, gold finally staged a decisive bull-market breakout. That changed everything psychologically.

The best gold levels seen in 5.8 years lit a fire under gold stocks, which kept rallying sharply in July when they are usually forgotten. They were getting overbought by mid-July, so momentum flagged heading into month-end. They were starting to roll over into what would’ve likely been a pullback until Trump surprised again, hiking tariffs on China as August dawned. That ignited gold stocks’ latest surge earlier last month.

That too soon started to fade since the gold stocks were so overbought. Smart traders who’ve dedicated many years to studying and understanding market cycles realized a corrective selloff was increasingly likely after such a big and fast surge. But yet again in late August Trump surprised with still another hike on Chinese tariffs! That sparked and fueled another gold and gold-stock rally that persisted into this week.

The result of these three catalyzing Trump-tariff-hike announcements in recent months is the near-vertical gold-stock surge seen in these charts. GDX blasted to its best levels in 3.1 years. That’s not necessarily high absolutely, but it is certainly high relatively. When prices surge really far really fast on major buying as sentiment turns greedy, overboughtness always results. Such blistering rallies inevitably lead to selloffs.

While traders chasing the herd to buy in high later in uplegs practically panic when major selloffs hit, they are actually very healthy. They are essential and necessary to rebalance sentiment, eradicating the out-of-control greed after excessive gains. They force prices lower until technicals grow oversold as popular psychology waxes bearish. That leaves gold stocks relatively low again, a great opportunity to buy back in.

These inexorable upleg-correction cycles are what enable shrewd traders to multiply their wealth in bull markets. The goal is to buy relatively low after the corrections, then sell relatively high after the uplegs. This can only be achieved by doing what’s unpopular, fighting the crowd to do the opposite. When other traders are scared and selling is when to buy low, then when they are excited and buying is when to sell high.

The challenge is defining relatively low and relatively high, seeing oversold and overbought conditions in real-time when they can be capitalized upon. While there are many technical indicators, one of the best is among the simplest. It just looks at prevailing price levels relative to their 200-day moving averages. I call this Relatively Trading, and started developing this system over 15 years ago. It has proven really profitable.

There’s no gold-stock level that can be considered high absolutely across different years and toppings. In early August 2016, GDX peaked at $31.32. From there it would plummet 39.4% over the next 4.4 months in a colossal selloff! That was considered a correction instead of a bear market since gold-stock bull-and-bear cycles are defined by gold’s own. But GDX peaked at $66.63 in September 2011 with gold’s last bull.

Is GDX high at $31, which it again challenged this week, or does it have to get to $67 to be high? Gold stocks’ absolute price levels are irrelevant, as what is exceptionally high or low gradually changes over time. So some kind of reference point is needed to identify overboughtness and oversoldness right as they happen, but that too needs to slowly evolve. I’ve found gold stocks’ 200dma acts as an ideal metric for this.

200dmas aren’t static, they gradually adjust to different prevailing gold-stock price levels. At the same time, they have enough inertia to lag extreme short-term price moves. Calendar months average about 21 trading days, so a 200dma digests the past 9.5 months of price action. Exceptional gold-stock moves stretch current prices far away from their trailing 200dmas. That distance is easily quantifiable to trade upon.

Relativity Trading simply divides daily price closes by their 200dmas and charts the resulting multiples over time. With a sufficiently-long span, especially in trending markets, horizontal trading ranges of these multiples form. After much study and trial and error, I settled with the last 5 calendar years to define Relativity trading bands. Seeing where 200dma multiples trade comparatively offers good buy and sell signals.

Again GDX is much newer than the HUI with a far-shorter price history. And all my years of work applying Relativity to trading gold stocks has used the HUI as their benchmark index. So I’m going to shift back to the HUI for this final chart on gold-stock overboughtness. The Relative HUI indicator, or rHUI, currently has a trading range of 0.80x to 1.50x. This is rendered in this chart with the green and red shaded zones.

Visually a Relativity chart effectively flattens a 200dma, straightening it to 1.00x. Then a price’s multiple to that 200dma oscillates around it over time, in perfectly-comparable percentage terms regardless of the prevailing price levels. No matter where gold stocks are trading, when the rHUI hits 0.80x or 1.50x the actual HUI is trading at 80% or 150% of its current 200-day moving average. Here is this gold-stock bull’s chart.

Thanks to the gold stocks’ blistering rally this summer, the rHUI shot up as high as 1.362x last week. On Wednesday as this upleg’s latest high was hit, the rHUI still ran 1.354x. In other words, the major gold stocks as a sector are stretched 35% to 36% above their 200dma! That is very overbought, and doesn’t happen very often. Gold-stock uplegs usually only deviate from their 200dmas so greatly when they go terminal.

Bull-market uplegs usually start gradually, with not many traders interested in buying relatively low after major corrections. But as uplegs gather steam and gains mount, traders get excited about the upside momentum and want to buy in. The higher prices climb, the more greed grows and the greater the allure of chasing the herd. Thus upleg gains tend to be back-loaded, the majority accruing quickly as uplegs mature.

So really-overbought readings generally only happen late in uplegs. Actual gold-stock topping levels in rHUI terms still vary greatly though. Back in this bull market’s mighty maiden upleg peaking in summer 2016, the rHUI soared as high as 1.70x before drifting back to 1.62x when gold stocks actually crested in early August. But anytime the major gold stocks stretch 25%+ above their 200dmas, traders need to be wary.

Since there’s so much variability in upleg toppings, I generally haven’t sold trading positions outright. My strategy is usually to ratchet up trailing stop losses as prices get more overbought. That effectively locks in more of our upleg gains, while preserving upside potential if the upleg persists even longer. Although stop losses have their own challenges as they can be whipsawed into tripping early, they help manage risk.

I also consider gold-stock overboughtness in rHUI-multiple terms against the backdrop of how speculators are currently positioned in gold futures. Gold stocks are effectively leveraged plays on gold, and the gold-futures traders dominate gold’s short-term price action. I last explained this in depth in a mid-July essay. For our purposes today, realize gold’s own selloffs driving gold stocks’ are almost always governed by futures.

In the latest weekly data, speculators held their second-highest levels of gold-futures long contracts on record! That left their total longs running 97% up into their gold-bull-market trading range since mid-December 2015, which was topped by July 2016’s all-time-record high. When specs are effectively all-in gold-futures longs, all they can do is sell. Excessive long positions precede major corrections in gold.

After that only time spec longs were slightly higher in mid-2016, gold plunged 17.3% over the next 5.3 months which hammered the gold stocks 39.4% lower per GDX! And on the short side of gold futures, in the latest weekly read specs’ total contracts were running just 11% up into their own gold-bull-market trading range. That means they also have little room to buy gold futures to cover shorts, but lots of room to sell.

The most-bearish-possible near-term outlook for gold happens when total spec longs and shorts swing to 100% and 0% up into their bull-market trading ranges. The latest 97% and 11% as of last Tuesday’s close is getting pretty darned close! Since gold stocks will tank with gold regardless of how overbought they get, their downside risks are high. A major correction is far more likely than additional material rallying.

Rather amusingly, warning of overboughtness and impending selloffs after powerful uplegs always gets people riled up. After these 877 weekly essays, I know my e-mail inbox will be full of people telling me what a fool I am Monday morning. How could gold stocks not soar to the moon? This time is different because… The irony is traders should welcome corrective selloffs as they create new buy-low opportunities.

I opened with the first third of my conclusion from our brand-new monthly newsletter, and here’s the rest. “That will rebalance sentiment, paving the way for far-bigger future gains. There’s no sense redeploying capital high before that inevitable selloff arrives. Don’t let that short-term bearishness cloud the big picture. Gold’s powerful surge higher in the last several months changes everything going forward.”

“It confirms gold is indeed in a secular bull market! That was ignored and disputed for years since gold failed to break out to new bull highs. Gold’s decisive breakout and rallying since ballooned interest in it. So future gold and gold-stock uplegs are going to attract way more capital from way more traders around the world, growing them to much-larger sizes.” This latest upleg was fun, but bigger and better are coming.

To profitably trade high-potential gold stocks, you need to stay informed about the broader market cycles that drive gold. Our newsletters are a great way, easy to read and affordable. 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. Subscribe today and take advantage of our 20%-off sale! Get onboard now so you can mirror our coming trades for the next upleg as they are deployed in real-time.

The bottom line is gold stocks are very overbought. The powerful counter-seasonal rally in recent months catapulted gold-stock benchmarks far beyond their 200-day moving averages. Such stretched technicals coupled with very-bullish popular sentiment are a warning this recent upleg is maturing. It is likely to roll over into a healthy correction soon to restore balance, driven by gold-futures selling from spec extremes.

All bull markets flow and ebb, with big uplegs followed by major corrections. Fighting the latter is utterly pointless. Ride the bull-market waves rather than drowning in them. Buy relatively low near the troughs, then sell relatively high near the crests. That means buying when everyone else is scared, before selling when everyone else is greedy. After enjoying a great and very-profitable upleg, we can cash out for the next one.

Adam Hamilton, CPA

September 9, 2019

The battered silver miners’ stocks surged in recent months, staging a strong rebound rally. That overdue turnaround was fueled by silver mean reverting higher on improving sentiment after gold’s decisive bull-market breakout. But silver miners still had a challenging Q2, as most of silver’s gains came after last quarter ended. They continued diversifying into gold to help weather silver’s endlessly-languishing low prices.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the U.S. Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.

The definitive list of major silver-mining stocks to analyze comes from the world’s most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. Launched way back in April 2010, it has maintained a big first-mover advantage. SIL’s net assets ran $476m in mid-August near the end of Q2’s earnings season, 5.3x greater than its next-biggest competitor’s. SIL is the leading silver-stock benchmark.

In mid-August SIL included 23 component stocks, which are weighted somewhat proportionally to their market capitalizations. This list contains the world’s largest silver miners, including the biggest primary ones. Every quarter I dive into the latest operating and financial results from SIL’s top 17 companies. That’s simply an arbitrary number that fits neatly into the table below, but still a commanding sample.

As of mid-August these major silver miners accounted for fully 94.1% of SIL’s total weighting. In Q2’19 they collectively mined 73.7m ounces of silver. The latest comprehensive data available for global silver supply and demand came from the Silver Institute in April 2019. That covered 2018, when world silver mine production totaled 855.7m ounces. That equates to a run rate around 213.9m ounces per quarter.

Assuming that mining pace persisted in Q2’19, SIL’s top 17 silver miners were responsible for over 34% of world production. That’s fairly high considering just 26% of 2018’s global silver output was produced at primary silver mines! 38% came from lead/zinc mines, 23% from copper, and 12% from gold. Nearly 3/4ths of all silver produced worldwide is just a byproduct. Primary silver mines and miners are quite rare.

Scarce silver-heavy deposits are required to support primary silver mines, where over half their revenue comes from silver. They are increasingly difficult to discover and ever-more expensive to develop. And silver’s challenging economics of recent years argue against miners even pursuing it. So even traditional major silver miners have shifted their investment focus into actively diversifying into far-more-profitable gold.

Silver price levels are best measured relative to prevailing gold prices, which overwhelmingly drive silver price action. In early July the Silver/Gold Ratio continued collapsing to its worst levels witnessed in 26.8 years, since October 1992! Those secular extremes of the worst silver price levels in over a quarter century sure added to the misery racking this once-proud sector. That compounded miners’ challenges in Q2.

The largest silver miners dominating SIL’s ranks are scattered around the world. 11 of the top 17 mainly trade in U.S. stock markets, 3 in the United Kingdom, and 1 each in South Korea, Mexico, and Canada. SIL’s geopolitical diversity is good for investors, but makes it difficult to analyze and compare the biggest silver miners’ results. Financial-reporting requirements vary considerably from country to country.

In the U.K., companies report in half-year increments instead of quarterly. Some silver miners still publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q2 approximation. Canada has quarterly reporting, but the deadlines are looser than in the States. Some Canadian miners really drag their feet, publishing their quarterlies close to legal limits.

The big silver companies in South Korea and Mexico present other problems. Their reporting is naturally done in their own languages, which I can’t decipher. Some release limited information in English, but even those translations can be difficult to interpret due to differing accounting standards and focuses. It is definitely challenging bringing all the quarterly data together for these diverse SIL-top-17 silver miners.

But analyzing them in the aggregate is essential to understand how they are faring. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. Some highlights make it into this table. Blank fields mean a company hadn’t reported that data by mid-August, as Q2’s earnings season wound down. Some of SIL’s components report in gold-centric terms.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-August. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each miner’s Q2’19 silver production in ounces, along with its absolute year-over-year change. Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold! That’s truly a double-edged sword. While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. So the next column reveals how pure these elite silver miners are, approximating their percentages of Q2’19 revenues actually derived from silver. This is calculated one of two ways.

The large majority of these SIL silver miners reported total Q2 revenues. Quarterly silver production multiplied by silver’s average price in Q2 can be divided by these sales to yield an accurate relative-purity gauge. When Q2 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. But that’s less optimal, as it ignores any base-metals byproducts.

Next comes the major silver miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drives profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated and hard GAAP earnings, with a couple exceptions necessary.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. Companies with symbols highlighted in light-blue have newly climbed into the elite ranks of SIL’s top 17 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry and individually. The super-low silver prices for most of Q2 really weighed on operating cash flows and earnings last quarter. But the major silver miners’ years-old and still-ongoing diversification into gold helped them weather the brutal low-silver-price storm. They still need silver to power far higher to thrive again.

The silver miners had the cards stacked against them last quarter, so their Q2 results weren’t going to look good. In addition to slumping towards early July’s incredible 26.8-year secular low relative to gold, silver languished for most of Q2. By late May it had fallen 5.0% quarter-to-date, far worse than gold’s own 1.0% QTD loss. While it did rally 6.6% into quarter-end from that nadir, that lagged gold’s 10.2% rebound.

Overall in Q2’19, silver merely eked out a pathetic 1.3% gain despite gold’s blistering 9.1% rally. And silver prices averaged a miserable $14.88 last quarter, plunging 9.9% year-over-year from Q2’18’s levels! Silver was about as deeply out of favor as it can get, which naturally killed any interest at all in the silver-mining stocks. At worst in late May, SIL had dropped 12.2% year-to-date on silver’s own 7.2% YTD loss.

So there weren’t going to be any silver-stock fireworks coming out of such a dismal quarter. Considering that nigh-apocalyptic silver backdrop, the major silver miners fared reasonably well in Q2. They kept on plugging away despite the choking pall of despair. The chronically-weak silver prices continued to justify the years-old shift into gold by traditional silver miners, which was again evident in the top SIL miners’ outputs.

That 73.7m ounces of silver these SIL-top-17 miners produced last quarter fell 1.8% YoY from Q2’18’s levels. Over the 13 quarters since Q2’16 when I started this deep-quarterly-results research thread, the SIL-top-17 peak was 78.6m ounces in Q4’17. Silver production is waning even among traditional major silver miners, its economics have been too constrained. They are increasingly shifting into gold instead.

The collective gold production from these elite silver majors ran 1.5m ounces in Q2’19, shooting up 13.4% YoY! They’ve been increasingly diversifying into gold in recent years as silver languished, since the yellow metal has had way-superior economics. The bombed-out silver prices have heavily impaired silver mines’ generation of operating cash flows and profits. So the silver miners have been forced to adapt.

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But at recent years’ average precious-metals prices, silver mines generate far lower returns than gold mines.

So even longtime traditional silver miners have reallocated much of their capital investments into growing gold outputs at silver’s expense. According to the Silver Institute’s latest World Silver Survey, 2018 was the third year in a row of waning global silver mine production. The mined-silver-supply shrinkage is even accelerating, running 0.0% in 2016, 1.8% in 2017, and 2.4% in 2018! Peak silver could really be upon us.

SIL’s top 3 component stocks commanding fully 38.9% of its total weighting sure exemplify the yellowing of the major silver miners. Pan American Silver currently crowns this leading silver-stock ETF, and has a proud heritage of mining its namesake metal. Last quarter its silver output only grew 2.9% YoY, yet its gold production skyrocketed 190.1% higher to 155k ounces! Thus its silver purity collapsed to merely 34.1%.

PAAS acquired troubled silver miner Tahoe Resources back in mid-November. Tahoe had owned what was once the world’s largest primary silver mine, Escobal in Guatemala. It had produced 5.7m ounces in Q1’17 before that country’s government unjustly shut it down after a frivolous lawsuit on a trivial bureaucratic misstep by the regulator. PAAS hopes to work through the red tape to win approval to restart Escobal.

But the real prize in that fire-sale buyout was Tahoe’s gold production from other mines. That deal closed in late February, so that new gold wasn’t fully reflected until PAAS’s latest Q2 results. Now this former silver giant is forecasting midpoint production of 575.0k ounces of gold and 25.8m ounces of silver in 2019. That is actually deep into mid-tier-gold territory and a far cry from 2018’s output of 178.9k and 24.8m!

SIL’s second-largest component in mid-August as this latest earnings season ended was the Russian-founded but UK-listed Polymetal. Its silver production fell 11.8% YoY in Q2, yet its gold output soared 30.2% to 302k ounces. That actually makes this company a major gold miner, exceeding 1m ounces annually! So not surprisingly only 18.1% of its Q2 revenues were derived from silver, among the lowest of SIL.

SIL’s third-largest component is Wheaton Precious Metals. It used to be a pure silver-streaming play known as Silver Wheaton. Silver streamers make big upfront payments to miners to pre-purchase some of their future silver production at far-below-market unit prices. This is beneficial to miners because they use the large initial capital infusions to help finance mine builds, which banks often charge usurious rates for.

Back in May 2017 Wheaton changed its name and symbol to reflect its increasing diversification into gold streaming. In Q2’19 WPM’s silver output collapsed 20.6% YoY, but its gold surged 17.9% higher! That pushed its silver-purity percentage in sales terms to just 38.0%, way below the 50%+ threshold defining primary silver miners. This gold-heavy ratio is forecast to persist, with WPM allocating more capital to gold.

Pan American will probably soon follow in Wheaton’s footsteps and change its name and symbol to reflect its new gold-dominated future. As miserable as silver has fared in recent years, I’m starting to wonder if the word “silver” in a miner’s name has become a liability with investors. The major primary silver miners are a dying breed, as it’s exceedingly difficult to generate sufficient cash flows and profits mining silver alone.

Major silver miners are becoming so scarce that SIL’s fourth-largest component is Korea Zinc. Actually a base-metals smelter, this company has nothing to do with silver mining. It ought to be kicked out of SIL posthaste, as its presence and big 1/11th weighting really retards this ETF’s performance. Korea Zinc smelted about 64.0m ounces of silver in 2018, which approximates roughly 17% of its full-year revenue.

Global X was really scraping the bottom of the barrel to include a company like Korea Zinc in SIL. I’m sure there’s not a single SIL investor who wants base-metals-smelting exposure in what is advertised as a “Silver Miners ETF”. The weighting and capital allocated to Korea Zinc should be reallocated and spread proportionally across the other SIL stocks. The ranks of major silver miners are becoming more rarefied.

In Q2’19 the SIL-top-17 silver miners averaged just 36.4% of their quarterly revenues from that metal! That was on the lower side of the recent years’ range. Only 3 of SIL’s top-17 component stocks were still primary silver miners last quarter, First Majestic Silver, Silvercorp Metals, and Fortuna Silver Mines. SIL is effectively another gold miners’ ETF, where its holdings derive nearly 2/3rds of their revenues from gold!

With SIL-top-17 silver production sliding 1.8% YoY in Q2’19, the per-ounce mining costs should’ve risen proportionally. Silver-mining costs are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. So the lower production, the fewer ounces to spread mining’s big fixed costs across. But the major silver miners’ Q2’19 costs surged disproportionally.

There are two major ways to measure silver-mining costs, classic cash costs per ounce and the superior all-in sustaining costs. Both are useful metrics. Cash costs are the acid test of silver-miner survivability in lower-silver-price environments, revealing the worst-case silver levels necessary to keep the mines running. All-in sustaining costs show where silver needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q2’19 these SIL-top-17 silver miners reported cash costs averaging $6.88 per ounce, which soared 73.9% YoY! While sounding catastrophic, that remains well under Q2’s average silver price.

That means the silver miners faced no existential threat last quarter despite its terrible silver prices. The reason cash costs soared is because Hecla Mining and Silvercorp Metals both reported negative cash costs in Q2’18 due to big byproduct credits. Excluding them, the comparable cash costs a year ago ran $6.49 which is much closer to last quarter’s levels. The silver miners are doing well holding the line on costs.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain silver mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current silver-production levels.

These additional expenses include exploration for new silver to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee silver mines. All-in sustaining costs are the most-important silver-mining cost metric by far for investors, revealing silver miners’ true operating profitability.

The SIL-top-17 silver miners reporting AISCs in Q2’19 averaged $11.51 per ounce, which was only up 5.3% YoY. That was really impressive considering their waning silver production, and the challenges of producing this metal at such low prices. That was well under late May’s silver low of $14.34, as well as mid-November’s 2.8-year secular low of $13.99. The silver miners are nicely navigating silver’s vexing slump.

At Q2’19’s average silver price of $14.88 and average SIL-top-17 AISCs of $11.51, these miners were earning $3.37 per ounce. That’s not bad for a sector that investors mostly left for dead, convinced it must be doomed. Being so wildly undervalued relative to gold, silver has the potential to surge much higher in this resurgent gold bull. Historically the Silver/Gold Ratio has averaged around 55x, which has big implications.

At early July’s apocalyptic 26.8-year low relative to gold, the SGR plunged all the way to 93.5x! In other words, it took 93.5 ounces of silver to equal the value of a single ounce of gold. But silver was awoken from its zombified stupor soon after, thanks to gold’s decisive bull-market breakout to major new secular highs. So by mid-August as Q2’s earnings season wrapped up, silver had clawed back up to an 88.5x SGR.

By August 15 silver had regained $17.22 at best, which was merely an 18.4-month high. That was still a joke compared to gold though, which at $1524 had soared to its own 6.3-year secular high! In order to mean revert back up to historical norms compared to gold, silver has a long way to go. At $1524 gold, a 55x SGR implies a silver price of $27.71. That’s another 61% higher from silver’s still-weak mid-August levels.

Industry-wide all-in sustaining costs don’t change much regardless of prevailing silver prices. That is because they are largely determined during mine-planning stages, when engineers and geologists decide which ores to mine, how to dig to them, and how to process them to extract the silver. So higher silver prices yield explosive profits growth, which is what makes the volatile silver-mining stocks so alluring to traders.

A silver mean reversion to 1/55th the price of gold at its mid-August prices would catapult silver-mining profits 381% higher at Q2’s AISCs! Capital would deluge into this forsaken sector if these miners were earning $16.20 per ounce on $27.71 silver. And mean reversions out of extreme lows never stop at the historical averages, but their strong upside momentum carries them to proportional upside overshoots.

So the potential silver-miner earnings growth and thus stock-price gains when silver normalizes relative to gold are colossal. But lest that seem like a pie-in-the-sky pipe dream, consider just the first half of Q3’19 already in the books when Q2’s earnings season concluded. As of August 15th, silver had already risen to a $16.10 QTD average. That was 8.2% higher than Q2’s miserable $14.88, and very bullish for the miners.

Assuming Q3’s AISCs stay in line with Q2’s which is highly likely, silver-mining profits could be exploding 36.2% higher QoQ in this current quarter! That of course supports much higher silver-stock prices. All silver and its miners’ stocks need to thrive is for traders to be convinced gold is likely to keep climbing on balance. That necessary shift in overall precious-metals sentiment back to bullish is finally underway.

The caveat is the degree to which silver miners’ earnings amplify this metal’s upside is dependent on how much of their sales are still derived from silver as it reverts north. If the SIL top 17 are still getting 36% of their sales from silver, their stocks should surge with silver. But the more they diversify into gold, the more dependent they will be on gold-price moves. Those aren’t as big as silver’s since gold is a far-larger market.

Back to Q2’19 results, the SIL-top-17 silver miners’ hard accounting metrics mostly weakened. And that makes sense with average silver prices falling 9.9% YoY and these elite silver miners producing 1.8% less. They did manage to achieve a 2.4% gain in total revenues to $3.6b last quarter. That was solely thanks to their collective gold output growing 13.4% YoY. Without that gold, Q2 would’ve looked terrible.

Operating-cash-flow generation was weak, plunging 43.8% YoY to $555m across the SIL top 17. That makes it harder for these miners to invest in future production growth. Their total cash treasuries reported at the end of Q2 also fell 33.9% to $2.4b. Silver needs to rally considerably and stay higher for at least a few quarters before the silver miners can spin off strong cashflows again. Hopefully that’s now underway.

These major silver miners’ hard GAAP earnings in Q2’19 proved really weak, reflecting the miserable prevailing silver prices. Together they reported a collective net loss of $134m, compared to a $463m group profit in Q2’18. Out of the 13 of these SIL-top-17 miners that reported last quarter’s earnings, 8 were losses. Leading the way was the streaming giant Wheaton Precious Metals, which lost $125m alone.

WPM wrote down $166m on a streaming agreement it had overpaid for, a massive non-cash charge that helped torpedo the silver miners’ profits. But I didn’t see any other major writedowns, which was on the impressive side given last quarter’s super-low silver prices. Thankfully traders don’t buy silver stocks for how they’re faring today, but for how they are likely to do as silver mean reverts higher. It’s all about potential.

Silver’s last major upleg erupted in essentially the first half of 2016, when silver soared 50.2% higher on a parallel 29.9% gold upleg. SIL blasted 247.8% higher in just 6.9 months, a heck of a gain for major silver stocks. But the purer primary silver miners did far better. The purest major silver miner First Majestic’s stock was a moonshot, skyrocketing a staggering 633.9% higher in that same short span! SIL’s gains are muted.

The key takeaway here is avoid SIL. The world’s leading “Silver Miners ETF” is increasingly burdened with primary gold miners with waning silver exposure. And having over 1/11th of your capital allocated to silver miners squandered in Korea Zinc is sheer madness! If you want to leverage silver’s long-overdue mean reversion higher relative to gold, it’s far better to deploy in smaller purer primary silver miners alone.

To profitably trade high-potential silver stocks, you need to stay informed about the broader market cycles that drive gold. Our newsletters are a great way, easy to read and affordable. 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. Subscribe today and take advantage of our 20%-off summer-doldrums sale! The biggest gains are won by traders diligently staying abreast so they can ride entire uplegs.

The bottom line is the major silver miners had a challenging Q2. Silver languished the entire quarter, on its way to horrific quarter-century-plus lows relative to gold. Silver didn’t start perking up until mid-July, after gold’s decisive bull-market breakout had lasted long enough to convince traders gold’s upside was real and sustainable. So silver miners’ operating cash flows and earnings were way down last quarter.

That will really change in Q3 as long as silver doesn’t plummet into quarter-end. It’s incredible how fast silver miners’ fundamentals improve with higher silver prices. And silver’s upside potential is enormous, as it has a vast way to go to normalize relative to prevailing gold prices. The more that precious-metals sentiment improves, the more capital will flow into the tiny silver sector catapulting miners’ stocks far higher.

Adam Hamilton, CPA

September 3, 2019

The mid-tier gold miners’ stocks have soared in recent months on gold’s decisive bull-market breakout. They are this sector’s sweet spot for stock-price upside potential, with room for strong production growth which investors love. That’s an attractive contrast to the stagnating major gold miners. The mid-tiers’ recently-reported Q2’19 results reveal whether their fundamentals justify their strong surge this summer.

The global nature of the gold-mining industry complicates efforts to gather this important data. Many mid-tier gold miners trade in Australia, Canada, South Africa, the United Kingdom, and other countries with quite-different reporting requirements. These include half-year reporting rather than quarterly, long 90-day filing deadlines after year-ends, and very-dissimilar presentations of operating and financial results.

The definitive list of mid-tier gold miners to analyze comes from the GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its misleading name, GDXJ is totally dominated by mid-tier gold miners and not juniors. GDXJ is the world’s second-largest gold-stock ETF, with $4.5b of net assets this week. That is only behind its big-brother GDX VanEck Vectors Gold Miners ETF that includes the major gold miners.

Major gold miners are those that produce over 1m ounces of gold annually. The mid-tier gold miners are smaller, producing between 300k to 1m ounces each year. Below 300k is the junior realm. Translated into quarterly terms, majors mine 250k+ ounces, mid-tiers 75k to 250k, and juniors less than 75k. GDXJ was originally launched as a real junior-gold-stock ETF as its name implies, but it was forced to change its mission.

Gold stocks soared in price and popularity in the first half of 2016, ignited by a new bull market in gold. The metal itself awoke from deep secular lows and surged 29.9% higher in just 6.7 months. GDXJ and GDX skyrocketed 202.5% and 151.2% higher in roughly that same span, greatly leveraging gold’s gains! As capital flooded into GDXJ to own junior miners, this ETF risked running afoul of Canadian securities laws.

Canada is the center of the junior-gold universe, where most juniors trade. Once any investor including an ETF buys up a 20%+ stake in a Canadian stock, it is legally deemed a takeover offer. This may have been relevant to a single corporate buyer amassing 20%+, but GDXJ’s legions of investors certainly weren’t trying to take over small gold miners. GDXJ diversified away from juniors to comply with that archaic rule.

Smaller juniors by market capitalization were abandoned entirely, cutting them off from the sizable flows of ETF capital. Larger juniors were kept, but with their weightings within GDXJ greatly demoted. Most of its ranks were filled with mid-tier gold miners, as well as a handful of smaller majors. That was frustrating, but ultimately beneficial. Mid-tier gold miners are in the sweet spot for stock-price-appreciation potential!

For years major gold miners have struggled with declining production, they can’t find or buy enough new gold to offset their depletion. And the stock-price inertia from their large market capitalizations is hard to overcome. The mid-tiers can and are boosting their gold output, which fuels growth in operating cash flows and profitability. With much-lower market caps, capital inflows drive their stock prices higher much faster.

Every quarter I dive into the latest results from the top 34 GDXJ components. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample. These companies represented 83.2% of GDXJ’s total weighting this week, even though it contained a whopping 70 stocks! 3 of the top 34 were majors mining 250k+ ounces, 24 mid-tiers at 75k to 250k, 5 “juniors” under 75k, and 2 explorers with zero.

These majors accounted for 12.8% of GDXJ’s total weighting, and really have no place in a “Junior Gold Miners ETF” when they could instead be exclusively in GDX. These mid-tiers weighed in at 60.9% of GDXJ. The “juniors” among the top 34 represented just 6.6% of GDXJ’s total. But only 1 of them at a mere 0.9% of GDXJ is a true junior, meaning it derives over half its revenues from actually mining gold.

The rest include 2 primary silver miners, a gold-royalty company, and a gold streamer. GDXJ is actually a full-on mid-tier gold miners ETF, with modest major and tiny junior exposure. Traders need to realize it is not a junior-gold investment vehicle as advertised. GDXJ also has major overlap with GDX. Fully 29 of these top 34 GDXJ gold miners are included in GDX too, with 23 of them also among GDX’s top 34 stocks.

The GDXJ top 34 accounting for 83.2% of its total weighting also represent 39.8% of GDX’s own total weighting! The GDXJ top 34 mostly clustered between the 10th- to 40th-highest weightings in GDX. Thus nearly 5/6ths of GDXJ is made up by almost 4/10ths of GDX. But GDXJ is far superior, excluding the large gold majors struggling with production growth. GDXJ gives much-higher weightings to better mid-tier miners.

The average Q2’19 gold production among GDXJ’s top 34 was 157k ounces, a bit over half as big as the GDX top 34’s 299k average. Despite these two ETFs’ extensive common holdings, GDXJ is increasingly outperforming GDX. GDXJ holds many of the world’s best mid-tier gold miners with big upside potential as gold’s own bull continues powering higher. Thus it is important to analyze GDXJ miners’ latest results.

So after each quarterly earnings season I wade through all available operational and financial reports and dump key data into a big spreadsheet for analysis. Some highlights make it into these tables. Any blank fields mean a company hadn’t reported that data as of this Wednesday. The first couple columns show each GDXJ component’s symbol and weighting within this ETF as of this week. Not all are U.S. symbols.

19 of the GDXJ top 34 primarily trade in the U.S., 5 in Australia, 8 in Canada, and 2 in the U.K. So some symbols are listings from companies’ main foreign stock exchanges. That’s followed by each gold miner’s Q2’19 production in ounces, which is mostly in pure-gold terms excluding byproducts often found in gold ore like silver and base metals. Then production’s absolute year-over-year change from Q2’18 is shown.

Next comes gold miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drive profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated, hard GAAP earnings, revenues, and cash on hand with a couple exceptions.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. In cases where foreign GDXJ components only released half-year data, I used that and split it in half where appropriate. That offers a decent approximation of Q2 results.

Symbols highlighted in light blue newly climbed into the ranks of GDXJ’s top 34 over this past year. And symbols highlighted in yellow show the rare GDXJ-top-34 components that aren’t also in GDX. If both conditions are true, blue-yellow checkerboarding is used. Production bold-faced in blue shows any rare junior gold miners in GDXJ’s higher ranks, under 75k ounces quarterly with over half of sales from gold.

This whole valuable dataset compared with past quarters offers a fantastic high-level read on how mid-tier gold miners are faring fundamentally as an industry. This last quarter was interesting, as gold’s awesome breakout surge to major new secular highs didn’t get underway until just before quarter-end. So the mid-tier gold miners had to contend with flat gold prices, with Q2’19’s average of $1309 merely 0.2% higher YoY.

The shuffling in the ranks of GDXJ’s top 34 components continued over this past year, with major gold miner Kinross Gold added. It, Gold Fields, and Harmony Gold really should be shifted exclusively into GDX since their production is way into major-dom. Gold miners of that scale just defeat the purpose of a “Junior Gold Miners ETF”, retarding its upside potential and eroding traders’ confidence in its managers’ competence.

Most of the other new additions are good though, including mid-tiers Buenaventura, Alacer Gold, and Torex Gold. While Hochschild Mining was technically a junior last quarter, it will likely soon grow into a mid-tier mining 75k+ ounces of gold quarterly. But there’s one GDXJ component that reported such an extreme quarter that it skews most of the year-over-year comparisons. That is South Africa’s Sibanye-Stillwater.

SBGL is actually a primary platinum-group-metals miner, which drove nearly two-thirds of its implied revenue based on average metals prices in Q2! Its shrinking South African gold operations are a total mess, just emerging from a 5-month-long strike organized by a violent Marxist union. That crippled its gold mines, and left at least 9 people dead! Sibanye-Stillwater also has to fight South Africa’s absurdly-corrupt government.

Even though that hellish strike ended in mid-April, very early in Q2, SBGL’s gold production plummeted a catastrophic 47.9% YoY last quarter! That catapulted its all-in sustaining costs to a ridiculous $2110 per ounce, up an extreme 60.5% YoY from already-high levels. This shocking anomaly needs to be excluded in GDXJ comparisons. I wouldn’t invest in this company if it was the last miner on earth, it is a nightmare.

Production has always been the lifeblood of the gold-mining industry. Gold miners have no control over prevailing gold prices, their product sells for whatever the markets offer. Thus growing production is the only manageable way to boost revenues, leading to amplified gains in operating cash flows and profits. Higher production generates more capital to invest in expanding existing mines and building or buying new ones.

Thus gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential. In Q2’19 these GDXJ-top-34 gold miners collectively produced 5.0m ounces of gold. That was actually down 1.2% YoY, which is worse than the 0.7% shrinkage the top 34 GDX majors reported last quarter after being adjusted for mega-mergers.

But excluding SBGL’s mayhem, the rest of the GDXJ top 34 actually managed to grow their total output by an impressive 1.7% YoY to 4.9m ounces! That not only trounced the majors, but narrowly bested the world’s aggregate production growth in Q2. According to gold’s leading fundamental authority, the World Gold Council, total world output grew 1.6% YoY last quarter to 28.4m ounces. The mid-tiers are thriving.

The GDXJ mid-tiers were able to enjoy strong production growth because this ETF isn’t burdened with many struggling major gold miners that dominate GDX. Again GDXJ’s components start at the 10th-highest weighting in GDX. The 9 above it averaged colossal Q2 production of 585k ounces, which is 3.7x bigger than the GDXJ top 34’s average! Gold mining’s inherent geological limitations make it very difficult to scale.

The more gold miners produce, the harder it is to even keep up with relentless depletion let alone grow their output consistently. Large economically-viable gold deposits are getting increasingly difficult to find and ever-more-expensive to develop, with low-hanging fruit long since exploited. But with much-smaller production bases, mine expansions and new mine builds generate big output growth for mid-tier golds.

The majors don’t only face that large-base growth problem with their production scales, but also with their stocks’ market capitalizations. The GDXJ top 34 companies averaged $2.5b in the middle of this week, compared to $6.9b in the GDX top 34 when I analyzed their Q2 results last week. With the mid-tiers generally around a third as big as the majors, their stock prices have much less inertia restraining them.

With gold returning to favor since late June’s awesome decisive bull-market breakout, the mid-tier-filled GDXJ is already outperforming the major-dominated GDX. Since its year-to-date low in late May, GDXJ surged as much as 52.1% higher by early August! That was considerably better than GDX’s 46.2% rally in the same timeframe. The longer gold-bull uplegs persist, the bigger the mid-tier outperformance grows.

The mid-tier gold miners continue to prove all-important production growth is achievable off smaller bases. With a handful of mines or less to operate, mid-tiers can focus on expanding them or building a new mine to boost their output beyond depletion. But the majors are increasingly failing to do this from the super-high production bases they operate at. As long as majors are struggling, it is prudent to avoid them.

Also interesting on the mid-tier production front was silver. Last quarter the GDXJ-top-34 miners’ silver output blasted 42.8% higher YoY to 28.2m ounces! Some of these companies indeed saw exploding silver production, led by Yamana Gold’s rocketing up 65.8% YoY to 2.2m ounces and SSR Mining’s soaring a similar 55.8% YoY to 1.5m ounces. But new GDXJ-top-34 components drove most of the silver growth.

Buenaventura and Hochschild Mining produced 5.5m and 4.3m ounces of silver last quarter, and they weren’t in GDXJ’s top 34 in Q2’18. Excluding them, the rest of these mid-tier gold miners actually saw their total silver output slump 5.1% YoY. I’ll discuss the serious challenges silver mining faces in next week’s essay, which will wade through the results of the top silver miners of the leading silver miners’ ETF.

In gold mining, production and costs are generally inversely related. Gold-mining costs are largely fixed quarter after quarter, with actual mining requiring about the same levels of infrastructure, equipment, and employees. So the higher production, the more ounces to spread mining’s big fixed costs across. Thus Q2’19’s solid production growth among the GDXJ top 34 ex-SBGL should’ve yielded proportionally-lower costs.

There are two major ways to measure gold-mining costs, classic cash costs per ounce and the superior all-in sustaining costs per ounce. Both are useful metrics. Cash costs are the acid test of gold-miner survivability in lower-gold-price environments, revealing the worst-case gold levels necessary to keep the mines running. All-in sustaining costs show where gold needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q2’19 these top-34-GDXJ-component gold miners that reported cash costs averaged $672 per ounce. That actually rose a sharp 6.6% YoY, and was worse than the GDX-top-34 majors’ $641 mean.

Sibanye-Stillwater didn’t report Q2 cash costs, so that wasn’t a factor. But a couple of other anomalous situations dragged up this average. Buenaventura has been struggling with weaker production, resulting in extreme $930 cash costs last quarter. And Harmony Gold, a South African miner facing that country’s miserable operating environment, had even-worse $965 cash costs in Q2’19! Those are crazy-high.

Excluding them, the rest of the GDXJ top 34 averaged $650. That’s towards the lower end of the GDXJ-top-34 average range of $612 to $730 in the 13 quarters I’ve been advancing this deep-quarterly-results research thread. As long as cash costs remain far below prevailing gold prices, which was certainly true in Q2, the gold miners face no existential threat. Gold returning to favor is really widening that key survival gap.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

These additional expenses include exploration for new gold to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee gold mines. All-in sustaining costs are the most-important gold-mining cost metric by far for investors, revealing companies’ true operating profitability.

The GDXJ-top-34 AISC picture in Q2’19 looked much like the cash-cost one, with average AISCs surging 6.1% YoY to $941 per ounce. That was on the higher side of the past 13 quarters’ range from $855 to $1002, but way below Q2’s average gold price of $1309. That implies GDXJ’s mid-tier gold miners were already earning sizable $368 profits last quarter. But this AISC read was heavily skewed by SBGL’s mess.

Again that cursed gold miner’s AISCs skyrocketed 60.5% YoY to an unbelievable $2110! That was as high as I’ve ever seen, and SBGL tried to bury this deep in its Q2 reporting. The strike was blamed, even though it ended in early Q2. But remove that wild outlier from the pool, and the rest of the GDXJ-top-34 gold miners averaged AISCs of $896 per ounce. That’s actually right in line with the GDX top 34’s $895.

With gold rocketing back over $1500 earlier this month to hit 6.3-year secular highs, it is easy to assume the gold miners must be thriving fundamentally. And they likely are. But realize the lion’s share of the recent huge gold gains didn’t start until late June when gold decisively broke out to new bull-market highs. So these Q2 results don’t yet reflect these new higher gold prices. But Q3’s are on track to look spectacular.

Gold’s lofty $1446 average price so far this quarter is a whopping 10.5% higher quarter-on-quarter than Q2’s! So the current likely profitability of the gold miners post-gold-breakout is far higher than seen last quarter. Assuming the GDXJ top 34’s average all-in sustaining costs hold flat near $941 this quarter, that implies Q3 profits running $505 per ounce. That’s up a massive 37.2% QoQ from what was seen in Q2!

This incredible profits leverage to gold is what makes gold stocks so alluring during major gold uplegs. Their earnings grow so darned fast, 3.5x gold’s advance in this example, that big stock-price gains are usually fundamentally-justified. In Q2’19, GDXJ averaged $30.46 per share. That’s when you should’ve been buying gold stocks, when they were low and out of favor. I explained their bullish outlook in early April.

So far in Q3 which is more than half over, GDX has averaged $38.43 which is 26.2% higher QoQ. That is still lagging big expected profits growth among mid-tier gold miners this quarter given the much-higher prevailing gold prices. So gold stocks’ strong gains in recent months are fundamentally-righteous, supported by underlying earnings growth and sustainable as long as gold holds over $1446 into quarter-end.

The mid-tier gold miners reported good accounting results last quarter even before gold reignited. The GDXJ top 34’s total revenues soared 23.0% YoY to $6.6b! While that is certainly overstated given the new inclusion of major gold miner Kinross Gold, without it the rest of these companies still saw strong 7.3% YoY growth. That’s impressive given Q2’19’s dead-flat average gold price, up a trivial 0.2% YoY.

These strong operations drove exploding operating-cashflow generation, with the GDXJ top 34’s total blasting 44.2% higher YoY to $2.3b! Even without KGC they still rose 23.6% YoY. And these elite mid-tier gold miners were investing some of this new capital in expanding their mines, which investors always like to see. Their collective cash hoards sunk 12.6% YoY to $6.0b, which remains healthy given mid-tiers’ sizes.

The GDXJ top 34’s profits under Generally Accepted Accounting Principles radically improved as well. Together they earned $291m last quarter, which was a colossal improvement from Q2’18’s $410m loss. Even though $384m of that resulted from an impairment charge by a single component miner that quarter, the mid-tiers’ profits picture still greatly improved. And that was even with last quarter’s still-anemic $1309 gold.

Imagine how awesome these numbers will look in this current quarter given all the gold fireworks since the end of Q2! The mid-tier gold miners generally report their results 4 to 6 weeks after quarter-ends, so Q3’19 fundamental performance will be revealed in the first half of November. As long as gold sentiment remains decent, these Q3 results should really impress and attract in legions of new investors to this sector.

That being said, gold and gold stocks have soared really far really fast this quarter. Sentiment quickly grew greedy as really-overbought levels were reached. Couple that with today’s menacing overhang of huge potential gold-futures selling, and a healthy bull-market correction is likely. But now is the time to do your homework before buying lower later, to ferret out the high-potential gold miners with superior fundamentals.

All portfolios need a 10% allocation in gold and its miners’ stocks! This is more important than ever with gold finally waking up from its long slumber while lofty central-bank-goosed stock markets are looking increasingly precarious. The better mid-tier gold miners are the place to be. Unlike the majors, they are actually growing their production and have far-higher upside coming from lower-market-capitalization bases.

To profitably trade high-potential gold stocks, you need to stay informed about the broader market cycles that drive gold. Our newsletters are a great way, easy to read and affordable. 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. Subscribe today and take advantage of our 20%-off summer-doldrums sale! The biggest gains are won by traders diligently staying abreast so they can ride entire uplegs.

The bottom line is the mid-tier gold miners are thriving fundamentally. Their Q2 results were good, even before gold’s powerful bull-market breakout. They are growing production while holding the line on costs. That means their earnings will soar as gold powers higher on balance in its resurgent bull market. That will support much-higher gold-stock prices in the future, and attract traders back to this long-neglected sector.

Gold’s bull market will flow and ebb as always, so gold-stock positions should be accumulated relatively low in post-selloff troughs. There’s no need to buy high at crests when everyone is excited. But you have to prepare in advance, monitoring the markets and researching the gold miners to be ready to pounce at opportune times. Capital allocations should be focused on mid-tier gold miners with superior fundamentals.

Adam Hamilton, CPA

August 26, 2019

The major gold miners’ stocks have soared in recent months, fueled by gold’s decisive breakout to new bull-market highs. Nothing motivates traders like performance, so interest in this long-neglected sector has exploded. While gold stocks’ technicals and sentiment have greatly strengthened, their just-reported Q2’19 results reveal whether their underlying fundamentals support their powerful surge and further upside.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the US Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.

The definitive list of major gold-mining stocks to analyze comes from the world’s most-popular gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF. Launched way back in May 2006, it has an insurmountable first-mover lead. GDX’s net assets running $11.8b this week were a staggering 44.0x larger than the next-biggest 1x-long major-gold-miners ETF! GDX is effectively this sector’s blue-chip index.

It currently includes 44 component stocks, which are weighted in proportion to their market capitalizations. This list is dominated by the world’s largest gold miners, and their collective importance to this industry cannot be overstated. Every quarter I dive into the latest operating and financial results from GDX’s top 34 companies. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample.

As of this week these elite gold miners accounted for fully 94.5% of GDX’s total weighting. Last quarter they combined to mine 297.6 metric tons of gold. That was 33.7% of the aggregate world total in Q2’19 according to the World Gold Council, which publishes comprehensive global gold supply-and-demand data quarterly. So for anyone deploying capital in gold or its miners’ stocks, watching GDX miners is essential.

The major gold miners dominating GDX’s ranks are scattered around the world. 20 of the top 34 mainly trade in US stock markets, 6 in Australia, 5 in Canada, 2 in China, and 1 in the United Kingdom. GDX’s geopolitical diversity is excellent for investors, but makes it more difficult to analyze and compare the larger gold miners’ results. Financial-reporting requirements vary considerably from country to country.

In Australia, South Africa, and the UK, companies report in half-year increments instead of quarterly. The big gold miners often publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q2 approximation. While Canada has quarterly reporting, the deadlines are looser than in the States. Some Canadian gold miners drag their feet in getting results out.

While it is challenging bringing all the quarterly data together for the diverse GDX-top-34 gold miners, analyzing it in the aggregate is essential to see how they are doing. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. The highlights make it into these tables. Blank fields mean a company hadn’t reported that data as of this Wednesday.

The first couple columns of these tables show each GDX component’s symbol and weighting within this ETF as of this week. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each gold miner’s Q2’19 production in ounces, which is mostly in pure-gold terms. That excludes byproduct metals often present in gold ore.

Those are usually silver and base metals like copper, which are valuable. They are sold to offset some of the considerable expenses of gold mining, lowering per-ounce costs and thus raising overall profitability. In cases where companies didn’t separate out gold but lumped all production into gold-equivalent ounces, those GEOs are included instead. Then production’s absolute year-over-year change from Q2’18 is shown.

Next comes gold miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drives profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated, hard GAAP earnings, revenues, and cash on hand with a couple exceptions.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. Companies with symbols highlighted in light-blue have newly climbed into the elite ranks of GDX’s top 34 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-level read on how the major gold miners are faring fundamentally as an industry. In Q2’19 the world’s larger gold miners continued their longstanding struggle against declining production. Last quarter was another major transition one with this past year’s gold-stock mega-mergers finally settled out. They’ve considerably altered major gold miners’ global landscape, ramping concentration risks in GDX.

Since Q2’19 was effectively the first quarter with those gold-stock mega-mergers complete, we have to start with them. In late September 2018, the world’s second-largest gold miner Barrick Gold rocked this small contrarian sector. It declared it was buying competitor Randgold in an all-stock acquisition worth $6.5b! That deal was to make Barrick the world’s largest gold miner, and was finalized in early January 2019.

But Barrick’s arch-rival Newmont wasn’t willing to lose the pole position, so within weeks it responded with a bigger salvo. In mid-January it announced it was buying its own major gold miner Goldcorp, which was about twice as large as Randgold in gold-output terms! Size does matter for elite gold-mining executives. This massive $10.0b all-stock deal wasn’t consummated until mid-April, encompassing most of Q2’19.

So last quarter was the first one where these new bigger and badder gold-mining behemoths dominated this sector and therefore GDX. Understanding these mega-mergers and their implications is essential for gold-stock traders. Back in mid-February I wrote a comprehensive essay explaining these deals and why they were done. They were desperate and expensive attempts to mask flagging production at both giants.

By the end of 2018, Barrick had suffered colossal annual production declines in 7 of the last 9 quarters averaging 12.4% year-over-year! It had proven incapable of growing its own operations organically, and thus had to resort to buying more. While Newmont had done a far-better job of maintaining its massive gold output, that too shrunk by an average of 5.9% YoY in 2018’s first three quarters. That trend was concerning.

I doubt Newmont’s managers would’ve bought Goldcorp if Barrick hadn’t forced their hand. But seeing their largest competitor gobble up a major gold miner was a shrill wake-up call. New gold deposits that are large enough to support operations at these giants’ huge scales are almost impossible to find, and take over a decade to develop. So buying production is the only way they can maintain their mining tempos.

But sadly for Barrick and Newmont shareholders, these mega-mergers look like an epic boondoggle! Both Randgold and Goldcorp were also suffering shrinking production as I outlined in that mega-merger essay. Combining two sets of major gold miners where all four already struggled to maintain their outputs wouldn’t fix this intractable problem. The mergers just mask it, and only for the first four quarters post-deals.

Narrowly the world’s largest gold miner by market cap, Barrick Gold reported its Q2’19 results on August 12th. Its mega-merger was trumpeted as “building a business that would be a model of value creation for the mining industry.” Barrick’s Q2 gold production rocketed 26.8% higher YoY. But if Randgold’s from Q2’18 is added in to those comparable results, the combined giant actually saw a 2.0% YoY decline in output!

The inexorable depletion-driven shrinkage continues, which will become glaringly apparent when Q1’20 rolls around after 2019’s four quarters of pre-merger to post-merger comparisons. Barrick sure looks to have squandered $6.5b of shareholders’ capital on four quarters of production growth! They should have been furious. If Barrick failed to grow its own output for years, how can it grow that from Randgold’s mines?

So in these tables the year-over-year comparisons show the new post-merger Barrick versus the smaller pre-merger Barrick and Randgold combined in Q2’18. I did the same thing for Newmont and Goldcorp, comparing the newly-merged giant’s Q2’19 results with the total of both its predecessors in Q2’18. It is really important investors and speculators understand that these gold-mining behemoths are not growing.

The new Newmont Goldcorp released its Q2 results on July 25, touting its mega-merger as having “positioned Newmont Goldcorp as the world’s leading gold business for decades to come.” And not surprisingly Newmont’s quarterly gold production soaring 36.6% YoY looked amazing. With gold stocks surging with gold in the month or so before that release, the financial media celebrated Newmont’s huge growth.

Yet shockingly when this post-merger giant’s Q2’19 production is compared to both its predecessors’ from Q2’18, it actually plunged 8.4% YoY! One-upping Barrick, Newmont’s managers apparently blew $10.0b of their investors’ holdings to show four quarters of big trans-merger production growth through Q1’20. But once Q2’20 arrives, all the comparisons will be post-merger and the shrinkage will again become apparent.

These new gold-mining giants are dominating and really distorting their sector. This week Newmont and Barrick commanded a total market capitalization of $63.4b, or 28.7% of the GDX top 34’s total! In terms of GDX weighting, they now account for 21.2% together. That compares to 16.4% in Q2’18 for just the two acquiring companies, and 26.1% for all four major gold miners. GDX is very concentrated in these giants.

Together Barrick and Newmont controlled 30.7% of the total Q2’19 gold production of the GDX top 34. If either of these colossi stumble in coming quarters hurting their stock prices, GDX will get dragged down with them. Traders need to realize GDX is more risky and less diversified than it was before these gold-stock mega-mergers. If you have doubts that Barrick and Newmont can grow, be wary of owning GDX!

Prior to last quarter, the primary theme of the major gold miners was inexorably declining production. I’ve discussed it extensively in earlier essays in this series, including the ones on Q1’19’s and Q4’18’s results from the GDX top 34. The gist of their core problem is large economically-viable gold deposits are getting ever-harder to find, and increasingly-expensive and time-consuming to exploit. Gold’s scarcity is mounting.

The world has been scoured for gold for centuries, with the low-hanging fruit long since picked. Really compounding these challenges, the low gold-stock prices in recent years left these companies largely starved of capital. So their exploration budgets cratered, further pinching their pipelines of new deposits to develop into new mines to replace current depleting ones. Thus Q2’s production growth looked amazing.

Together these elite top-34 GDX majors reported mining 9.6m ounces in Q2’19, which was up a big 5.6% YoY! If we could celebrate this as the potential start of a new production-growth trend, these latest results would have a very different tone. Unfortunately this higher collective gold output is another distortion from the mega-mergers. They combined four Q2’18 GDX component stocks into two, making room for two more.

One of the replacement GDX-top-34 components that climbed into these ranks is Harmony Gold, South Africa’s third-largest gold miner. It shot from being GDX’s 44th-largest holding a year earlier to 33rd this week. Harmony produced 357k ozs of gold in Q2’19 now included in the GDX-top-34 total, while none of its was in Q2’18’s. Excluding it alone collapses the GDX top 34’s output growth to 1.7% YoY, relatively flat.

The silver miners First Majestic Silver and SSR Mining were also newly included, producing 34k and 81k ozs of gold in Q2’19. Another traditional major silver miner Pan American Silver diversified heavily into gold over this past year, buying Tahoe Resources. So Tahoe’s former gold output not included in the GDX top 34’s in Q2’18 was added to Pan American’s in Q2’19, which nearly tripled it to 155k ozs last quarter.

Adjust for these new inclusions into GDX’s top-34 ranks, and their total Q2’19 gold production among the comparable companies actually shrunk a modest 0.7% YoY! The major gold miners’ long-vexing growth problems certainly haven’t gone away. And gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential.

Sooner or later global peak-gold production will be reached, after which it starts declining on balance as major gold miners fail to find enough new deposits to replace depleting ones. That will leave smaller mid-tier gold miners able to consistently grow their output far more attractive for investors than the stagnating larger majors. So the major-dominated GDX isn’t the best way to deploy investment capital in this sector.

The production-cost front in Q2’19 highlighted the majors’ challenges. Gold-mining costs are mostly fixed quarter after quarter, with production generally requiring the same levels of infrastructure, equipment, and employees. These big fixed costs are largely determined during mine-planning stages, when engineers and geologists decide which gold-bearing ores to mine, how to dig to them, and how to recover their gold.

Because these ongoing mining costs are spread across quarterly production, gold output and unit costs are usually inversely proportional. The richer the gold ores fed through fixed-capacity mills, the more gold produced. The more gold produced, the more ounces to bear mining costs which lowers per-ounce costs and thus increases profitability. Q2’19’s slightly-lower gold output should’ve led to slightly-higher costs.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q2’19 these top-34-GDX-component gold miners that reported cash costs averaged $641 per ounce. Bucking the production trend, this was actually up a sharp 5.2% YoY from Q2’18’s read!

Neither of the new mega-miners helped, with Barrick and Newmont seeing cash costs climb by 7.6% and 1.1% YoY to $651 and $759 respectively. Dragging the average higher was Peru’s Buenaventura, which continues to struggle with production issues. Its gold mined in Q2’19 plunged 22.0% YoY, forcing cash costs up 16.7% to an extreme $930! Excluding that wild outlier, the rest of GDX’s top 34 averaged $630.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

These GDX-top-34 gold miners reported average AISCs of $895 per ounce in Q2’19, surging 4.6% higher YoY despite slightly-lower production! Those were relatively high absolutely too, the highest seen out of all 13 quarters since Q2’16 when I started this deep-quarterly-results research thread. Plenty of major gold miners are seeing their own costs rise as their production declines, ratcheting up the industry average.

$895 certainly isn’t a problem with gold prices averaging $1309 in Q2’19, enabling hefty profit margins around $414 per ounce. But the trend of rising production costs among the majors leaves them relatively less attractive going forward compared to their smaller peers gradually lowering their costs through higher outputs. This rising-cost trend needs to be watched, as it will retard the majors’ profits growth if it persists.

With gold rocketing back over $1500 in the last couple weeks to hit 6.3-year secular highs, it is easy to assume the gold miners must be thriving fundamentally. And they likely are. But realize the lion’s share of the recent huge gold gains didn’t start until late June when gold decisively broke out to new bull-market highs. So these Q2 results don’t yet reflect these new higher gold prices. That will come in Q3’s results.

Gold’s lofty $1436 average price so far this quarter is a whopping 9.7% higher quarter-on-quarter than Q2’s! So the current potential profitability of the gold miners post-gold-breakout is far higher than seen last quarter. Assuming the GDX top 34’s average all-in sustaining costs hold flat near $895 this quarter, that implies Q3 profits running $541 per ounce. That’s up a massive 30.7% QoQ from what was seen in Q2!

This incredible profits leverage to gold is what makes gold stocks so alluring during major gold uplegs. Their earnings grow so darned fast, 3.2x gold’s advance in this example, that big stock-price gains are usually fundamentally-justified. In Q2’19, GDX averaged $22.03 per share. That’s when you should’ve been buying gold stocks, when they were low and out of favor. I explained their bullish outlook in early April.

So far in Q3’19 which is about half over, GDX has averaged $27.32 which is 24.0% higher QoQ. That is right in line with expected profits growth among the major gold miners this quarter given the much-higher prevailing gold prices. So gold stocks’ strong gains in recent months are likely fundamentally-righteous, supported by underlying earnings growth and sustainable as long as gold holds over $1436 into quarter-end.

The GDX top 34’s accounting results in Q2’19 didn’t match their slight production decline when adjusted for the mega-mergers. Interestingly their total revenues of $11.0b were dead flat compared to Q2’18’s, despite average gold prices being 0.2% better. A material factor in the relatively-weak sales was silver, with the GDX top 34 mining 11.3% less than they did in Q2’18. Miners are increasingly diversifying out of silver.

With its price languishing at miserable lows compared to gold for years now, it has been nowhere near as profitable to mine as gold. Silver recently started outperforming again after gold’s bull-market breakout, which began to improve precious-metals sentiment. But silver’s upside will have to exceed gold’s on balance for years to convince gold miners to invest in gold deposits with significant silver byproducts again.

Those $11.0b of sales the GDX-top-34 gold miners did yielded hard GAAP earnings of $621m in Q2, for a pathetic 5.7% profits margin. Some impairment charges contributed, led by Wheaton Precious Metals writing down $166m on a streaming agreement it overpaid for. Hedging was also a factor, as some of these major gold miners lock in future selling prices. That’s going to kill their profits in Q3 after gold’s surge.

The new monster gold miners had divergent earnings pictures last quarter. Barrick reported $223m in net profits, 35.9% of the entire GDX top 34’s! That was without any unusual gains either, clean operating results after its second merged quarter. Its $869 AISCs contributed, which were a long way below the average gold price in Q2. That was a vast improvement from Q2’18, when Barrick and Randgold lost $18m.

The newly-merged Newmont on the other hand reported a $25m loss last quarter, which was also clean with no unusual charges. Probably thanks to that $10.0b buyout of Goldcorp, expenses skyrocketed 55.1% YoY despite the flat gold prices! Shareholders should be getting out the torches and pitchforks. In Q2’18, together Newmont and Goldcorp reported decent profits of $161m. Did the merger impair that potential?

The operating-cash-flow front looked much better, with the GDX top 34’s total climbing 10.5% YoY to $3.2b in Q2’19. Strong OCF generation is essential to funding future growth, both expanding existing gold mines and adding new ones. Every single GDX-top-34 component reporting OCFs had positive ones, with 18 of those 29 seeing growth despite the flat gold prices. That’s an encouraging sign for the majors.

These elite gold miners collectively reported $10.1b of cash in their coffers at the end of Q2. While that was down 20.0% YoY, it is still a healthy treasury. The gold miners tap into their cash hoards when they are building or buying mines, so declines in overall cash balances suggest more investment in growing future production. They desperately need to do that to slow their depletion inexorably shrinking their output.

Overall the major gold miners of GDX reported a solid Q2’19, which again was mostly before gold surged in its powerful breakout rally of recent months. Unless gold collapses in the next 6 weeks, Q3’19 results should prove radically better. While the risks of a normal healthy short-term gold correction are high due to gold-futures speculators’ excessively-bullish positioning, gold-stock fundamentals support higher prices.

A quarter ago when I published my GDX Q1’19 results essay, GDX had slumped 1.6% year-to-date and no one wanted to buy gold stocks low despite their huge opportunities. That has sure changed as I forecast it would, with GDX soaring to 34.7% YTD gains as of the middle of this week! Since traders love chasing winners, gold stocks are way more popular. GDX definitely isn’t the best way to own this sector though.

This ETF’s potential upside is really retarded by large gold miners struggling to grow their production. So the smart investment capital will seek out the smaller mid-tier and junior gold miners actually able to increase their outputs. Investing in excellent individual miners with superior fundamentals has far-greater upside potential. While some are included in GDX, their relatively-low weightings seriously dilute their gains.

To profitably trade high-potential gold stocks, you need to stay informed about the broader market cycles that drive gold. Our newsletters are a great way, easy to read and affordable. 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. Subscribe today and take advantage of our 20%-off summer-doldrums sale! The biggest gains are won by traders diligently staying abreast so they can ride entire uplegs.

The bottom line is the major gold miners’ just-reported Q2’19 earnings season was solid. Gold didn’t take off until late June, so they hadn’t yet materially benefitted from its breakout surge. With the recent mega-mergers finally settling out, gold stocks saw slightly-lower production at materially-higher costs. That hit accounting profits, but operating-cash-flow generation was strong. Higher gold will greatly improve Q3 results.

That being said, the major gold miners are still struggling to grow their production. The mega-mergers will help mask that for one year, but the intractable underlying problem persists. That leaves smaller mid-tier gold miners with superior fundamentals much more attractive for future upside potential. That is where investors should focus their capital allocations to gold stocks, which should approach 10% in all portfolios.

Adam Hamilton, CPA

August 19, 2019

The U.S. stock markets are becoming more unstable, fueling mounting anxiety about what’s likely coming. After surging to new all-time-record highs in late July, stocks plunged in a sharp pullback as the US-China trade war escalated. Stock markets’ resiliency in the face of bearish news is partially determined by how companies are faring fundamentally. The big U.S. stocks’ just-reported Q2’19 results illuminate these key indicators.

The deadline for filing 10-Qs for “large accelerated filers” is 40 days after fiscal quarter-ends. The SEC defines this as companies with market capitalizations over $700m. That easily includes every stock in the flagship S&P 500 stock index (SPX), which contains the biggest and best American companies. The middle of this week marked 38 days since the end of Q2, so almost all the big US stocks have reported.

The SPX is the world’s most-important stock index by far, with its components commanding a staggering collective market cap of $25.8t at the end of Q2! The vast majority of investors own the big US stocks of the SPX, as some combination of them are usually the top holdings of nearly every investment fund. That includes retirement capital, so the fortunes of the big U.S. stocks are crucial for Americans’ overall wealth.

The huge ETFs that track the S&P 500 dominate the increasingly-popular passive-investment strategies as well. The SPY SPDR S&P 500 ETF, IVV iShares Core S&P 500 ETF, and VOO Vanguard S&P 500 ETF are the 3 largest ETFs in the world. This week they reported colossal net assets running $258.5b, $179.3b, and $115.8b respectively! The big SPX companies overwhelmingly drive the entire stock markets.

Q2’19 proved quite volatile in the U.S. stock markets, leading to increasing unease. The SPX surged 3.9% higher in April, hitting 4 new record closing highs. That capped an unbelievable 25.3% rocketing over just 4.2 months, a crazy move higher. That was driven by extreme Fed dovishness, as it panicked following the SPX’s severe 19.8% near-bear correction that bottomed in late December. Euphoria reigned supreme.

But the big US stocks couldn’t stay at such lofty heights, so the SPX fell on balance through May on the way to a 6.8% pullback by early June. China reneged on major trade commitments it made to the US over a year through 10 rounds of high-level trade talks. So Trump ramped tariffs on a $200b tranche of annual Chinese imports into the US from 10% to 25%. US-China trade-war news was a key market driver in Q2.

That considerable selloff was reversed by a hyper-dovish Fed riding to the rescue. First its chairman said the Fed was ready to start cutting rates again, and later top Fed officials’ collective outlook for future rates shifted from one hike to one cut. The SPX blasted 7.6% higher in a few weeks on that, achieving another new record high in late June. The US-China trade war and Fed jawboning and actions will keep fueling volatility.

Every quarter I analyze the top 34 SPX/SPY component stocks ranked by market cap. This is just an arbitrary number that fits neatly into the tables below, but a dominant sample of the SPX. As Q2 waned, these American giants alone commanded fully 44.2% of the SPX’s total weighting! Their $11.4t collective market cap exceeded that of the bottom 439 SPX companies. Big US stocks’ importance cannot be overstated.

I wade through the 10-Q or 10-K SEC filings of these top SPX companies for a ton of fundamental data I feed into a spreadsheet for analysis. The highlights make it into these tables below. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q2’19. That’s followed by the year-over-year change in each company’s market capitalization, an important metric.

Major U.S. corporations have been engaged in a wildly-unprecedented stock-buyback binge ever since the Fed forced interest rates to the zero lower bound during 2008’s stock panic. Thus the appreciation in their share prices also reflects shrinking shares outstanding. Looking at market-cap changes instead of just underlying share-price changes effectively normalizes out stock buybacks, offering purer views of value.

That’s followed by quarterly sales along with their YoY change. Top-line revenues are one of the best indicators of businesses’ health. While profits can be easily manipulated quarter to quarter by playing with all kinds of accounting estimates, sales are tougher to artificially inflate. Ultimately sales growth is necessary for companies to expand, as bottom-line profits growth driven by cost-cutting is inherently limited.

Operating cash flows are also important, showing how much capital companies’ businesses are actually generating. Companies must be cash-flow-positive to survive and thrive, using their existing capital to make more cash. Unfortunately many companies now obscure quarterly OCFs by reporting them in year-to-date terms, lumping multiple quarters together. So if necessary to get Q2’s OCFs, I subtracted prior quarters’.

Next are the actual hard quarterly earnings that must be reported to the SEC under Generally Accepted Accounting Principles. Lamentably companies now tend to use fake pro-forma earnings to downplay real GAAP results. These are derided as EBS profits, Everything but the Bad Stuff! Certain expenses are simply ignored on a pro-forma basis to artificially inflate reported corporate profits, often misleading traders.

While I’m also collecting the earnings-per-share data Wall Street loves, it is more important to consider total profits. Stock buybacks are executed to manipulate EPS higher, because the shares-outstanding denominator of its calculation shrinks as shares are repurchased. Raw profits are a cleaner measure, again effectively neutralizing the impacts of stock buybacks. They better reflect underlying business performance.

Finally the trailing-twelve-month price-to-earnings ratios as of the end of Q2’19 are noted. TTM P/Es look at the last four reported quarters of actual GAAP profits compared to prevailing stock prices. They are the gold-standard valuation metric. Wall Street often intentionally conceals these real P/Es by using fictional forward P/Es instead, which are literally mere guesses about future profits that almost always prove too optimistic.

These are mostly calendar-Q2 results, but some big U.S. stocks use fiscal quarters offset from normal ones. Walmart, Cisco, and Home Depot have lagging quarters ending one month after calendar ones, so their results here are current to the end of April instead of June. Oracle uses quarters that end one month before calendar ones, so its results are as of the end of May. Such offset reporting ought to be banned.

Reporting on offset quarters renders companies’ results way less comparable with the vast majority that report on calendar quarters. We traders all naturally think in calendar-quarter terms too. Decades ago there were valid business reasons to run on offset fiscal quarters. But today’s sophisticated accounting systems that are largely automated running in real-time eliminate all excuses for not reporting normally.

Stocks with symbols highlighted in blue have newly climbed into the ranks of the SPX’s top 34 companies over the past year, as investors bid up their stock prices and thus market caps relative to their peers. Overall the big US stocks’ Q2’19 results looked decent, with modest sales and profits growth. But these growth rates are really slowing, and stock valuations remain near bubble levels relative to underlying earnings.

Over the past 19.3 years, I’ve written 873 of these weekly web essays. None are more challenging than these ones analyzing quarterly results. There’s so much data to collect and analyze, so much work to do. So it wasn’t until Q4’17 results that I took on this Herculean task. Understanding the fundamentals of big U.S. stocks is critical to gaming likely coming stock-market performance, so the hard work is well worth it.

Out of the 7 quarters so far in this essay series, the concentration of capital in the top 34 SPX companies has never been higher. A staggering 44.2% of the market capitalization of all 500 stocks is centralized in just 34 stocks! This compares to 41.7% in Q1’18. It is not healthy for a shrinking pool of market-darling stocks to dominate the entire US markets. That leaves market performance overly dependent on them.

Much of this ominous concentration risk comes from the beloved mega-cap technology companies. The SPX’s top 5 component stocks are Microsoft, Amazon, Apple, Alphabet, and Facebook. They commanded fully 16.2% of the SPX’s entire market cap at the end of Q2, nearly 1/6th! Thus if any one of them gets hit by bad company-specific news, it will help drag the entire stock markets lower intensifying any selling.

One of the cool perks of being a professional speculator and newsletter guy is I get to listen to financial television including CNBC and Bloomberg all day every day. That offers excellent reads on the prevailing sentiment that drives markets. Almost every professional money manager interviewed loves these elite mega-cap techs, including them in their top holdings. They are universally-held and incredibly-crowded trades.

When capital deployed in stocks becomes overly concentrated, that feeds on itself for awhile. Investors deploy capital with money managers based on their performance. If they don’t own these mega-cap techs that investment inflows have driven higher for years, they risk falling behind their peers and losing business. So money managers feel forced to buy the high-flying mega-cap techs even at lofty valuations.

Interestingly these guys try to justify their heavy mega-cap-tech holdings by claiming these stocks are less risky than the broader markets because their businesses are so strong. I can’t count the number of times I’ve heard that mega-cap techs are what to own in case of a recession. That’s total nonsense, as high-flying really-popular stocks have greater downside. The more capital invested, the more potential selling.

During that severe near-bear correction where the SPX plummeted 19.8% largely in Q4’18, these top 5 SPX stocks amplified that by 1.3x with a 24.8% average drop. When the SPX pulled back 6.8% mostly in May, MSFT, AMZN, AAPL, GOOGL, and FB averaged big 12.5% declines nearly doubling the SPX’s retreat! And during the sharp 6.0% SPX pullback since late July, their average fall of 7.8% again leveraged it 1.3x.

The serious risks of too much capital in too few stocks aside, the big U.S. stocks as a group enjoyed a solid Q2 fundamentally. Their collective revenues grew 2.7% year-over-year to $978.8b. Much of this was concentrated in those 5 mega-cap tech stocks, which averaged amazing 16.0% top-line growth compared to just 4.4% for the rest of the top 34 SPX stocks. Money managers use this to rationalize being overweight.

These elite tech market-darlings are certainly not recession-proof, despite the euphoria surrounding them. Recessions are often triggered by stock bear markets, which generate enough fear to scare both consumers and businesses into pulling in their horns and spending less. That is likely to lead to falling sales for all 5 of these mega-cap techs, which will hammer their prices sharply lower sucking in the SPX.

Businesses will cut back on their information-technology spending if they are worried about their own sales, hurting the fast-growing cloud-computing sides of Amazon, Microsoft, and Google. Companies will also cut back on their marketing spends if their own perceived prospects dim sufficiently, leading to lower revenues for Google, Facebook, and even Amazon. These high-flying stocks will really suffer in a bear market.

On the consumer side, the sales of Apple’s expensive products will plunge dramatically when consumers get worried about their own futures. They will keep their existing iPhones and iPads longer, extending the critical upgrade cycle. And most of the endless stuff Amazon sells is discretionary not essential, so those purchases will be cut back when people feel financially stressed. The top SPX stocks aren’t immune to a slowdown.

In Q2’19 these top 34 SPX and SPY stocks saw operating-cash-flow generation soar 17.0% YoY to $144.8b. Again those 5 mega-cap techs led the way, with 21.0% average growth compared to 12.9% for the rest. But these market-darling tech companies benefit heavily from the great optimism spawned by record-high stock markets. That convinces both companies and consumers to heavily buy their offerings.

The GAAP-earnings front was more interesting, with these big US stocks’ total profits up just 4.2% YoY to $140.5b in Q2’19. These were dragged down by a couple notable losses, including Procter & Gamble writing down $8.3b in a massive goodwill-impairment charge. That was an admission this company paid far too much for its Gillette shaving business, as men are shaving less and increasingly using cheaper razors.

Then Boeing suffered an ugly $3.4b loss from operations due to its ill-fated 737 MAX airplane. This is a 1960s-era airframe that was upgraded with engines far larger than ever intended in order to maximize fuel efficiency. But these wouldn’t fit under the wings, so they were mounted forward and higher. That screwed up this airplane’s center of gravity and aerodynamics, requiring computer assistance to keep flying.

Either this inherently-unstable flawed design or software bugs caused two horrific crashes killing 346 people. So the entire 737 MAX fleet was grounded, and that airplane was supposed to generate about a third of Boeing’s revenue over the next 5 years! So this company is in a world of hurt until well after this airplane is cleared to fly again. Overall SPX-top-34 profits would’ve been even higher without these losses.

While 4.2% profits growth sounds good, it is still slowing sharply. Overall SPX corporate-earnings growth rocketed 20.5% higher in 2018 largely thanks to the Tax Cuts and Jobs Act. Its centerpiece slashed the US corporate tax rate from 35% to 21%, which went effective as last year dawned. 2018’s four quarters were the only ones comparing pre- and post-TCJA earnings. This year the comparisons are all post-tax-cut.

Thanks to the stock markets’ massive corporate-tax-cut rally in 2017 and 2018, and sharp rebound on the Fed’s radical shift to dovishness earlier this year, valuations remain dangerously high. They are still up near historical bubble levels heralding new bear markets. So low-single-digit earnings growth, with the threat of actual shrinkage in future quarters, isn’t likely to be enough to support these lofty stock prices for long.

Before we get to valuations though, there’s more to consider on the big US stocks’ earnings. One of the main reasons corporations engage in stock buybacks is to artificially boost their reported earnings per share. That masks what their underlying overall GAAP profits are doing, lulling traders into complacency. Some of the companies among these top 34 had yawning gulfs between earnings per share and total profits!

The main culprits were the top 4 mega-cap US banks, JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. Their financial reporting is mind-bogglingly complex, and full of estimates that allow them to actively manipulate their reported earnings per share. Wall Street loves the big financial stocks, which are often the most-important sector after mega-cap tech for coloring sentiment for the entire stock markets.

JPM’s EPS soared 22.5% YoY in Q2 despite total GAAP earnings only up 10.5%. BAC looked similar at 17.2% EPS growth versus 8.3% overall profits growth. WFC saw earnings per share soar 33.7% YoY despite overall earnings only rising 19.7%. And C’s 19.0% EPS surge literally tripled its 6.3% growth in hard GAAP profits! Something is really wrong here and highly misleading, eventually the truth will catch up.

Some big non-financial stocks also had magical earnings-per-share growth far outstripping underlying corporate-profits growth. Cisco’s EPS rocketed 25.0% higher despite mere 13.1% growth in the bottom-line profits on its income statement. Sooner or later there has to be a reckoning between earnings per share and actual profits, even if huge stock buybacks persist. These key profits measures have to converge.

Wall Street analysts have grown adept at using misdirection to blind investors to the adverse trends in earnings growth. Mighty Apple was a key case in point recently, reporting its Q2’19 results after the close on July 30th. This was heralded as a big beat, with EPS of $2.18 on revenues of $53.8b both exceeding expectations of $2.10 and $53.4b. By those metrics it looked like Apple was thriving, so its stock shot higher.

In after-hours trading it was up 4%+, and by the middle of the next day this monster-market-cap stock had rocketed 6.0% higher! The problem was comparing those Q2 results to estimates is totally deceptive. The analysts always lowball their guesses to ensure companies beat, stoking euphoria and complacency. But all that really matters is companies’ absolute profits and sales growth compared to their year-earlier quarters.

In hard year-over-year terms, Apple’s Q2’19 sales only eked out a 1.0% gain. That was pathetic relative to its other 4 mega-cap-tech peers, which averaged 19.7%. And Apple’s Q2’19 GAAP earnings actually plunged 12.8% YoY from Q2’18! So what Wall Street dishonestly spun into a great quarter was in reality a weaker one. Eventually stock prices have to reflect underlying fundamentals, not perma-bull propaganda.

Ominously stock prices remain dangerously high relative to their underlying corporate earnings. The big U.S. stocks averaged trailing-twelve-month price-to-earnings ratios way up at 27.5x as Q2’19 wrapped up. That is just shy of the historical bubble threshold above 28x! So the current earnings picture over the past 4 quarters certainly doesn’t justify such lofty stock prices. That greatly amplifies market downside risk.

These chronic overvaluations aren’t just concentrated in those top 5 mega-cap tech stocks, which sported 36.2x average P/Es. The rest of the top 34 were still near bubble territory averaging 25.9x. Trading at such high valuations, these stock markets are an accident waiting to happen. It’s only a matter of time until the next bear market arrives. It could be spawned by the mounting US-China trade war, or weaker profits.

Over the past several calendar years, earnings growth among all 500 SPX companies ran 9.3%, 16.2%, and 20.5%. This year even Wall Street analysts expect it to be flat at best. And if corporate revenues actually start shrinking due to mounting trade wars or rolling-over stock markets damaging confidence and spending, profits will amplify that downside. Declining SPX profits will proportionally boost valuations.

Excessive valuations after long bulls always eventually spawn proportional bear markets. And we are way overdue for the next one. At its latest all-time-record high in late July, this current monster SPX bull up 347.3% in 10.4 years ranked as the 2nd-largest and 1st-longest in all of US stock-market history! This powerful secular uptrend can’t persist near bubble valuations as corporate-earnings growth stalls or even reverses.

Bear markets are necessary to maul stock prices sideways to lower long enough for profits to catch up with lofty stock prices. These fearsome beasts are nothing to be trifled with, yet complacent traders mock them. The SPX’s last couple bears that awoke and ravaged due to high valuations pummeled the SPX 49.1% lower in 2.6 years leading into October 2002, and 56.8% lower over 1.4 years leading into March 2009!

Seeing big US stocks’ prices cut in half or worse is common and expected in major bear markets. And there’s a decent chance the current near-bubble valuations in US stock markets will soon look even more extreme. If the big US stocks’ fundamentals deteriorate, the overdue bear reckoning after this monster bull is even more certain. So big US stocks’ coming Q3’19 and Q4’19 results could prove pivotal if they’re weak.

Cash is king in bear markets, since its buying power grows. Investors who hold cash during a 50% bear market can double their holdings at the bottom by buying back their stocks at half-price. But cash doesn’t appreciate in value like gold, which actually grows wealth during major stock-market bears. When stock markets weaken its investment demand surges, which happened in December as the SPX sold off hard.

While the SPX plunged 9.2% that month, gold rallied 4.9% as investors flocked back. The gold miners’ stocks which leverage gold’s gains fared even better, with their leading index surging 10.7% higher. The last time a major SPX selloff awakened gold in the first half of 2016, it soared up 30% fueling a massive 182% gold-stock upleg! Gold’s awesome decisive bull breakout in late June is already attracting traders back.

Absolutely essential to weathering bears is cultivating excellent contrarian intelligence sources. That’s our specialty at Zeal. After decades studying the markets and trading, we really walk the contrarian walk. We buy low when few others will, so we can later sell high when few others can. Lately we’ve been doing this in gold stocks, buying them while out of favor earlier this year to enjoy massive gains in recent months.

This past week we realized absolute gains on gold-stock trades including 109.7%, 105.8%, and 92.0%! All our trades, analyses, and outlooks are detailed in our popular weekly and monthly newsletters for speculators and investors. 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. Subscribe today and take advantage of our 20%-off summer-doldrums sale! Staying informed is essential for success.

The bottom line is big U.S. stocks’ latest fundamentals from Q2’19’s earnings season were decent. These elite companies enjoyed modest sales and earnings growth. But that masked serious and mounting risks. Investment capital is increasingly concentrating in the beloved mega-cap technology stocks, leaving stock markets overly dependent on their fortunes. Any slowing from them will drag the entire stock markets lower.

More ominously big U.S. stocks’ valuations remain way up near dangerous bubble territory. Their earnings aren’t justifying their lofty stock prices. The resulting downside risks are exacerbated with profits growth really slowing, and threatening to stall out entirely or even shrink in coming quarters. This is a potently-bearish situation, even before any bad news like further escalation in the US-China trade war hits stocks.

Adam Hamilton, CPA

August 13, 2019

The gold miners’ stocks have surged dramatically this summer, catapulted higher by gold’s major bull-market breakout. That atypical strength bucking the normal summer-doldrums slump has carried this sector right back to its traditional strong season. That begins with a robust autumn rally starting in late summers. This year’s autumn-rally setup is very unusual, but investment buying could still fuel further gains.

Seasonality is the tendency for prices to exhibit recurring patterns at certain times during the calendar year. While seasonality doesn’t drive price action, it quantifies annually-repeating behavior driven by sentiment, technicals, and fundamentals. We humans are creatures of habit and herd, which naturally colors our trading decisions. The calendar year’s passage affects the timing and intensity of buying and selling.

Gold stocks exhibit strong seasonality because their price action mirrors that of their dominant primary driver, gold. Gold’s seasonality generally isn’t driven by supply fluctuations like grown commodities see, as its mined supply remains relatively steady year-round. Instead gold’s major seasonality is demand-driven, with global investment demand varying considerably depending on the time in the calendar year.

This gold seasonality is fueled by well-known income-cycle and cultural drivers of outsized gold demand from around the world. Starting in late summers, Asian farmers begin to reap their harvests. As they figure out how much surplus income was generated from all their hard work during the growing season, they wisely plow some of their savings into gold. Asian harvest is followed by India’s famous wedding season.

Indians believe getting married during their autumn festivals is auspicious, increasing the likelihood of long, successful, happy, and even lucky marriages. And Indian parents outfit their brides with beautiful and intricate 22-karat gold jewelry, which they buy in vast quantities. That’s not only for adornment on their wedding days, but these dowries secure brides’ financial independence within their husbands’ families.

So during its bull-market years, gold has always tended to enjoy major autumn rallies driven by these sequential episodes of outsized demand. Naturally the gold stocks follow gold higher, amplifying its gains due to their profits leverage to the gold price. Today gold stocks are once again back at their most-bullish seasonal juncture, the transition between the usually-drifting summer doldrums and big autumn rallies.

Since it is gold’s own demand-driven seasonality that fuels gold stocks’ seasonality, that’s logically the best place to start to understand what’s likely coming. Price action is very different between bull and bear years, and gold remains in a younger bull market. After falling to a 6.1-year secular low in mid-December 2015 as the Fed kicked off its latest rate-hike cycle, gold powered 29.9% higher over the next 6.7 months.

Crossing the +20% threshold in March 2016 confirmed a new bull market was underway. Gold corrected after that sharp initial upleg, but normal healthy selling was greatly exacerbated after Trump’s surprise election win. Investors fled gold to chase the taxphoria stock-market surge. Gold’s correction cascaded to monstrous proportions, hitting -17.3% in mid-December 2016. But that remained shy of a new bear’s -20%.

Gold rebounded sharply from those anomalous severe-correction lows, nearly fully recovering by early September 2017. But gold failed to break out to new bull-market highs, then and several times since. That left gold’s bull increasingly doubted, until June 2019. Then gold surged to a major decisive breakout confirming its bull remains alive and well! Its total gains grew to 37.5% at best in mid-July, still small for gold.

Gold’s last mighty bull market ran from April 2001 to August 2011, where it soared 638.2% higher! And while gold consolidated high in 2012, that was technically a bull year too since gold just slid 18.8% at worst from its bull-market peak. Gold didn’t enter formal bear-market territory until April 2013, thanks to the crazy stock-market levitation driven by extreme distortions from the Fed’s QE3 bond monetizations.

So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, and resumed in 2016 to 2019. Thus these are the years most relevant to understanding gold’s typical seasonal performance throughout the calendar year. We’re interested in bull-market seasonality, because gold remains in its younger bull today and bear-market action is quite dissimilar.

Prevailing gold prices varied radically throughout these modern bull-market years, running between $257 when gold’s last secular bull was born to $1894 when it peaked a decade later. All these years along with gold’s latest bull since 2016 have to first be rendered in like-percentage terms in order to make them perfectly comparable. Only then can they be averaged together to distill out gold’s bull-market seasonality.

That’s accomplished by individually indexing each calendar year’s gold price action to its final close of the preceding year, which is recast at 100. Then all gold price action of the following year is calculated off that common indexed baseline, normalizing all years regardless of price levels. So gold trading at an indexed level of 105 simply means it has rallied 5% from the prior year’s close, while 95 shows it’s down 5%.

This chart averages the individually-indexed full-year gold performances in those bull-market years from 2001 to 2012 and 2016 to 2018. 2019 isn’t included yet since it remains a work in progress. This bull-market-seasonality methodology reveals that late summers are when gold’s long parade of big seasonal rallies gets underway. And that starts with the major autumn rally which is born in gold’s summer doldrums.

During these modern bull-market years, gold has enjoyed a strong and pronounced seasonal uptrend. From that prior-year-final-close 100 baseline, it has powered 14.8% higher on average by year-ends! These are major gains by any standard, well worth investing for. While this chart is rendered in calendar-year terms since these increments are easiest for us to grasp, gold’s seasonal year actually starts in the summers.

Remember this whole concept of seasonality relies on blending many years together, smoothing away outliers to reveal core underlying tendencies. Seasonally gold tends to bottom in mid-June, but then still largely drifts sideways in its summer doldrums until early July. Gold sure bucked its weakest season this year, blasting sharply higher in June to that huge decisive bull-market breakout! But seasonals remain relevant.

Tremendous buying was necessary to negate gold’s summer doldrums in the last couple months, which largely came from gold-futures speculators. But that nearly exhausted their capital firepower available to buy, leaving a high selloff risk. They could rapidly unwind their excessively-bullish bets if the right catalyst convinces them to exit. The resulting quickly-cascading gold-futures selling would kill gold’s autumn rally.

But gold’s bull-breakout momentum carrying it to its best levels in 6.2 years by mid-July could stave off the bearish mean reversion in spec gold futures. Seeing gold hold over $1400 again has unleashed new-high psychology, which powerfully motivates investors to buy. Investment capital inflows could grow and feed on themselves, amplifying gold’s upside during its autumn-rally span. We still have to consider these seasonals.

Interestingly at gold’s typical mid-June summer-doldrums lows that birth its major autumn rallies, it has still been 5.8% higher year-to-date on average. On that same trading day this year, gold had already been rallying but was still only up 4.6% YTD! So gold remained relatively low this summer compared to seasonal precedent when its autumn rallies normally get underway. There was lots of room for seasonal buying.

Gold’s autumn rallies generally start grinding higher in Julies, which have seen modest average gains of 0.5% in these modern bull-market years per this dataset indexed from prior-year closes. They accelerate considerably in Augusts, which is when that Asian harvest buying kicks into full swing. Gold averaged big 1.9% gains in Augusts, which is its 4th-best month seasonally! So traders need to be long gold by late Julies.

The upside momentum in gold’s strong autumn rallies only builds from there. From 2001 to 2012 and 2016 to 2018, Septembers enjoyed hefty additional average gains of 2.5%! That makes for gold’s 3rd best month of the year, only behind Januaries’ 3.1% and Novembers’ 2.7%. Gold’s autumn rallies generally running from mid-Junes to late Septembers have enjoyed sizable 5.7% average gains in these bull years!

That’s certainly a nice run higher in just 3.4 months. For comparison the US benchmark S&P 500 stock index has averaged 8% annual returns historically. So gold surging almost 3/4ths that much in just over 1/4th the time is impressive. And these autumn rallies are only the first third of gold’s strong season, which includes the much-larger winter rallies averaging big 9.3% gains and smaller spring rallies running 3.3%.

Together gold’s troika of autumn, winter, and spring rallies carve its strong seasonal uptrend rendered in this chart. These sequential seasonal rallies begin right after gold’s weakest time of the year, normally those summer doldrums which were short-circuited this year. Speculators and investors alike can ride gold’s strong bull-market seasonality in physical bullion or the leading GLD SPDR Gold Shares gold ETF.

But the gold miners’ stocks well outperform gold’s underlying seasonal gains, amplifying gold’s trio of big seasonal rallies. The gold stocks enjoy powerful sentimental and fundamental boosts when gold rallies materially. Higher gold prices shock traders out of their usual apathy for this small contrarian sector, restoring capital inflows. The resulting gold-stock gains start shifting sentiment back to bullish, fueling more buying.

And that is fundamentally-justified, as gold-mining profits really amplify underlying gold gains. The higher gold prices flow directly through to bottom lines, as production costs are largely fixed when mines are being planned. Gold miners’ profits leverage to gold is important to understand, illuminating why gold stocks are the best way to ride gold’s seasonal uptrend. The latest real-world data drives home this point.

The leading gold-stock investment vehicle is the GDX VanEck Vectors Gold Miners ETF. It includes the world’s biggest and best major gold miners. Every quarter I analyze the latest financial and operational results from GDX’s elite gold stocks. While this current Q2’19 earnings season is well underway, it won’t be finished until mid-August. So the latest full results available are still Q1’19’s, which proved quite robust.

The GDX gold miners reported average all-in sustaining costs of $893 per ounce, which is what it costs them to produce and replenish each ounce of gold. AISCs don’t change much regardless of prevailing gold prices, as mining still requires the same levels of infrastructure, equipment, and employees quarter after quarter. From Q2’18 to Q1’19, the GDX gold miners’ AISCs averaged $856, $877, $889, and $893.

That makes for $879 AISCs over the past year. Gold-mining profits are the difference between prevailing gold prices and AISCs. Q1’19’s $1303 average gold price and average AISCs yielded industry profits of $410 per ounce. So far in Q3’19, gold has averaged $1415 which is a hefty 8.5% higher! Assuming gold holds these levels and past-year AISCs persist like usual, gold miners are earning about $536 this quarter.

That is big 30.7% earnings growth on a mere 8.5% gold rally, making for 3.6x upside leverage! This core fundamental relationship between mining profits and gold prices is why major gold stocks tend to amplify gold’s gains by 2x to 3x. That leverage can grow much larger after gold stocks are really undervalued and out of favor. In roughly the first half of 2016, GDX skyrocketed 151.2% on a 29.9% gold upleg for 5.1x upside!

So gold stocks’ own strong bull-market seasonality is fully justified fundamentally. This next chart applies this same seasonal methodology to the flagship HUI NYSE Arca Gold BUGS Index. We can’t use GDX for this study since its price history is insufficient, it was only born in May 2006. But since GDX and the HUI hold most major gold miners in common, they closely mirror each other. Gold stocks see big autumn rallies.

During these same modern gold-bull-market years of 2001 to 2012 and 2016 to 2018, the gold stocks as measured by the HUI enjoyed average gains of 9.3% between late Julies to late Septembers. Augusts and Septembers are actually this sector’s second-strongest 2-month span, averaging big respective gains of 3.7% and 3.5%. Speculators and investors need to be fully deployed before Augusts, just like in gold.

The gold stocks’ 9.3% average autumn rally only leverages gold’s 5.7% one by 1.6x, behind the 2x to 3x expected. But that evens out over the winter and spring rallies, where gold stocks climb another 14.9% and 12.2%. That works out to 1.6x and 3.7x upside leverage to gold. In full-calendar-year terms, the gold stocks’ bull-market seasonal gains averaging 25.9% amplified gold’s 14.8% by 1.8x. That was still short of 2x to 3x.

Prior to this summer’s dazzling gold breakout, gold stocks had underperformed the metal they mine for years. With gold unable to hit new bull highs, investors largely forgot about it and its miners’ stocks. That has dragged down gold stocks’ average upside relative to gold. But it has picked up dramatically with gold’s decisive bull-market breakout starting to wake up traders. Recent gold-stock gains well outpaced gold’s.

At best in mid-July, GDX had rocketed 30.8% higher summer-to-date! That was 2.9x gold’s own 10.7% gain over that span. Gold stocks’ powerful counter-seasonal summer surge extended GDX’s upleg-to-date gains to 60.8% over 10.2 months by mid-July. That also proved 2.9x upside leverage to gold’s own 20.7% upleg over that same time frame. That’s at the high side of that historical 2x-to-3x outperformance range.

Since gold stocks mirror and amplify underlying moves in gold, their autumn-rally setup this year is very similar. Rather than drifting like usual in June and July, gold-stock prices soared higher on gold’s decisive bull-market breakout. That’s left them relatively high heading into their normal autumn-rally span. While that increases the risks of a counter-seasonal selloff slaughtering this year’s autumn rally, it all depends on gold.

Gold stocks will follow and leverage gold in the next couple months, whether the metal retreats or keeps rallying. Again gold faces a major selloff if gold-futures selling starts snowballing, rapidly unwinding the speculators’ excessively-bullish bets. But if investors entranced by the alluring new-high psychology keep buying, gold will continue powering higher. Gold stocks’ near-term fortunes depend on gold investment demand.

This final chart slices up gold-stock seasonals into calendar months instead of years. Each is indexed to 100 at the previous month’s final close, and then all like calendar months’ indexes are averaged together across these same modern bull-market years of 2001 to 2012 and 2016 to 2018. Again gold’s autumn rally makes Augusts and Septembers gold stocks’ second-best 2-month span after Januaries and Februaries.

There’s no doubt gold-stock seasonals are very favorable in these next couple months. Gold miners only enjoy strong back-to-back months a couple times a year, and this autumn-rally span is one of them. Late summers offer the best seasonal buying opportunities of the year to deploy capital in gold stocks. That’s when they transition from seasonally-weak summers to seasonally-strong autumns, winters, then springs.

That being said, seasonality reveals mere tendencies. The primary drivers of gold and its miners’ stocks are sentiment, technicals, and fundamentals. Seasonality reflects how these average out across calendar years over long spans, but they can easily override seasonals in any given year. This summer so far is a key case in point. The usual summer doldrums failed to materialize as gold surged on the Fed pivoting dovish.

This year’s autumn-rally setup is well on the bearish side with gold-futures speculators effectively all-in long upside bets and all-out short downside bets. Their buying firepower is nearing exhaustion, leaving vast room to sell and hammer gold and thus gold stocks lower. That remains a serious risk if the right catalyst arises to ignite cascading selling. But the power of new-high psychology to attract investors is strong.

Investment capital inflows can drive gold higher for many months or even years, regardless of what gold-futures speculators are doing. The higher gold rallies, the more investors want to own it. The more they buy, the higher gold climbs. Buying begets buying, and nothing fuels this virtuous circle like new secular highs. So while we need to remain wary entering the autumn rally relatively high, it could certainly still happen.

Exactly a year ago gold’s setup heading into its autumn-rally span was incredibly bullish. As I explained in last year’s essay updating this research thread, extreme gold-futures selling had pushed spec shorts to all-time-record highs. Spec longs were really low too, leaving lots of room to buy and push gold much higher. Yet what happened? Speculators kept on aggressively shorting anyway, battering gold even lower!

Gold was trading at $1302 in mid-June when its summer seasonal low tends to be hit. It fell hard from there, hitting $1224 at the end of July. Then it plunged even lower still to $1174 by mid-August, and only rebounded modestly to $1199 by late September when the autumn rally tends to end. Gold had terrible autumn-rally performance in 2018 despite the super-bullish setup. Strong momentum tends to build on itself.

Last year bearish psychology grew even more bearish in August and September, leading to even more selling beyond normal limits. This year we could see self-reinforcing bullish sentiment as gold’s best prices in years fuel greed. That new-high psychology motivating investors to return could gradually push gold higher as they buy. The resulting high resilient gold prices could retard the big overhang of gold-futures selling.

Regardless of what happens in August and September, gold and its miners’ stocks are entering their strong season which runs until late next spring. So material selloffs can be used to accumulate positions in gold and silver miners with superior fundamentals. But make sure to protect your capital with trailing stop losses, as speculators’ excessively-bullish gold-futures bets still have to normalize via selling sooner or later.

To multiply your capital in the markets, you have to trade like a contrarian. That means buying low when few others are willing, so you can later sell high when few others can. Earlier this year well before gold’s breakout, we recommended buying many fundamentally-superior gold and silver miners in our popular weekly and monthly newsletters. This week their unrealized gains ran as high as 130.2%, 122.6%, and 106.6%!

To profitably trade high-potential gold stocks, you need to stay informed about the broader market cycles that drive them. Our newsletters are a great way, easy to read and affordable. 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. Subscribe today and take advantage of our 20%-off summer-doldrums sale! The biggest gains are won by traders diligently staying abreast so they can ride entire uplegs.

The bottom line is gold and gold stocks are entering their strong season, starting with their autumn rally. In modern bull-market years, Augusts and Septembers have averaged out to the second-best couple-month span. This is normally fueled by Asian seasonal gold demand coming back online, driving this metal considerably higher. Gold stocks’ profits leverage to gold enables them to nicely amplify its gains.

This year’s autumn-rally setup is very unusual, as gold skipped its summer-doldrums slump after breaking out to major new bull-market highs. That was driven by massive gold-futures buying, leaving speculators’ positioning quite bearish. But rare new-high psychology is a powerful motivating force for investors to buy. Sustained capital inflows from them could easily overpower or retard gold-futures selling for months.

Adam Hamilton, CPA

August 2, 2019

Silver has blasted higher in the last couple weeks, far outperforming gold. This is certainly noteworthy, as silver has stunk up the precious-metals joint for years. This deeply-out-of-favor metal may be embarking on a sea-change sentiment shift, finally returning to amplifying gold’s upside. Silver is not only radically undervalued relative to gold, but investors are aggressively buying. Silver’s upside potential is massive.

Silver’s performance in recent years has been brutally bad, repelling all but the most fanatical contrarians. Historically silver prices have been mostly driven by gold, with the white metal amplifying moves in the yellow metal. Silver has generally leveraged gold by at least 2x in the past. And rarely silver skyrockets as higher prices and bullish sentiment feed on themselves in powerful virtuous circles fueling huge gains.

Silver’s legendary upside is largely the result of it being such a tiny market. Silver’s leading fundamental authority is the Silver Institute. In its latest World Silver Survey covering 2018, it reported that total world demand ran 1033.5m ounces last year. That was worth a mere $16.2b at 2018’s average silver prices, a rounding error in markets terms. That was just 1/11th the size of last year’s world gold demand worth $179.4b!

So when investors grow interested in silver again and start deploying capital, relatively-small inflows in absolute terms catapult silver far higher. This classic dynamic last worked in 2016. In roughly the first half of that year, silver rocketed 50.2% on the parallel 29.9% maiden upleg of this current gold bull. That made for 1.7x upside leverage to gold, remaining on the weaker side historically but still well worth riding.

Through gold suffered a severe correction in the second half of 2016, it still ended that year 8.5% higher. Silver’s 15.1% gain amplified that by 1.8x. The secret to gaming silver is it tends to act like a sentiment gauge for gold. When gold is relatively high and has been rallying, traders start assuming that will persist. And that’s when they want to buy silver. The white metal thrives mostly only when gold psychology is bullish.

In 2017 and 2018 gold fell deeper out of favor. The yellow metal wasn’t performing poorly, but it couldn’t break out to new bull-market highs. And contrarian investing was dying, with stock markets levitating to endless new record highs on hopes for big tax cuts soon and extreme Fed dovishness. With gold apathy stellar, silver didn’t stand a chance. Silver sentiment and thus price performance is totally controlled by gold.

Even though gold rallied a strong 13.2% in 2017, silver lagged at mere 6.4% gains. That 0.5x leverage to gold was terrible. The longer silver underperformed, the more traders capitulated on it and walked away. 2018 was even worse. Though gold only drifted 1.6% lower, silver plunged 8.6% making for horrendous 5.5x downside leverage. Silver wasn’t worth the big additional risk of its serious volatility compared to gold.

Thankfully silver’s dire fortunes started to change in early 2019, when I wrote my original essay on Silver Outperforming Gold. But unfortunately that was short-lived, as silver is slaved to gold. In mid-February the young gold upleg stalled out and reversed lower, after failing to break out to new bull-market highs. That kneecapped silver’s budding outperformance streak, casting it back to the underperformance wasteland.

By June 19th, silver was back to its recent miserable form. It was down 2.1% year-to-date despite gold enjoying a respectable 6.1% YTD rally. While we were taking advantage of the hellish sentiment to buy and recommend fundamentally-superior silver-mining stocks at crazy-low prices in our newsletters, it was hard to write about silver. Virtually no one was the least bit interested, with suffocating apathy universal.

But silver started awakening from its bearish haze on June 20th, kicked in the butt by an extraordinary watershed event. That day gold finally surged to its first new bull-market high since way back in early July 2016, when this bull’s maiden upleg peaked! Gold’s $1389 close was also its highest in 5.8 years, starting to unleash powerful new-high psychology. In the 5 weeks since, that has increasingly infected silver.

Silver didn’t respond immediately to gold’s decisive bull-market breakout. On breakout day it stuck to its languid ways, only rallying 1.8% on a major 2.1% gold up day. The silver price action actually stayed relatively weak for the next several weeks. By July 11th gold was 3.4% higher from the day before that major breakout, while silver slumped 0.3% lower. But something interesting was brewing behind the scenes.

Silver investment demand is notoriously difficult to monitor. The best fundamental data available for this white metal is again from the Silver Institute’s World Silver Survey. But as awesome as that is, it is only published once per year. There is a high-resolution proxy for silver investment demand available daily though, the physical-silver-bullion holdings of the world’s largest and dominant silver exchange-traded fund.

That is the American SLV iShares Silver Trust, which has a huge first-mover advantage after launching way back in April 2006. As of the end of 2018, the Silver Institute’s data showed SLV commanded fully 49% of all the silver held by all the world’s silver ETFs! SLV’s holdings are published daily, and when they climb it reveals American stock-market capital flowing into silver. This dynamic is important to understand.

SLV’s mission is to track the silver price, giving stock traders full silver exposure. But the SLV-share supply and demand is independent of silver’s own. If stock traders are buying SLV shares faster than silver itself is being bought, SLV’s price will decouple from silver’s to the upside. SLV’s managers prevent this by shunting that excess share demand back into physical silver itself. The mechanics are simple in concept.

When SLV prices are being bid up faster than silver, new SLV shares are issued to absorb that differential demand. The capital raised from selling those shares is then used to buy more physical silver bullion. This enables SLV to act as a conduit for stock-market capital to flow into and out of silver itself. When SLV shares are sold faster than silver, this process reverses. SLV holdings reveal silver investment trends!

While silver was drifting sideways to lower in the first half of July and looking unimpressive, American stock investors were starting to buy SLV. Between July 2nd and 9th, SLV enjoyed daily holdings builds averaging 0.7% in 4 out of 5 trading days! At the same time the leading gold ETF’s holdings, which is of course the GLD SPDR Gold Shares, were mostly draws. Silver was attracting investors while gold wasn’t.

With gold consolidating high and largely holding over $1400, precious-metals sentiment was improving. After long ignoring gold and silver, investors were starting to take another look. Silver had not only really lagged gold’s breakout rally since mid-June, but it was radically undervalued compared to its dominant primary driver gold. We’ll explore that shortly. So smart contrarians were starting to shift back into silver.

This didn’t first become evident in silver’s price action until July 15th, just a couple weeks ago. That day silver rallied 1.2% despite gold only edging 0.1% higher. That was peculiar and out of character for silver in recent years, so it could’ve been an anomaly. But it proved otherwise. As of this Wednesday’s data cutoff for this essay, silver has outperformed gold in a major way for 8 trading days in a row! That’s incredible.

On the 16th silver climbed 0.9% while gold fell 0.9%. On the 17th and 18th silver surged 2.6% and 2.3% on 1.5% and 1.4% gold up days. The 19th saw silver only retreat 0.7% as gold dropped 1.4%. Then on the 22nd and 23rd silver rallied 1.0% and 0.2% despite gold’s 0.1% and 0.5% declines. This Wednesday the 24th saw silver climb 1.1% outpacing gold’s 0.6%. Such a strong outperformance streak is important.

Thus in the past couple weeks or so, silver has blasted 9.7% higher despite a mere 1.3% gold rally! That makes for epic 7.4x upside leverage, the kind silver enthusiasts dream about. This outperformance stretch is even more impressive because it was driven by big capital inflows into SLV by American stock investors returning to silver. As of this Wednesday SLV saw strong holdings builds for 6 trading days in a row.

That started with a monster 2.6% SLV build on the 17th, which proved the biggest seen by far since way back in January 2013! Gold largely holding over $1400 rekindled American stock investors’ interest in silver in a way not seen in 6.5 years. Over the next 5 trading days ending Wednesday, SLV’s holdings grew another 0.8%, 1.0%, 2.6%, 0.5%, and 0.5%. This silver-investment-buying streak is pretty amazing.

While silver’s outperformance of gold has exploded only in the last couple weeks, it has totally changed how silver looks since gold’s decisive bull-market breakout on June 20th. As of Wednesday, silver has now rallied 9.3% over that 24-trading-day span compared to gold’s 4.8% gain. That’s right back up to that historical 2.0x-upside-leverage norm. SLV’s holdings enjoyed 13 build days, 11 flat days, and 0 draw days.

They have catapulted SLV’s holdings 12.6% higher since the day before gold’s breakout. Via this leading ETF, American stock investors are now holding 1/8th more silver in absolute-ounces terms in just 5 weeks. Over this same span GLD’s holdings only climbed 7.6%. And it only saw 8 holdings-build days, 5 flat days, and a whopping 11 draw days. Something special, major, and likely pivotal is underway in silver!

Nevertheless, silver remains in an ugly place compared to gold. YTD as of this Wednesday, silver was just up 7.1% compared to gold’s 11.1%. Gold’s $1445 upleg-to-date high achieved on July 18th was its best level seen in 6.2 years. Silver’s own upleg-to-date high of $16.55 this Wednesday was merely a 1.1-year one. So though silver has started to outperform gold again, it has a long way to go to look impressive.

There’s no sugarcoating it, the carnage in silver in recent years has been catastrophic. Thanos himself couldn’t have done worse with a fully-stoned Infinity Gauntlet! While there were a half-dozen silver charts I considered sharing this week, this one is the most telling. It shows the Silver/Gold Ratio over the past decade-and-a-half or so. This SGR is the best measure of whether silver prices are relatively high or low.

The SGR simply divides the daily silver close by the daily gold close, but yields hard-to-parse decimals like 0.0116 this Wednesday. So I prefer to use an inverted-axis Gold/Silver Ratio instead, which is the same thing but offers easier-to-understand numbers like 86.1 mid-week. Silver prices had almost never been lower relative to gold in modern history before recent weeks! Silver is climbing out of a stygian abyss.

Back in mid-June just before gold’s decisive bull-market breakout changed everything, the SGR had fallen to an absurd 90.4x. In other words it took 90.4 ounces of silver to equal the value of a single ounce of gold. That was wildly out of whack with historical precedent. From 2005 to just before 2008’s first stock panic in a century, the SGR averaged 54.9x. From 2009 to 2012 after that panic, it averaged a similar 56.9x.

The SGR had generally meandered in the mid-50s for decades, so miners had long used 55.0x as the leading proxy for calculating silver-equivalent or gold-equivalent ounces. The SGR also experienced great cycles, long secular periods of silver outperformance where the SGR generally fell followed by multi-year spans of silver underperformance where the SGR rose on balance. SGR extremes were short-lived.

As gold surged over this past month, the SGR spiraled higher still to a mind-boggling 93.5x on July 5th. That was an apocalyptic 26.8-year low, the worst silver levels relative to gold since October 1992. That is longer than the average investing lifespan of today’s traders, over a quarter century! And 93.5x isn’t much better than the worst SGR since 1970, 100.3x seen briefly in February 1991. Silver has just been slaughtered.

For an incredible 8.2 years the SGR had been rising on balance, showing chronic underperformance relative to gold. This secular cycle is far-overdue to turn, and after extreme lows historically silver has spent years mean reverting higher relative to gold. 2008’s extraordinary stock panic offers a fantastic recent example of how greatly silver can soar after being battered down to extreme lows relative to gold.

Back in November 2008 in that most-extreme market-fear event seen in our lifetimes, the SGR was crushed to 84.1x. Silver was radically undervalued relative to gold, investors wanted nothing to do with it. Such a great disconnect between silver and gold wasn’t sustainable given their relative market sizes and the ratio at which they are mined. So over the next 2.4 years into April 2011, silver skyrocketed 442.9% higher!

After SGR extremes silver doesn’t just revert to the mean, but overshoots proportionally towards the opposite extreme. The SGR fell as low as 31.7x when that silver bull peaked over $48 per ounce. Odds are the SGR will again overshoot and at least return to the 40s before silver’s next bull fully runs it course. With silver not far off its lowest levels compared to gold in modern times in early July, it has vast room to soar.

Gold’s current bull market was born in mid-December 2015, and is what has driven silver higher during gold-bull uplegs. Since then, the SGR has averaged just 77.8x. That is actually higher than during that wild stock-panic span in late 2008, incredibly extreme! Over the past several weeks or so, the SGR has already started mean reverting falling as low as 86.1x this week. Silver’s upside potential from here is epic.

At $1400 gold and this miserable gold-bull-average 77.8x SGR, silver would need to trade at $18.00. That’s another 9% higher from this week’s levels. But again mean reversions off extremes don’t just stop at the averages, but keep going like a pendulum. That yields an SGR target of 62.1x, implying $22.56 silver at $1400 gold. Silver would have to power another 36% higher to regain those still-pathetic SGR levels.

If gold’s young secular bull persists for years to come as it ought to based on historic precedent, silver is going to climb far higher greatly lowering the SGR. If it just mean reverts back to that longstanding 55.0x average with no overshoot, that means $25.45 silver at $1400 gold. These SGR-mean-reversion-and-overshoot silver-price targets grow far bigger at higher prevailing gold prices and proportional-overshoot SGR lows.

The point of all this is silver is so radically undervalued compared to its primary driver gold that it needs to soar vastly higher to reestablish normal relationships. While silver’s outperformance over the past couple weeks is impressive, it hardly even registers coming off such extreme lows. Digging out of such a deep hole relative to gold, silver needs to rally higher on balance for many months or even years to come!

While investment buying including via silver ETFs like SLV will be the primary driver, silver futures will also play a big role. A couple weeks ago I wrote about gold’s high short-term selloff risk due to how the gold-futures speculators are now positioned, with excessively-bullish bets that are actually very bearish over the near term. A healthy gold pullback or correction would certainly drag silver down with it for a spell.

The most-bullish situation possible for gold- and silver-futures is for speculators to be all-out long upside bets and all-in short downside bets. That leaves them nothing to do but buy. That is 0% longs and 100% shorts. In the latest weekly Commitments of Traders report, specs’ gold-futures bets were running 75% on the long side and 10% on the short side up into their entire bull-market trading ranges. That’s really bearish.

By bull-to-date precedent, gold-futures speculators had room to sell 347.4k contracts but only room to buy 80.5k. That made for an ominous 4.3x ratio of potential selling outweighing potential buying. I bring this up because speculators’ silver-futures positioning was nowhere near as menacing. They are running 66% on the long side and 44% on the short side up into their gold-bull-market trading ranges, much less bearish.

Speculators had room to sell 97.4k silver-futures contracts and buy 65.8k in the latest CoT report, for a way-more-moderate 1.5x ratio of potential selling to potential buying. The takeaway here is silver has a lot more near-term futures-buying-driven upside potential than gold does. Together silver investment buying and silver-futures buying are powerful forces to catapult silver higher. But it all depends on gold.

If gold continues to consolidate high above or near $1400, that will foster the bullish sentiment necessary for silver buying to persist. New-high psychology driving gold investment buying could make this happen. But if something spooks the gold-futures speculators, they have massive room to sell which would quickly cascade and hammer gold lower. That would suck in silver, driving both into healthy short-term corrections.

But once speculators’ excessively-bullish gold-futures bets normalize, gold and silver should be off to the races again with silver really outperforming. So any material weakness should be used to aggressively accumulate physical silver bullion, SLV shares, and stocks of fundamentally-superior silver miners. Their upside potential trounces silver’s because their profits growth really amplifies higher prevailing silver prices.

Again silver soared 50.2% higher in largely the first half of 2016. The leading SIL Global X Silver Miners ETF rocketed a colossal 247.8% higher in essentially that same span! That made for huge 4.9x leverage to silver’s gains. Every quarter I analyze the fundamentals of the major silver miners of SIL, with the latest essay covering Q1’19 results. Now is the time to do your homework before silver really starts running again.

To multiply your capital in the markets, you have to trade like a contrarian. That means buying low when few others are willing, so you can later sell high when few others can. In recent months well before gold’s breakout, we recommended buying many fundamentally-superior gold and silver miners in our popular weekly and monthly newsletters. Mid-week our unrealized silver-stock gains already ran as high as 113.8%!

To profitably trade high-potential gold and silver stocks, you need to stay informed about broader market cycles that drive them. Our newsletters are a great way, easy to read and affordable. 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. Subscribe today and take advantage of our 20%-off summer-doldrums sale! The biggest gains are won by traders diligently staying abreast, always learning.

The bottom line is silver really started outperforming gold again in the last couple weeks. Silver surged dramatically on heavy investment buying, as evidenced by big differential SLV-share demand. This looks like a sea-change sentiment shift getting underway in silver, especially after it was crushed to its lowest levels relative to gold in well over a quarter century. Silver is long overdue to mean revert vastly higher.

Silver effectively acts like a gold sentiment gauge, with investment demand dependent on gold’s fortunes. The longer gold consolidates high or grinds higher, the more silver will be bought. Coming out of such radically-undervalued levels, silver’s future bull-market upside should greatly exceed gold’s. But silver will also get sucked into periodic gold corrections, which can be used as lower entry points to add silver positions.

Adam Hamilton, CPA

July 29, 2019

The gold miners’ stocks continue to rally on balance, after a major upside breakout extended their strong upleg. That’s driving mounting interest in this recently-forsaken sector. With the latest quarterly earnings season underway, traders will soon enjoy big fundamental updates from the gold miners. They are likely to report good Q2 results, with improving operational performances supporting further stock-price gains.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the US Securities and Exchange Commission by 40 calendar days after quarter-ends. The gold miners generally release their quarterly reports in the latter half of that window. So Q2’19’s will arrive between late July to mid-August.

After spending decades intensely studying and actively trading this contrarian sector, there’s no gold-stock data I look forward to more than the miners’ quarterly financial and operational reports. They offer a true and clear snapshot of what’s really going on, shattering the misconceptions bred by ever-shifting winds of sentiment. Nearly all fundamental analysis is based off the data gold miners provide in quarterlies.

So for many years I’ve delved deeply into gold miners’ quarterly results. They are the dominant source of information I use to winnow down the universe of gold stocks to the fundamentally-superior ones with the greatest upside potential. Every quarter after their latest earnings season ends, I research and write essays discussing the newest results from the major gold miners, mid-tier gold miners, and silver miners.

Q2’19’s full analyses are coming starting in mid-August once that 40-day post-quarter reporting deadline has passed. But before that I eagerly dive into individual companies’ results as they’re reported, since there’s so much to digest. Even earlier soon after a quarter ends, I start thinking about what gold miners’ latest quarterly results are likely to show collectively. Their aggregate trends can be somewhat predicted.

In high-level fundamental terms, gold mining is a simple business. These companies painstakingly wrest gold from the bowels of the Earth, then generally sell all they can produce at prevailing market prices. So their profits are effectively the difference between current gold levels and operating costs. The former is easy to calculate once a quarter ends, and the latter can be reasonably estimated for this sector as a whole.

Gold’s dramatic bull-market breakout a month ago and high consolidation since have greatly improved sector psychology. But gold’s big surge came late in Q2, minimizing its full-quarter impact. The early quarter was rough, with gold slumping to a new year-to-date low near $1271 in early May. The average gold prices in April, May, and June were $1286, $1284, and $1361. Gold was mostly sucking wind last quarter.

Thus Q2’19’s overall average gold price of $1309 was just a meager 0.4% better than Q1’s $1303. So the gold miners’ latest quarterly results aren’t going to get much help from gold’s young surge. That will really change in the current Q3 if gold can hold these high levels. With Q3 about 1/5th over, gold has averaged an awesome $1407 so far! So the higher-gold boost to gold-stock earnings is coming, but not in Q2.

Gold stocks really leverage higher gold prices because their mining costs are largely fixed. Quarter after quarter mining operations generally require the same levels of infrastructure, equipment, and employees. The vast majority of any gold mine’s future cost structure is actually determined during its planning phase, when engineers decide which ore to mine, how to excavate it, and how to process it to recover the gold.

Every quarter after results I analyze the all-in-sustaining costs reported by the world’s gold miners. These are the best measure of what it really costs to produce an ounce of gold. Over the past four quarters, the major gold miners of the leading GDX VanEck Vectors Gold Miners ETF reported average AISCs of $856, $877, $889, and $893. That in turn yields a trailing-four-quarter mean of $879 per ounce, a key cost metric.

With $1309 average gold in Q2’19 and AISCs likely near $879, that implies the large gold miners as an industry likely earned $430 per ounce last quarter. That’s actually a decent improvement considering the flat quarterly gold prices. Though gold averaged a similar $1303 in Q1, the GDX miners’ average AISCs that quarter came in a bit higher at $893. That implied $410 profits, which Q2 results should easily exceed.

$430 is up 4.9% quarter-on-quarter despite the relatively-flat average gold price! This is really impressive sequential profits growth relative to the broader stock markets, where earnings are stalling out. But if that is all we could hope for, I would’ve written on a different topic this week. The gold miners’ Q2’19 earnings are likely to well exceed expectations for an entirely-different reason, portending even-higher gold-stock prices.

Most traders assume gold miners produce their yellow metal at fairly-steady rates year-round. That sure makes sense given how capital-intensive gold mining is, how individual mines’ capacities and throughputs to process ore are fixed, and how expanding mines’ outputs takes years of construction. But surprisingly global gold mine production actually varies considerably quarter-to-quarter! This should really boost Q2 earnings.

The best global gold fundamental data is published by the World Gold Council, also on a quarterly basis. These Gold Demand Trends reports are essential reading for all gold-stock speculators and investors, as these miners are ultimately just leveraged plays on gold. The latest GDT covering Q1’19 was released in early May, with Q2’s due out in early August. One key number GDTs report is world gold mine production.

That happened to run 852.4 metric tons in Q1, nearly a third of which came from the major gold miners of GDX. Analyzing global gold mine production each quarter since 2010 reveals some fascinating quarter-to-quarter output trends. Over the last 37 quarters, calendar Q1s have seen gold mined average a sharp 7.2% QoQ plunge from the immediately-preceding calendar Q4s! Not a single Q1 saw sequential output growth.

From 2010 to 2019 Q1 gold mined fell 7.2%, 6.9%, 7.6%, 11.2%, 8.8%, 3.3%, 8.7%, 5.7%, and 5.6% from the respective Q4s. These drops and their uniformity across radically-different gold-price environments is stunning. For some reason the world’s gold mines suffer universal declines in their outputs early in calendar years. Why? This curious industrywide Q1 production slump results from an interplay of several factors.

Most gold miners run their accounting on calendar years. So early in new years they have new capital budgets to spend on maintaining and enhancing their existing operations. If they temporarily shut down their mills for repairs or minor upgrades, Q1s are usually when they do it. Weather plays a role too, as the majority of the world’s gold mines are in the northern hemisphere with the majority of the world’s land masses.

Winter creates operational challenges for gold mines, ranging from extreme cold to heavy snow or rains depending on their latitudes and elevations. So in addition to short planned shutdowns to work on infrastructure, adverse weather can impair operational efficiencies. But the main reason global gold-mine outputs plunge in Q1s is due to ore-grade-management decisions made by mine managers to maximize bonuses.

Gold deposits are not homogeneous, ore grades vary widely within them. So managers must choose which ore to mine, when to run it through their mills, and how to mix it with ores from other locations. The mills that crush the gold-bearing rock into small-enough chunks to recover the metal have fixed capacities in tonnage-per-day terms. So the less gold contained in the ore processed, the less gold the mines recover.

Mine managers often choose to dig through lower-grade ores, or run lower-grade ores through their mills, in Q1s. They save the higher-grade ores for later in calendar years. They often claim these decisions are related to early-year capital budgets being spent to improve outputs later in years. But there’s probably more to it, since this happens so universally across the world’s gold mines. Incentives have to play a role.

Gold-mine managers are often partially compensated based on how their stock prices are faring. This is usually a big factor in annual bonuses calculated near year-ends. These bonuses are the most-variable part of compensation, and can greatly boost income. After long years of study and talking with some of these guys, I’m convinced they choose to take any gold-output hits early in years to engineer strong finishes.

Q1 results are reported by mid-Mays, a long way out from year-ends. That’s the least-beneficial time in bonus terms for strong output to boost stock prices. Q2 results released by mid-Augusts and Q3 results published by mid-Novembers are far-more important. So mine managers feed their fixed-capacity mills better-grade ore mixes in Q2s and Q3s, after early-year maintenance is finished and summer weather is favorable.

Thus in calendar Q2s since 2010, global gold mine output according to the World Gold Council surged an average of 5.4% sequentially from Q1s! Over the past 9 years Q2s have seen huge QoQ global-output gains of 6.7%, 7.7%, 6.3%, 7.1%, 6.1%, 5.7%, 0.7%, 4.9%, and 3.4%. There has not been a single down Q2 in this span despite wildly-different gold-price environments. Such uniformity reveals deliberate planning.

Over roughly the past decade, world gold mine production has averaged -7.2% QoQ in Q1s, +5.4% in Q2s, another hefty +5.3% in Q3s, then just +0.5% in Q4s. That Q4 stalling is pretty telling too, as those Q4 results are typically released by mid-Marches which doesn’t affect annual bonuses when those quarters were underway. The gold miners contrive their best output reporting from late Julies to mid-Novembers!

So in these upcoming Q2’19 results, the gold miners are likely to report production about 5% higher than Q1’s! That big sequential output boost really increases overall corporate earnings. And it has another key benefit of reducing all-in sustaining costs. AISCs are calculated by spreading the costs of gold mining across all ounces produced. So the more gold mined, the lower the unit costs of producing it that quarter.

A year ago in Q2’18, the GDX gold miners’ average AISCs dropped a big 3.2% sequentially from the prior quarter’s to $856 per ounce. So it is certainly reasonable to expect Q2’19’s AISCs to retreat 3% or so from Q1’s $893, which yields $866 per ounce. Subtract that from Q2’19’s average gold price of $1309, and it yields likely earnings of $443 per ounce. That is 8.0% higher quarter-on-quarter from Q1’s results!

That’s conservative too. As detailed in my essay on the GDX gold miners’ Q1’19 results, that quarter’s average AISCs were skewed higher by a single anomalous outlier. That company expects costs to greatly retreat in Q2. Excluding it, the GDX gold miners averaged considerably-lower $874 AISCs in Q1. A 3% reduction to that on higher Q2 output leaves an excellent $848 AISC target, implying big $461 profits!

That represents a major 12.4% quarter-on-quarter surge, which should excite traders anytime. And with gold-stock sentiment already growing far more bullish thanks to gold’s bull-market breakout, there’s a good chance Q2 earnings’ positive psychological impact will be amplified. As long as gold hangs in there and doesn’t sell off, the gold miners’ stocks have real potential to rally considerably on good Q2 results.

A couple charts offer some quick perspective. Gold’s breakout drove a major decisive upside breakout in gold stocks too as measured by their leading GDX benchmark. That dominant ETF is rendered in blue here, superimposed over its key technical lines. As of the Wednesday data cutoff for this essay, GDX had powered 54.2% higher in 10.2 months in its upleg to date. But gold-stock prices still remain relatively low.

Mid-week GDX hit $27.09 on close, its best levels in 2.8 years. But that remains well below gold stocks’ bull-to-date peak of $31.32 in early August 2016. The gold stocks ought to at least exceed those levels, which is another 15.6% higher from here. Good Q2 results interpreted through the lens of increasing sector bullishness should be enough to fuel a bull-market breakout. Gold argues for higher gold-stock levels.

Back in mid-2016 when GDX peaked at $31.32, gold merely hit $1365 at best. That was just after a quarter when the GDX gold miners’ AISCs averaged $886 per ounce. Gold was considerably higher this week, hitting $1425. And it has averaged $1408 for nearly a month since its bull-market breakout. So the higher prevailing gold prices this summer, and lower AISCs, should support much-higher gold-stock prices.

Showing just how strong gold stocks are and how unique today’s situation is, this last chart looks at gold stocks’ average performances in modern bull-market summers. I explained this indexed chart in depth in an essay on gold summer doldrums a couple weeks ago. The yellow lines show where the older HUI gold-stock index traded in past modern gold-bull-market summers, and the red line averages them together.

This year’s action is rendered in dark blue, revealing gold stocks’ best summer by far since 2016 after this gold bull’s massive maiden upleg! In the middle of this week the HUI rocketed 32.3% higher summer-to-date, literally off this seasonal chart I’ve gradually built up over the years. If there was ever a summer where gold stocks could punch out to new bull highs, this one is it. Their upside momentum is incredibly strong.

All this gold-stock bullishness aside, it is always wise to be wary when everyone else is getting excited. The potential for gold stocks to surge to new bull highs on good Q2 results is totally dependent on what gold does over the coming 6 weeks or so. While gold has shown awesome resilience in consolidating high and mostly holding $1400 over the past month, the gold selloff risk is high due to gold-futures positioning.

I wrote a whole essay last week explaining this in depth. In a nutshell, gold-futures speculators dominate short-term gold price action. Their current bets on gold are excessively-bullish, warning that their capital firepower to buy gold is nearing exhaustion. They are effectively all-in on long upside bets, and all-out on short downside bets. That leaves them vast room to sell hard on the right catalyst, pushing gold sharply lower.

There’s a chance new-high psychology can ignite enough investor gold buying to overpower and absorb any spec gold-futures selling. But realize gold-stock fortunes are still slaved to gold as always. Gold has to stay high to support new gold-stock highs. If gold materially falters and slumps into a healthy pullback or correction within an ongoing bull, the gold stocks will follow it lower regardless of how good Q2 results prove.

Buying high on strong upside momentum is always tempting, as that’s when traders feel the best about any sector. Bullishness and capital inflows soar as stocks power higher. But over time far-larger gains are won by instead buying low, adding positions when sectors are out of favor. The later you buy gold stocks in any upleg, the smaller their potential gains and the higher the odds a major selloff is looming.

To multiply your capital in the markets, you have to trade like a contrarian. That means buying low when few others are willing, so you can later sell high when few others can. In recent months well before gold’s breakout, we recommended buying many fundamentally-superior gold and silver miners in our popular weekly and monthly newsletters. Mid-week their unrealized gains ran as high as 123.9%, 123.5%, and 116.5%!

The bottom line is the gold miners’ just-starting Q2’19 earnings season should prove impressive. That’s no thanks to gold, as its awesome bull-market breakout came too late last quarter to push its average price significantly higher. But the gold miners are still likely to collectively report sharply-higher Q2 output, which is normal after Q1’s deep production slump. That will also naturally lead to proportionally-lower costs.

Growing production combined with lower costs at slightly-higher gold prices should yield big profits growth for the gold miners. Their Q2 results will be more closely watched and better received since psychology is shifting much more bullish in this sector. That should fuel big gold-stock buying as long as gold holds up. The yellow metal has proven resilient so far, but faces an ominous overhang of gold-futures selling pressure.

Adam Hamilton, CPA

July 22, 2019

Gold surged dramatically in recent weeks, powering higher to a decisive bull-market breakout. Gold’s first major secular highs in years have really improved sentiment, with bullishness mounting. But gold-futures buying fuel is largely exhausted, after the colossal amount expended to catapult gold back over $1400. That leaves this metal at high risk of suffering a major selloff, a healthy correction in an ongoing bull market.

Even the most-powerful bull markets flow and ebb, taking two steps forward before one step back. Gold is certainly no exception. At best in late June, its current bull extended to modest 35.4% gains over 3.5 years. Those weren’t linear, the path to gold’s recent breakout high was quite volatile. It included a 29.9% upleg, a 17.3% correction, a 20.4% upleg, a 13.6% correction, and today’s upleg running 21.2% at best.

This alternating repeating bull-market pattern is simple, uplegs are inevitably followed by material selloffs often extending into correction territory. Periodic corrections are essential to keep bulls healthy, working off the excessive greed that builds as uplegs peak. That risks sucking in too much capital too soon, prematurely burning out bulls. Corrections rebalance sentiment, bleeding away greed to extend bulls’ longevity.

Even though they are inevitable, normal corrections stress out the majority of traders. The selling taints their psychology and clouds their perspectives of longer-terms trends in play. They fret bulls are dying, and sell out too early and too low. Instead corrections should be embraced, as they offer the greatest opportunities to buy relatively low within ongoing bulls! Entering near correction lows amplifies gains.

While gold’s current bull clocked in at 35.4% total in late June, its three major uplegs added up to much-larger 71.5% gains. Traders had the potential to more than double gold’s headline gains by attempting to buy relatively low later in corrections and sell relatively high later in uplegs! Although impossible to game bull-market swings’ major lows and highs precisely in real-time, trading near them really boosts capital growth.

The reason gold faces high risk for its next major selloff today is speculators’ current positioning in gold futures. Unfortunately spec gold-futures trading has a wildly-disproportional influence over short-term gold price levels. The dominant reason is the extreme leverage inherent in gold futures, which greatly multiplies that capital’s impact on gold prices. This unfair reality has sorely vexed the gold market for decades.

When a normal investor buys gold outright, $1 of capital exerts $1 of buying pressure on the gold price. That’s the way markets are supposed to work. That can be extended with margin in the stock markets, which has had a hard legal limit of 2.0x since 1974. $1 of capital using maximum margin to buy shares in the leading GLD SPDR Gold Shares gold ETF can exert $2 of buying pressure on gold. That’s still reasonable.

But gold-futures trading is way out in its own extreme realm. Each gold-futures contract controls 100 troy ounces of gold. At this Wednesday’s data cutoff for this essay, gold closed at $1417. So each contract wields gold worth $141,700. An investor would have to put up $141,700 to control that much gold, or $70,850 using stock-market-legal-limit leverage on GLD shares. Futures speculators only need $4,000!

That’s no typo, this week the CME Group only requires traders to have $4,000 cash in their accounts for each gold-futures contract they want to trade. That is absurd, enabling extreme maximum leverage of 35.4x! That means a fully-margined gold-futures speculator can exert $35 of buying or selling pressure on gold with each $1 deployed. That temporarily outguns investors, even though they have vastly more capital.

The Federal Reserve has capped stock-market leverage at 2.0x for 45 years because extreme leverage has extreme risks. At 35.4x, a mere 2.8% gold move against speculators’ gold-futures bets would wipe out 100% of their capital risked! This constant threat of ruin forces these traders’ focus to an ultra-myopic short-term span, days or weeks at most. All they can do is ride gold’s immediate momentum, piling on.

As if arbitrarily declaring $1 of gold-futures capital should have up to 35x the influence on gold prices as $1 invested outright isn’t ridiculous enough, it gets worse. Unscrupulous traders can wield gold futures’ extreme leverage like a weapon to manipulate gold prices at key technical and sentimental junctures. One way is spoofing, slamming the market with huge gold-futures orders that are canceled before being executed.

This is not theoretical. In late June the U.S. Department of Justice levied $25m of criminal fines on Merrill Lynch Commodities for this very behavior! And that’s just the tip of the iceberg for gold futures’ extreme leverage being abused to defraud normal investors. This seriously needs to be legally capped at vastly-lower levels. The DoJ’s actual press release did a great job explaining how gold-futures spoofing works.

“…beginning by at least 2008 and continuing through 2014, precious metals traders employed by MLCI schemed to deceive other market participants by injecting materially false and misleading information into the precious metals futures market. They did so by placing fraudulent orders for precious metals futures contracts that, at the time the traders placed the orders, they intended to cancel before execution.”

“In doing so, the traders intended to “spoof” or manipulate the market by creating the false impression of increased supply or demand and, in turn, to fraudulently induce other market participants to buy and to sell futures contracts at quantities, prices and times that they otherwise likely would not have done so. Over the relevant period, the traders placed thousands of fraudulent orders.” These crooks should be in prison!

Compounding gold futures’ gold-price impact, the American gold-futures price is gold’s global reference one. So gold-futures trading moving the gold price heavily influences and sometimes totally controls the entire gold market’s psychology! Investors are motivated to buy and sell gold outright based on what is happening in gold futures. It’s impossible to understand and game gold without closely watching futures.

I had to break my chart into two parts today, lest it get too busy to parse. These superimpose gold’s price through its current bull market over speculators’ gold-futures positioning. Reported weekly by the CFTC in its famous Commitments of Traders reports, specs’ long contracts or upside bets on gold are shown in green while their short contracts or downside bets are rendered in red. They usually dominate gold action.

The wildly-disproportional influence on gold prices by speculators’ gold-futures trading is critical for all investors to understand. Let’s start with this gold bull itself, the cadence of its uplegs and corrections. Its maiden upleg erupted in mid-December 2015 out of deep 6.1-year secular lows in gold, and ultimately blasted up 29.9% in 6.7 months by early July 2016. Major selloffs inevitably follow major uplegs in any bull.

So gold plunged 17.3% over 5.3 months into mid-December 2016 in a severe correction. That was way bigger than normal, greatly exacerbated by Trump’s surprise election victory in early November that year. With Republicans controlling the presidency and both chambers of Congress, stock markets soared on hopes for big tax cuts soon. That crushed gold demand, as fully 5/8ths of that correction came after the election!

While ugly, gold remained in a bull market since that massive selloff didn’t cross the -20% threshold for a new bear market. Gold quickly rebounded from those deep lows and gradually powered to another nice bull-market upleg, up 20.4% over 13.3 months leading into late January 2018. This gold bull’s second major upleg was followed by its second major correction, a 13.6% drop over 6.7 months by mid-August 2018.

That birthed today’s third major upleg, which had extended to 21.2% at best over 10.3 months by late June. This past month saw gold get exciting again after decisively breaking out of its years-long giant ascending-triangle technical formation to surge to major new bull-market and secular highs. This bull’s pattern has been upleg, correction, upleg, correction, upleg. What comes next in this series is obvious.

Gold is at high risk for another major selloff, potentially a full-blown correction over 10% again, because of speculators’ gold-futures positioning. This next chart illuminates what the specs were doing during each of this gold bull’s uplegs and corrections including today’s newest one. These hyper-leveraged traders with their outsized impact on gold prices have effectively exhausted their near-term buying, threatening big selling!

This gold bull’s initial upleg in largely the first half of 2016 was massive, the biggest in this bull so far at 29.9%. That was partially fueled by gold-futures speculators buying a staggering 249.2k long contracts and buying to cover another 82.8k short ones! There are two kinds of buying and two kinds of selling in gold futures, and each set has the same price impact on gold. Thus they can be lumped together for analysis.

Specs can buy new gold-futures contracts to establish long positions, the normal way to buy. But they also buy to cover and close previously-established short positions. The upward pressure on gold from buying longs and covering shorts is identical. On the selling side they can sell their own existing longs, or effectively borrow gold-futures contracts they don’t own to short sell them. Both types hit gold the same way.

Speculators’ total gold-futures buying in this gold bull’s first upleg ran a mind-boggling 331.9k contracts! That’s the equivalent of 1032.4 metric tons of gold. For comparison, total global gold investment demand in the first half of 2016 ran 1091.6t per the World Gold Council’s latest fundamental data. That epic spec long buying catapulted their total upside bets to an all-time-record high of 440.4k contracts as that upleg peaked!

Keep these numbers in mind. This gold bull’s greatest upleg soared 29.9% higher on 331.9k contracts of total buying by gold-futures speculators. That forced their total longs to their highest levels ever seen of 440.4k contracts. As I’ll discuss shortly, today’s latest gold upleg is skating ever closer to those extreme levels. The ice gets pretty thin in that rarefied air of likely gold-futures buying being essentially exhausted.

This gold bull’s first major correction was largely driven by specs reversing that huge long build in largely the second half of 2016. Note the green spec-longs line above collapsed symmetrically to its massive surge in the preceding upleg. Specs dumped 164.5k long contracts and short sold 25.8k more over that severe correction’s exact span. That adds up to 190.3k contracts of total selling, the equivalent of 592.0t.

During gold-bull uplegs the green spec-longs line rises while the red spec-shorts line falls. Then in following corrections that reverses, the green line falling while the red one rises. Gold-futures buying and selling is heavily driving these major bull-market cycles in gold, and that’s not going to change until regulators wake up and radically curtail gold futures’ extreme inherent leverage. Gold’s second upleg straddled 2017.

That was somewhat peculiar, as the spec gold-futures long buying of 80.6k contracts and short covering of 4.1k only totaled 84.7k. That wasn’t much considering gold’s strong 20.4% upleg gains. But realize that gold upleg effectively topped much earlier in early September 2017. Its later upleg peak was marginal. As gold challenged its $1350 bull-market resistance, total spec longs soared as high as 400.1k contracts!

This gold bull’s second correction mostly unfolded during the first half of 2018, and was a textbook-perfect example of heavy spec gold-futures selling. Their green longs line plunged by 98.3k contracts, while their red shorts line rocketed an enormous 128.9k contracts higher. That correction bottomed last August as total spec shorts soared to their own all-time-record high of 256.7k contracts! That portended the next upleg.

Back in early September, I wrote an essay on the “Record Gold/Silver Shorts!”. Published when gold still languished way down at $1196, I concluded then “gold and silver soon soared on short-covering buying following all past episodes of excessive and record short selling. There’s nothing more bullish for gold and silver than extreme shorts! … Record futures shorts are the best gold and silver buy signals available.”

Speculators’ collective gold-futures positions provide both excellent buy signals near major gold lows and excellent sell signals near major gold highs. Smart contrarians get really bullish on gold when specs are really bearish as evidenced by relatively-low longs and relatively-high shorts. And it is just as prudent to get short-term bearish on gold when specs are excessively bullish with relatively-high longs and -low shorts.

This is exactly the situation we’re in today, and it’s growing ominously extreme. This gold bull’s third upleg powered 21.2% higher at best so far as of late June, propelling this metal to a new 6.1-year secular high of $1423. This awesome decisive-bull-breakout upleg was again fueled by enormous gold-futures buying by speculators. They added 99.4k long contracts, while buying to cover a staggering 153.4k short ones!

That adds up to total buying of 252.8k contracts as of gold’s latest peak in late June, or the equivalent of 786.3 metric tons of gold! That’s relevant because it is already 76% of the total gold-futures buying that unfolded during this gold bull’s huge maiden upleg in early 2016. Back then popular gold psychology was waxing really bullish, fostering that extreme gold-futures buying. Getting that high again today is a tall order.

The current gold-futures picture is even worse. While gold hit its latest interim high in late June, the gold-futures speculators kept on buying since. The weekly CoT reports are published late Friday afternoons current to the preceding Tuesdays. So the latest data available this week is current to last Tuesday July 2nd. That saw still more big spec buying, they added another 16.5k longs and covered another 10.2k shorts.

That extends this upleg’s total spec long buying to 115.9k contracts and short covering to 163.6k, making for a larger 279.5k total. Thus today’s upleg has already seen speculators buy 84% of the gold-futures contracts that they did during early 2016’s massive maiden upleg! That doesn’t leave much room to keep on adding more longs and covering more shorts to propel gold to major news highs in the coming weeks.

As of last Tuesday, total spec longs were already way up in nosebleed territory at 374.0k contracts! Out of the last 1070 CoT weeks since early 1999, only 2.2% saw spec longs higher. And that is getting closer to their all-time-record high of 440.4k in early July 2016. While they could conceivably go higher, that’s a hard ceiling until proven otherwise. Gold-futures speculators and their capital are finite, relatively small.

Out of all the world’s traders, only a tiny fraction are willing to run extreme 35x leverage and risk ruin on being slightly wrong on gold’s near-term direction. New gold highs really don’t mint sizable numbers of new gold-futures speculators either, as the risks are so crazy. And this small pool of gold-futures traders really don’t control much capital compared to broader markets. They’d be irrelevant without their extreme leverage.

So at some point gold-futures buying pressure literally exhausts itself. All the specs who want to be long gold have already bought in, expending all their available capital firepower. We can’t know in advance if it will happen at 375k longs, 400k, 425k, or 450k, but odds are it will be somewhere around there. Once the specs are all-in, all they can do is sell to start unwinding their excessively-bullish bets. That will hammer gold.

This relatively-young gold bull has seen three prior episodes where specs liquidated high longs, as seen in the falling green line above. Those were during this bull’s two corrections and a milder pullback in late 2018. Gold fell sharply each time, and this next episode of major spec long selling won’t prove different. At their latest 374.0k levels, spec longs are really high today with little room to buy and tons of room to sell!

The near-term gold risk is compounded by the fact spec shorts are also really low, just 87.2k contracts as of the last CoT report. That’s just a hair over the lowest levels of this entire bull market, 82.5k seen in late March 2018. So spec short-covering buying isn’t likely to go much lower, and in any case has a hard limit as these downside bets get closer to zero. Like spec long buying, spec short covering is largely exhausted.

Total spec gold-futures longs approaching bull-market and all-time-record highs, coupled with total spec gold-futures shorts just over bull-market lows, is very bearish for gold over the near-term! Remember by necessity these guys are short-term momentum followers, their extreme leverage will slaughter them if they are on the wrong side of gold for long. When gold noses over, their selling will intensify and cascade.

It certainly has the potential to snowball forcing another correction-grade gold selloff over 10%, which equates to a demoralizing sub-$1281 gold price. We might get lucky, the bullish new-high psychology could retard gold-futures selling. If the normalization of specs’ gold-futures bets is very slow, gold could see a milder pullback largely consolidating high. But we can’t bet on that based on all the bull-market precedent.

The greatest hope of gold evading a big selloff on gold-futures selling is investors returning in a big way. They control vastly more capital than the gold-futures speculators, so when they are buying aggressively that can easily absorb and overpower any gold-futures selling. But while new-high psychology has spawned some investment buying, it has only been sporadic so far with euphoric US stock markets near record highs.

Meanwhile traders should prepare for the next major gold selloff, possibly this gold bull’s third correction. That means tightening trailing stop losses on existing long positions in gold and the stocks of its miners. On stoppings, cash should be accumulated and not redeployed. It is simply too risky to add material new long positions in gold and gold stocks until speculators’ extreme gold-futures positioning considerably normalizes.

To multiply your capital in the markets, you have to trade like a contrarian. That means buying low when few others are willing, so you can later sell high when few others can. In recent months well before gold’s breakout, we recommended buying many fundamentally-superior gold and silver miners in our popular weekly and monthly newsletters. This week their unrealized gains ran as high as 112.8%, 105.0%, and 95.2%!

You need to stay informed about gold cycles and gold-futures positioning to profitably trade the high-potential gold stocks. Our newsletters are a great way, easy to read and affordable. 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. Subscribe today and take advantage of our 20%-off summer-doldrums sale! Then you’ll be ready to buy back in relatively low for gold’s next major upleg.

The bottom line is gold is at high risk for a major selloff today. Speculators’ gold-futures positioning has grown excessively-bullish, leaving their buying firepower largely exhausted. That leaves vast room for big selling to snowball on the right catalyst. This bull’s prior episodes where specs had similar really-high longs and really-low shorts heralded major gold corrections. Extreme bets must eventually be normalized.

Such corrections are normal and healthy within ongoing bull markets, rebalancing sentiment to ensure longer lives with greater ultimate gains. These corrections should be embraced, as they yield the very best opportunities to buy relatively low within powerful bulls. Gold’s current bull is likely to run for years yet, so gird yourself for a major selloff and be ready to buy back in aggressively once it has largely run its course.

Adam Hamilton, CPA

July 15, 2019

Gold’s incredible strength this summer is very unusual, as early summers are the weakest times of the year seasonally for gold, silver, and their miners’ stocks. With traders’ attention diverted to vacations and summer fun, interest in and demand for precious metals normally wane. So this entire sector tends to suffer a seasonal lull, along with the general markets. This June’s bull-market breakout is a momentous anomaly.

This doldrums term is very apt for gold’s usual summer predicament. It describes a zone in the world’s oceans surrounding the equator. There hot air is constantly rising, creating long-lived low-pressure areas. They are often calm, with little or no prevailing winds. History is full of accounts of sailing ships getting trapped in this zone for days or weeks, unable to make headway. The doldrums were murder on ships’ morale.

Crews had no idea when the winds would pick up again, while they continued burning through their limited stores of food and drink. Without moving air, the stifling heat and humidity were suffocating on these ships long before air conditioning. Misery and boredom were extreme, leading to fights breaking out and occasional mutinies. Being trapped in the doldrums was viewed with dread, it was a very trying experience.

Gold investors can somewhat relate. Like clockwork nearly every summer, gold starts drifting listlessly sideways. It often can’t make significant progress no matter what the trends looked like heading into June, July, and August. As the days and weeks slowly pass, sentiment deteriorates markedly. Patience is gradually exhausted, supplanted with deep frustration. Plenty of traders capitulate, abandoning ship.

Thus after decades of trading gold, silver, and their miners’ stocks, I’ve come to call this time of year the summer doldrums. Junes and Julies in particular are usually desolate sentiment wastelands for precious metals, totally devoid of recurring seasonal demand surges. Unlike much of the rest of the year, these summer months simply lack any major income-cycle or cultural drivers of outsized gold investment demand.

The vast majority of the world’s investors and speculators live in the northern hemisphere, so markets take a back seat to the great joys of summer. Traders take advantage of the long sunny days and kids being out of school to go on extended vacations, hang out with friends, and enjoy life. And when they aren’t paying much attention to the markets, naturally they aren’t allocating much new capital to gold.

Given gold’s dull summer action historically, it is never wise to expect too much from it this time of year. Summer rallies can happen, but they aren’t common. So expectations need to be tempered, especially in Junes and Julies. That early-1990s Gin Blossoms song “Hey Jealousy” comes to mind, declaring “If you don’t expect too much from me, you might not be let down.” The markets are ultimately an expectations game.

Quantifying gold’s summer seasonal tendencies during bull markets requires all relevant years’ price action to be recast in perfectly-comparable percentage terms. That is accomplished by individually indexing each calendar year’s gold price to its last close before market summers, which is May’s final trading day. That is set at 100, then all gold-price action each summer is recalculated off that common indexed baseline.

So gold trading at an indexed level of 105 simply means it has rallied 5% from May’s final close, while 95 shows it is down 5%. This methodology renders all bull-market-year gold summers in like terms. That’s necessary since gold’s price range has been so vast, from $257 in April 2001 to $1894 in August 2011. That span encompassed gold’s last secular bull, which enjoyed a colossal 638.2% gain over those 10.4 years!

Obviously 2001 to 2011 were certainly bull years. 2012 was technically one too, despite gold suffering a major correction following that powerful bull run. At worst that year, gold fell 18.8% from its 2011 peak. That was not quite enough to enter formal bear territory at a 20%+ drop. But 2013 to 2015 were definitely brutal bear years, which need to be excluded since gold behaves very differently in bull and bear markets.

In early 2013 the Fed’s wildly-unprecedented open-ended QE3 campaign ramped to full speed, radically distorting the markets. Stock markets levitated on the Fed’s implied backstopping, slaughtering demand for alternative investments led by gold. So in Q2’13 alone, gold plummeted 22.8% which proved its worst quarter in an astounding 93 years! Gold’s bear continued until the Fed started hiking rates again in late 2015.

The day after that first rate hike in 9.5 years in mid-December 2015, gold plunged to a major 6.1-year secular low. Then it surged out of that irrational rate-hike scare, formally crossing the +20% new-bull threshold in early March 2016. Ever since, gold has remained in this current bull. At worst in December 2016 after gold was crushed on the post-election Trumphoria stock-market surge, it had only corrected 17.3%.

So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, then resumed in 2016 to 2019. Thus these are the years most relevant to understanding gold’s typical summer-doldrums performance, which is necessary for managing your own expectations this time of year. This spilled-spaghetti mess of a chart is fairly simple and easy to understand.

The yellow lines show gold’s individual-year summer price action indexed from each May’s final close for all years from 2001 to 2012 and 2016 to 2017. 2018’s is rendered in light blue. Together these establish gold’s summer trading range. All those past bull-market years’ individual indexes are averaged together in the red line, revealing gold’s central summer tendency. 2019’s indexed action is superimposed in dark blue.

While there are outlier years, gold generally drifts listlessly in the summer doldrums much like a sailing ship trapped near the equator. The center-mass drift trend is crystal-clear in this chart. The vast majority of the time in June, July, and August, gold simply meanders between +/-5% from May’s final close. This year that equated to a probable summer range between $1240 to $1370. Gold tends to stay well within trend.

Obviously this year has proven a huge exception to that normal summer rule, with gold rocketing higher to a major bull-market breakout! Gold blasted to its best early-summer performance ever seen in all modern bull-market years. Comparing this current summer’s dark-blue line to past years’ price action certainly drives home how unique, exceptional, and special gold’s breakout surge to major new secular highs has been.

Still, understanding gold’s typical behavior this time of year is important for traders. Sentiment isn’t only determined by outcome, but by the interplay between outcome and expectations. If gold rallies 5% but you expected 10% gains, you will be disappointed and grow discouraged and bearish. But if gold rallies that same 5% and you expected no gains, you’ll be excited and get optimistic and bullish. Expectations are key.

History has proven it is wise not to expect too much from gold in these lazy market summers, particularly Junes and Julies. Occasionally gold still manages to stage a summer rally, like this year’s monster. But most of the time gold doesn’t veer materially from its usual summer-drift trading range, where it is often adrift like a classic tall ship. With range breakouts either way uncommon, there’s often little to get excited about.

In this chart I labeled some of the outlying years where gold burst out of its usual summer-drift trend, both to the upside and downside. But these exciting summers are atypical, and can’t be expected very often. Most of the time gold grinds sideways on balance not far from its May close. Traders not armed with this critical knowledge often wax bearish during gold’s summer doldrums and exit in frustration, a real mistake.

Gold’s summer-doldrums lull marks the best time of the year seasonally to deploy capital, to buy low at a time when few others are willing. Gold enjoys powerful seasonal rallies that start in Augusts and run until the following Mays! These are fueled by outsized investment demand driven by a series of major income-cycle and cultural factors from around the world. Summer is when investors should be bullish, not bearish.

The red average indexed line above encompassing 2001 to 2012 and 2016 to 2018 reveals gold’s true underlying summer trend in bull-market years. Technically gold’s major seasonal low arrives relatively early in summers, mid-June. On average through all these modern bull-market years, gold slumped 0.9% between May’s close and that summer nadir. But seasonally that’s still on the early side to deploy capital.

Check out the yellow indexed lines in this chart. They tend to cluster closer to flatlined in mid-June than through all of July. The only reason gold’s seasonal low appears in mid-June mathematically is a single extreme-outlier year, 2006. The spring seasonal rally was epic that year, gold rocketed 33.4% higher to a dazzling new bull high of $720 in just 2.0 months between mid-March to mid-May! That was incredible.

Extreme euphoria had catapulted gold an astounding 38.9% above its 200-day moving average, radically overbought by any standard. That was way too far too fast to be sustainable, so after that gold had to pay the piper in a sharp mean-reversion overshoot. So over the next month or so into mid-June, gold’s overheated price plummeted 21.9%! That crazy outlier is the only reason gold’s major summer low isn’t later.

There were 15 bull-market years from 2001 to 2012 and 2016 to 2018. That is a big-enough sample to smooth out the trend, but not large enough to prevent extreme deviations from skewing it a bit. Gold sees a series of marginally-higher lows in late June, early July, and even late July. In this dataset they came in 0.0%, 0.3%, and 0.8% higher than mid-June’s initial low. And that last late-July one arrives over 6 weeks later.

So generally there’s no hurry to deploy capital right at that initial mid-June seasonal low. Gold tends to drift nearly flatlined over the next several weeks into early July, trying traders’ patience. Buying within a few trading days of the US Independence Day holiday seems to have the best odds of catching gold near its summer-doldrums lows. Investment capital inflows usually begin ramping back up after that as traders return.

On average in these modern bull-market years, gold slipped 0.4% in Junes before rallying 0.7% in Julies. After July’s initial lazy summer week, gold tends to gradually start clawing its way back higher again. But this is so subtle that Julies often still feel summer-doldrumsy. By the final trading day in July, gold is still only 0.3% higher than its May close kicking off summers. That’s too small to restore damaged sentiment.

Since gold exited May 2019 at $1305, an average 0.3% rally by July’s end would put it at $1309. That’s hardly enough to generate excitement after two psychologically-grating months of drifting. But the best times to deploy any investment capital are when no one else wants to so prices are low. Gold’s summer doldrums come to swift ends in Augusts, which saw hefty average gains of 1.9% in these bull-market years!

And that’s just the start of gold’s major autumn seasonal rally, which has averaged strong 5.7% gains between mid-Junes to late Septembers. That is driven by Asian gold demand coming back online, first post-harvest-surplus buying and later Indian-wedding-season buying. June is the worst of gold’s summer doldrums, and the first half of July is when to buy back in. It’s important to be fully deployed before August.

These gold summer doldrums driven by investors pulling back from the markets to enjoy their vacation season don’t exist in a vacuum. Gold’s fortunes drive the entire precious-metals complex, including both silver and the stocks of the gold and silver miners. These are effectively leveraged plays on gold, so the summer doldrums in them mirror and exaggerate gold’s own. Check out this same chart type applied to silver.

Since silver is much more volatile than gold, naturally its summer-doldrums-drift trading range is wider. The great majority of the time, silver meanders between +/-10% from its final May close. That came in at $14.56 this year, implying a summer-2019 silver trading range between $13.10 to $16.02. While silver suffered that extreme June-2006 selling anomaly too, its major seasonal low arrives a couple weeks after gold’s.

Given gold’s spectacular bull-market-breakout surge last month, silver’s summer performance this year has been utterly dismal. Normally silver amplifies gold upside by at least 2x. But silver has been bombed out and languishing for so long that investors and speculators still want nothing to do with it. Silver often acts as a gold sentiment gauge, and gold hasn’t been over $1400 long enough yet to shift psychology to bullish.

On average in these same gold-bull-market years of 2001 to 2012 and 2016 to 2018, silver dropped 4.1% between May’s close and late June. That is much deeper than gold’s 0.9% seasonal slump, which isn’t surprising given silver’s leverage to gold. Silver’s summer performances are also much lumpier than gold’s. Junes see average silver losses of 3.2%, but those are more than erased in strong rebounds in Julies.

Silver’s big 3.6% average rally in Julies amplifies gold’s gains by an impressive 5.1x! But unfortunately silver hasn’t been able to maintain that seasonal momentum, with Augusts averaging a modest decline of 0.7%. Overall from the end of May to the end of August, silver’s summer-doldrums performance tends to drift lower. Silver averaged a 0.4% full-summer loss, way behind gold’s 2.2% gain through June, July, and August.

That means silver sentiment this time of year is often worse than gold’s, which is already plenty bearish. The summer doldrums are more challenging for silver than gold. Being in the newsletter business for a couple decades now, I’ve heard from countless discouraged investors over the summers. While I haven’t tracked this, it sure feels like silver investors have been disproportionally represented in that feedback.

Since gold is silver’s primary driver, this white metal is stuck in the same dull drifting boat as gold in the market summers. Silver usually leverages whatever is happening in gold, both good and bad. But again the brunt of silver’s summer weakness is borne in Junes. Fully expecting this seasonal weakness and rolling with the punches helps prevent getting disheartened, which in turn can lead to irrationally selling low.

The gold miners’ stocks are also hostage to gold’s summer doldrums. This last chart applies this same methodology to the flagship HUI gold-stock index, which mostly closely mirrors that leading GDX VanEck Vectors Gold Miners ETF. The major gold stocks tend to amplify gold’s gains and losses by 2x to 3x, so it is not surprising that the HUI’s summer-doldrums-drift trading range is also twice as wide as gold’s own.

The gold miners’ stocks share silver’s center-mass summer drift running +/-10% from May’s close. This year the HUI entered the summer doldrums at 157.1, implying a June, July, and August trading range of 141.4 to 172.8. While gold stocks’ GDX ETF is too young to do long-term seasonal analysis on, in GDX terms this summer range translates to $19.43 to $23.75 this year. That’s based off a May 31st close of $21.59.

Thanks to gold’s dazzling bull-market breakout, gold stocks have defied these weak summer seasonals this year to soar to their own major decisive breakout! This high-potential contrarian sector has enjoyed its best early-summer performance ever witnessed in gold’s modern bull-market years. While I hope this incredible outperformance persists, the summer doldrums could still reassert themselves if gold retreats.

Like gold, the gold stocks’ major summer seasonal low arrives in mid-June. On average in these gold-bull-market years of 2001 to 2012 and 2016 to 2018, by then the HUI had slid 2.1% from its May close. Then gold stocks tended to more than fully rebound by the end of June, making for an average 0.6% gain that month. But there is no follow-through in July, where the gold stocks averaged a modest 0.5% loss.

Overall between the end of May and the end of July, which encompasses the dark heart of the summer doldrums, the HUI proved dead flat on average. Again two solid months of grinding sideways on balance is hard for traders to stomach, especially if they’re not aware of the summer-doldrums drift. The key to surviving it with minimum psychological angst is to fully expect it. Managing expectations in markets is essential!

But also like gold, the big payoff for weathering the gold-stock summer starts in August. With gold’s major autumn rally getting underway, the gold stocks as measured by the HUI amplify it with good average gains of 3.1% in Augusts! And that’s only the start of gold stocks’ parallel autumn rally with gold’s, which has averaged 9.3% gains from late Julies to late Septembers. Gold-stock upside resumes in late summers.

Like much in life, withstanding the precious-metals summer doldrums is less challenging if you know they’re coming. While outlying years happen, they aren’t common. So the only safe bet to make is expecting gold, silver, and the stocks of their miners to languish in Junes and Julies. Then when these drifts again come to pass, you won’t be surprised and won’t get too bearish. That will protect you from selling low.

The precious-metals sector radically bucked its seasonal-slump trend this year, surging to a record start. Gold began blasting higher on May’s final trading day, and that sharp rally carried into early June. New trade-war tariff threats were ramping up market fears, driving the US stock markets to selloff lows following late April’s all-time record highs. So traders remembered diversifying with gold and flocked back to it.

In mid-June gold’s gains accelerated after the Fed reversed its future-rate outlook from hiking back to cutting. That propelled gold to its first new bull-market highs in 3.0 years, with it surging to a 5.8-year secular high on that late-June breakout day. That momentum fed on itself and carried gold back over $1400 for the first time since early September 2013. Those awesome $1400+ levels have mostly held since.

The gold miners’ stocks naturally leveraged gold’s gains, enjoying their own epic early-summer action. The precious-metals sector is doing wildly better than last summer, when gold rolled over in mid-June on a sharp US dollar rally. Hyper-leveraged gold-futures speculators watch the dollar’s fortunes for trading cues. Hopefully gold’s huge early-summer gains can hold, and it consolidates sideways in coming weeks.

Gold’s massive and exceptional June rally was mostly fueled by speculators buying enormous quantities of gold futures. That has largely exhausted their available capital firepower, and left their collective bets on gold exceedingly bullish. These positions must be partially unwound with selling, which forces gold into a high consolidation at best and a sharp selloff at worst. So gold isn’t out of the summer-doldrums woods yet.

The inevitable coming gold-futures selling could be largely offset by investment buying. Investors are radically underinvested in gold after the second-largest and first-longest stock bull in US history, giving them big room to buy to reestablish normal portfolio allocations. Since they love chasing winners, gold’s powerful new-high psychology is starting to attract them back. Their return could dwarf gold-futures selling.

Given gold’s long-established lackluster summer-doldrums performance record, it is probably not prudent to chase this rally with gold-futures speculators effectively all-in longs and all-out shorts. But the metal and its miners’ stocks can be accumulated aggressively on any significant weakness. All portfolios need a 10% allocation in gold and gold stocks! Far-more upside is coming after recent overboughtness is worked off.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from selloffs, their unrealized gains were already running as high as +105% this week!

If you want to multiply your capital in the markets, you have to stay informed. Our newsletters are a great way, easy to read and affordable. 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. As of Q1 we’ve recommended and realized 1089 newsletter stock trades since 2001, averaging annualized realized gains of +15.8%! That’s nearly double the long-term stock-market average. Subscribe today and take advantage of our 20%-off summer-doldrums sale!

The bottom line is gold, silver, and their miners’ stocks usually drift listlessly during market summers. As investors shift their focus from markets to vacations, capital inflows wane. Junes and Julies in particular are simply devoid of the big recurring gold-investment-demand surges seen during much of the rest of the year, leaving them weak. Investors need to expect lackluster sideways action on balance this time of year.

This summer has proven an epic exception, with gold rocketing to its first major bull-market breakout in years! That has catapulted both the metal and its miners’ stocks to their best early-summer performances in gold’s modern bull-market years. But the summer doldrums could still reassert themselves as specs’ excessively-bullish gold-futures bets are bled off. So enjoy these big anomalous gains, but remain wary.

Adam Hamilton, CPA

July 8, 2019

The gold miners’ stocks just blasted higher to a major decisive breakout this week! Driven by gold’s own huge bull-market breakout, the gold stocks surged well above vexing years-old upper resistance. The resulting new multi-year highs are a game changer, starting to shift long-apathetic sector sentiment back towards bullish. This will increasingly attract back traders, with their buying unleashing a virtuous circle of gains.

Traders usually track gold-stock fortunes with this sector’s most-popular exchange-traded fund, the GDX VanEck Vectors Gold Miners ETF. Launched in May 2006, this was the original gold-stock ETF. That big first-mover advantage has helped propel GDX to sector dominance. This week its net assets of $10.5b ran 44.6x larger than the next-biggest 1x-long major-gold-miners ETF! GDX is this sector’s leading benchmark.

And as recently as late May, neither speculators nor investors wanted anything to do with gold stocks. GDX slumped to $20.42 on May 29th, down 3.2% year-to-date. That was much worse than gold’s own slight 0.2% YTD decline then warranted. The gold stocks were really out of favor, largely ignored by apathetic traders. What a difference a month makes though, as their fortunes changed radically in June.

The gold miners started reanimating on May 31st, after Trump unleashed a bombshell warning to Mexico the evening before. He said tariffs would be imposed on all of its exports to the US if it didn’t seriously clamp down on illegal immigration across the US southern border. While Trump subsequently suspended those tariffs on Mexico’s promises to take action, that was the catalyzing event that awoke gold from its slumber.

A couple weeks ago I wrote an essay on the resulting mounting gold-stock upleg, explaining what was going on. But the developments since have been stunning, a colossal bullish surprise. Long neglected, GDX kept on marching higher mid-month leading into last week’s highly-anticipated Federal Open Market Committee decision. GDX closed at $23.67 the day before, already 15.9% higher in only several weeks.

The Fed kowtowed to stock traders’ hyper-dovish expectations and shifted its future rate bias from tightening to cutting, lighting a fire under gold. In last week’s essay I analyzed the gold bull breaking out, which was a momentous sea-change event. Gold rallied 1.0% to $1360 that day with top Fed officials forecasting a new rate cut next year. Gold-stock traders just shrugged at gold’s best close in 2.9 years.

They only bid GDX 1.4% higher to $24.00 after the Fed’s dovish shift. That only amplified gold’s gains by 1.4x, far short of the major gold stocks’ normal upside leverage to gold of 2x to 3x. While gold was high, it had tried and failed for years to break out above its $1350 resistance zone. And gold stocks suffered big and sharp selloffs after those previous forays proved unsuccessful. Traders didn’t expect this time to be different.

That Fed-Day evening New York time, Asian markets reopened as their Thursday morning rolled around. The Asian cultures have a deep cultural affinity for gold, and aggressively piled on in early trading. All that buying catapulted gold from $1358 to $1383 in about an hour! Partially thanks to Iran shooting down a big and sophisticated US surveillance drone overnight, gold’s Asia gains held in last Thursday’s U.S. trading.

Gold closed 2.1% higher that day at $1389, a decisive breakout 1%+ beyond its previous bull-market high of $1365 from way back in early July 2016! That also happened to be a 5.8-year closing high, so gold-stock traders realized big changes were afoot. They poured capital into gold stocks with a vengeance, catapulting GDX 4.4% higher on 3.5x its 3-month-average daily volume! That propelled it to $25.05 on close.

That was a critical technical level, as this GDX chart shows. It looks at the gold-stock price action of the last several years or so during gold’s own parallel bull market. GDX is rendered in blue, its key 50-day and 200-day moving averages in white and black, and 2.5-standard-deviation bands in light yellow. This leading gold-stock ETF had to decisively best years-old upper resistance at $25 to prove this time is different.

Since late 2016, GDX has largely been trapped in a giant consolidation basing trend running from $21 support to $25 resistance. $25 had proven a graveyard in the sky for gold stocks since November 2016, and needed to be overcome to change bearish psychology. GDX’s $25.05 close last Thursday on that new secular gold high was right there. But $25 resistance had to be broken decisively to impress traders.

Last Friday gold climbed another 0.7% to $1399 on pure momentum, yet gold-stock traders were worrying again. So GDX’s resulting 0.6% rally was pathetic, actually lagging gold. While not a decisive breakout over $25.25, or 1% above that long-vexing resistance line, GDX’s $25.21 close was darned close. The major gold stocks as measured by this ETF hadn’t been higher in 21.4 months. That was certainly bullish.

Last Friday and this Monday it was becoming evident that new-high psychology was taking root in gold. That is a powerful force motivating speculators and investors to buy. GDX $25 finally being materially surpassed has long been the key to unleashing this self-reinforcing sentiment in gold stocks. A couple weeks ago when GDX had merely climbed to $23.33 at best, I wrote about this coming critical breakout.

“The higher gold stocks climb, the more traders will want to buy them to ride that momentum. The more capital they deploy, the more gold stocks will rally. This normal virtuous circle of improving psychology and buying will become even more exaggerated as GDX $25 is surpassed. Seeing the highest gold-stock levels in several years will work wonders to improve sector sentiment, unleashing widespread bullishness.”

“This gold-stock upleg’s potential gains are massive spanning such a major upside breakout. Remember speculators and investors love chasing winners, so the higher gold stocks rally the more attractive they’ll look.” Nothing drives trader interest and thus capital inflows like major new highs. And GDX was right on the verge of entering that excitement-fueling zone decisively over $25 as markets opened for trading this week.

This Monday gold surged another 1.4% higher to a dazzling $1419 close! That new 6.1-year high was fueled by sheer momentum, there was little gold-moving news that day. Gold’s new-high psychology was already feeding on itself. And that enthusiasm spilled into gold stocks, with traders bidding GDX another 3.8% higher to $26.17. That was the long-awaited decisive $25 breakout, with GDX blasting 4.7% beyond!

The importance of gold stocks powering through to new 2.7-year highs cannot be overstated. Major new highs act like magnets attracting traders’ attention, interest, and capital. They prove that the long-ignored gold stocks are in bull-market-rallying mode again, portending massive gains to come. They also garner media coverage, which greatly increases the number of traders looking to ride the breakout momentum.

Since late May’s depressing low, GDX had rocketed a huge 28.2% higher in just 18 trading days! Stock traders would kill for those kinds of fast gains. And the major gold stocks’ upleg-to-date advance per this ETF had grown to 48.9% over 9.4 months. That would be impressive for any sector, but is actually still on the smaller side for the high-potential gold stocks. Their uplegs have tended to grow much larger in the past.

The last time gold was hitting new bull-market highs was in the first half of 2016. That was the maiden upleg of this bull, where gold soared 29.9% higher in just 6.7 months. The resulting excitement fueled a deluge of capital roaring into gold stocks, which skyrocketed GDX an incredible 151.2% higher in roughly that same span! While that upleg was exceptionally large, the last major gold-stock bull’s uplegs were big.

Before GDX came along, the primary gold-stock benchmark was the classic HUI NYSE Arca Gold BUGS Index. Like GDX it tracks most of the same major gold stocks, so HUI and GDX price action are usually indistinguishable. The last gold-stock bull straddling GDX’s birth saw the HUI soar 1664.4% higher over 10.8 years between November 2000 to September 2011! Those gains accrued over 12 separate uplegs.

One was an anomaly, the epic mean-reversion rebound after late 2008’s first-in-a-century stock panic. Excluding it, the other 11 normal gold-stock uplegs in that last bull averaged 80.7% gains over 7.9 months per the HUI! So GDX’s 48.9% upleg-to-date advance as of early this week remains well below precedent to be mature. Odds are it will grow much larger in line with past major uplegs before giving up its ghost.

Gold stocks paid a terrible price as gold drifted sideways over the last several years, trapped under that $1350 resistance zone which masked its in-progress bull. That’s why GDX mostly meandered between those $21 support and $25 resistance lines since late 2016. That chronic inability to break out to new highs gradually scared away the great majority of traders, leaving gold stocks incredibly undervalued.

Gold-stock prices are ultimately determined by gold, because it overwhelmingly drives their earnings. So one way to measure gold-stock “valuations” is looking at them relative to gold. This can be done using the GDX/GLD Ratio, the leading gold-stock ETF’s price divided by the flagship gold ETF’s price. That of course is the GLD SPDR Gold Shares. I last wrote about and analyzed the GGR in an early-February essay.

This Monday as GDX finally decisively broke above $25 to close at $26.17, GLD’s shares closed way up at $133.94. That made for a GGR of just 0.195x at the best gold-stock levels in several years. Yet that was still really low by historical standards. The last normal years for the gold market were arguably 2009 to 2012. That stretch was sandwiched between 2008’s stock panic and the Fed’s QE3 stock-market levitation.

The resulting extreme and irrational stock euphoria had a devastating impact on gold. But from 2009 to 2012 before markets became wildly central-bank-distorted and fake, the GDX/GLD ratio averaged 0.381x. That encompassed all kinds of gold environments, from strong bull to budding bear. So there’s no better recent span to approximate gold stocks’ “fair value” relative to gold. Applying that today is super-bullish.

At Monday’s $133.94 GLD close, that historical-average fair-value GGR would put GDX at $51.03. That is a whopping 95.0% higher than its actual close that day! Gold stocks are literally trading at just half of where they ought to be at today’s gold prices, meaning they still need to double just to catch up. And that doesn’t account for higher future gold prices or the GGR overshooting proportionally higher after mean reverting!

At best GDX has powered 151.2% higher within gold’s current bull. But during gold’s last secular bull, the HUI skyrocketed an astounding 1664.4% higher over 10.8 years! Gold stocks are one of the highest-potential sectors in the entire stock markets. When they really start running the resulting gains can truly generate life-changing wealth. That’s why contrarians are willing to suffer between their mighty bull runs.

This week’s long-awaited GDX $25 breakout is a critical technical milestone that is likely signaling much-bigger gains to come. The gold-stock surge this month is really special, actually the strongest early-summer performance for this sector in modern gold-bull history! Normally this time of year I’d be updating my gold-summer-doldrums research, highlighting the weakest time of the year seasonally for gold stocks.

Hopefully I can find time next week. This chart looks at the HUI’s average summer performances in all modern gold-bull-market years. Each summer is individually indexed to its final close in May, keeping gold-stock price action perfectly comparable regardless of prevailing gold levels. The yellow lines show 2001 to 2012 and 2016 to 2017. Last year’s summer gold-stock action is rendered in light blue for comparison.

All these lines averaged together form the red one, revealing the center-mass drift trend of gold stocks in market summers. Gold stocks’ current 2019 summer action is superimposed over all that in dark blue. As you can see, this past month’s action is the best summer start gold stocks have seen since at least 2001! They are even tracking better than the summer of 2016 in this gold bull’s mighty maiden upleg.

This chart really illuminates how unique gold stocks’ powerful June rally has been. This is more evidence that a sea-change sentiment shift is underway in this long-neglected sector. That sure implies the gains to come will be much larger than traders expect, driving GDX towards its own new bull highs on balance. In early August 2016, GDX hit its bull-to-date high of $31.32. That’s 19.7% higher than Monday’s breakout close.

The major gold miners’ fundamentals remain strong and bullish too, supporting much-higher stock prices. After every quarterly earnings season, I dig deep into the GDX gold miners’ fundamentals. They finished reporting their latest Q1’19 results about 6 weeks ago, and I wrote a comprehensive essay analyzing them. At that point GDX was still really out of favor, languishing under its $21 multi-year support line.

Stock prices are ultimately determined by underlying corporate earnings, and for the gold miners that is totally dependent on prevailing gold prices. Gold-mining costs are best measured in all-in-sustaining-cost terms. In Q1’19 the GDX gold miners’ AISCs averaged $893 per ounce. That’s right in line with the prior four quarters’ trend of $884, $856, $877, and $889. Gold-mining profits are going to soar with higher gold.

Gold averaged $1303 in Q1 when the major gold miners were producing it for $893. That implies they were earning $410 per ounce mined. $1400 and $1500 gold are only 7.4% and 15.1% higher from there. As the GDX gold miners’ AISCs reveal, gold-mining costs are largely fixed from quarter to quarter and don’t follow gold higher. So assuming flat AISCs, gold-mining profits surge to $507 at $1400 and $607 at $1500.

That’s 23.7% and 48.0% higher from Q1’19 levels on mere 7.4% and 15.1% gold gains from that quarter’s average price! And as of earlier this week, gold had already climbed 9.2% of that. The major gold miners’ fundamentals are already bullish, but improve greatly at higher prevailing gold prices. With earnings growth hard to come by in general stock markets this year, the gold stocks will be even more alluring.

All the stars are aligning for big gold-stock gains in coming months, with their technicals, sentiment, and fundamentals all looking very bullish. This breaking-out gold-stock upleg has excellent potential to grow much larger later this year, greatly rewarding contrarians buying in early. More and more traders are becoming aware of this sector’s huge potential, and their buying will push the gold stocks much higher.

This is not the summer to check out, but to do your homework and get deployed in great gold stocks. All portfolios need a 10% allocation in gold and its miners’ stocks! Many smaller mid-tier and junior miners have superior fundamentals and upside potential to the majors of GDX. And by the time gold stocks get really exciting again hitting their own new bull highs, much of the easy gains will have already been won.

The bottom line is gold stocks have joined gold with their own decisive breakout! GDX finally burst back above its long-oppressing $25 upper-resistance line this week. These multi-year highs are a game changer for gold stocks, ushering back long-absent bullish psychology enticing traders to return. They’ve been gone for so long that this entire gold-mining sector is deeply undervalued relative to prevailing gold prices.

That portends huge upside potential as gold and its miners’ stocks return to the limelight on their major breakouts. Traders love chasing winners to ride their upside momentum, and buying begets buying. Of course gold-stock uplegs don’t power higher in straight lines, periodic selloffs to rebalance sentiment are normal and healthy. So any material gold-stock weakness should be used to accumulate sizable positions.

Adam Hamilton, CPA

June 28, 2019

Gold is finally surging to new bull-market highs! Several years after its last bull high, gold punched through vexing resistance after the Fed continued capitulating on ever normalizing. This huge milestone changes everything for gold and its miners’ stocks, unleashing new-high psychology fueling self-feeding buying. With speculators not yet all-in and investors wildly underdeployed, gold has room to power much higher.

Gold momentum has certainly been building for a major upside breakout. Back in mid-April with gold still near $1300, I wrote an essay describing the “Gold-Bull Breakout Potential” and why it was finally coming. Then a couple weeks ago with gold in the $1330s, I published another one analyzing “Gold Surges Near Breakout”. For several years higher lows had slowly compressed gold ever closer to surging over resistance.

Today’s gold bull was first born back in mid-December 2015 the day after the Fed’s initial rate hike in its just-abandoned tightening cycle. Gold’s maiden upleg was massive, rocketing 29.9% higher in just 6.7 months to $1365 in early July 2016! But that first high-water mark has proven impregnable over the 3.0 years since. Gold tried and failed to break out in 2017, 2018, and 2019, repelled near a $1350 Maginot Line.

While gold mostly climbed on balance, the lack of higher highs really impaired traders’ view on this asset. New bull highs generate enthusiasm, enticing capital inflows. When prices fail to achieve new bull bests from time to time, traders’ interest wanes. Gold was largely forgotten, even though it technically remained in a bull market since there had been no 20%+ selloff. Psychology needed new bull highs decisively over $1365.

While they were inevitable sooner or later here, I sure didn’t expect them this week. June is peak summer doldrums, the weakest time of the year seasonally for gold. And U.S. stock markets remain way up near recent all-time record highs, steeped in euphoria. That has really stunted gold demand in recent years. So the odds favored gold’s long-overdue bull-market breakout getting pushed later into July or August.

But this metal was defying weak seasonals to inch inexorably closer. It closed at $1340 on June 7th, $1342 on the 13th, and $1346 ton June 18. That was the day before the latest Fed decision. The Federal Open Market Committee had really painted itself into a corner. It had shifted dovish so hard in recent months that traders’ expectations for a new rate-cut cycle starting seemed impossible to meet.

Had the Fed not been dovish enough, the U.S. dollar would’ve surged unleashing sizable-to-serious gold-futures selling. But amazingly the FOMC managed to neither cut rates nor tease a rate cut at its next meeting in late July, yet still convince traders it was ready to cut. That masterful sleight of hand came in the quarterly dot plot, the collective future federal-funds-rate forecasts of top Fed officials. They were dovish.

Back in late September before the flagship S&P 500 stock index plunged 19.8% in a severe near-bear correction, the dots predicted 5 more rate hikes including 3 in 2019 and 1 in 2020. After December’s 9th hike of this cycle, the mid-December dot plot only moderated to 2 in 2019 and 1 in 2020. In the next dot plot in late March, this year’s hikes were struck but 2020’s lone 1 remained. That led into this week’s dot plot.

Traders were expecting almost 4 rate cuts over the next year heading into this FOMC decision, which seemed like a bridge too far. And it was! Top Fed officials’ neutral 2019 outlook of no rate hikes stayed unchanged, no cuts were added. I’m surprised the U.S. dollar didn’t surge on that, indirectly hitting gold. But the dot plot did eliminate 2020’s lone hike and pencil in 2 cuts instead, which was a major dovish shift.

So improbably in mid-June with the S&P 500 just 0.7% off late April’s all-time-record peak, gold caught a bid. Even before Wednesday’s 2pm release of the FOMC statement and dot plot, gold held steady near $1345. When the Fed headlines hit and currency traders interpreted them as dollar-bearish and sold, gold shot up to $1354. It gradually climbed from there to challenge $1360 by the end of that U.S. trading day.

Gold’s full reaction after major FOMC decisions often isn’t apparent until the next trading day though, after Asian traders can react. Their markets are closed when the Fed makes its announcements. As Asian markets opened Thursday morning which was late evening Wednesday U.S. time, gold rocketed from $1358 to $1385 in about an hour! Being a markets junkie, I always check overseas action last thing before bed.

I could hardly believe my eyes that night, and verified gold’s price in multiple trading accounts. This gold bull was breaking out! A decisive breakout is 1%+ beyond an old key level. That translated into $1379 off July 2016’s seemingly-ancient $1365 bull-to-date peak. If those gains could hold into the US close on Thursday, a decisive breakout would be confirmed. In early summer with euphoric U.S. stock markets no less!

These charts are current to Wednesday’s Fed-Day closes. In order to write and proof these essays on Thursdays, Wednesdays are the data cutoff. But as I pen these words on midday Thursday, gold is still trading at $1385 in U.S. markets (and has climbed over $1400 on June 24 – ed). This breakout looks like the real deal, the answer to contrarian investors’ prayers. And speculators’ gold-futures positioning shows room for more buying!

Because of the extreme leverage inherent in gold futures, their traders wield outsized influence over the short-term gold price. At $1350 gold, each 100-ounce contract controls $135,000 worth. Yet traders are now only required to hold $3400 cash in their account per contract. That equates to absurd maximum leverage of 39.7x. Each gold-futures dollar has up to 40x the gold-price impact as a dollar invested outright!

This chart superimposes gold in blue over speculators’ total gold-futures positions, with long upside bets in green and short downside bets in red. Note that while gold has spent several years struggling with that $1350 overhead resistance, it has carved major higher lows. That has coiled gold into a giant tightening ascending-triangle technical formation. These patterns are usually resolved with strong upside breakouts.

Speculators’ collective gold-futures bets are reported weekly late each Friday afternoon, current to the preceding Tuesday. So the latest data available when this essay was published was as of June 11, 6 trading days before the Fed’s shift into forecasting rate cuts coming. Gold did rally 1.5% over the next Commitments-of-Traders-report week ending this Tuesday the 18th, so specs had to be buying gold futures.

But this latest-available data still offers some great insights. Total spec longs and shorts were running 299.1k and 97.1k gold-futures contracts nearing the FOMC decision. Those shorts were actually at a 14.3-month low, leaving big room for aggressive short selling. I was worried heading into this week’s Fed meeting that it would disappoint by not being dovish enough, igniting a dollar rally triggering gold-futures shorting.

With shorts so low, the risk of a short-term gold selloff remains high. But high gold prices really stamp out any zeal traders have for short selling gold futures at extreme leverage. At 39.7x, a mere 2.5% gold rally would wipe out 100% of the capital risked by short sellers! So in the several months following recent years’ major $1350 breakout attempts, spec shorts stayed low. They didn’t climb until gold started falling.

Major gold uplegs have three stages. They are initially triggered by gold-futures short covering which quickly exhausts itself after a couple months or so. Note above that gold’s 15.9% upleg as of Wednesday was largely fueled by a massive 153.7k contracts of short covering! That was necessary after spec short selling soared to all-time-record highs late last August, forcing gold to the lows which birthed this upleg.

After first-stage short covering, the second stage is fueled by gold-futures long buying. So far that has been relatively minor, just 41.0k contracts as of the latest CoT data. Again heading into the FOMC, the specs were only long 299.1k contracts. That is much lower than at past $1350-breakout attempts, which implies much more room to keep buying from here. This is very bullish for gold unless short selling flares up.

Back in early July 2016 when gold rocketed to this bull’s initial $1365 peak, it was fueled by spec longs soaring to 440.4k contracts! That was a whopping 141.3k or 47.2% higher than the latest read. The next major $1350 breakout attempt came in early September 2017, driven by total spec longs surging way back up to 400.1k contracts. That too was 101.0k or 33.8% higher than recent levels leading into the Fed.

In late January 2018 that vexing upper resistance repelled another valiant gold breakout attempt. Total spec longs crested at 356.4k then. That was 57.3k or 19.2% higher than the latest data. So assuming there wasn’t massive gold-futures long buying leading into this Tuesday, there’s still room for gold-futures speculators to buy another 57k to 141k contracts! Such big long buying would propel gold well higher from here.

But far more bullish than that is the potential stage-three investment buying. While speculators have the leverage, investors control vastly-larger pools of capital. All the stage-one gold-futures short covering and stage-two gold-futures long buying is just an ignition mechanism to entice investors to return. Once they do, their big capital inflows can ignite strong virtuous circles of buying that persist for months or even years.

The higher gold climbs, the more investors want to own it. The more they buy, the higher gold rallies. As investors love chasing winners, nothing drives buying like new highs. New-high psychology is easily the most-powerful motivator fueling big investment buying. And gold investment remains very low even this week as gold’s bull-market breakout neared. This is evident in the leading gold ETF’s gold-bullion holdings.

The American GLD SPDR Gold Shares dominates the gold-ETF world, acting as the primary conduit for American stock-market capital to flow into and out of gold. I discussed this in depth a couple months ago in another essay on stock euphoria and gold. As of this Wednesday as gold surged back to $1360 on that Fed capitulation from tightening, GLD held 764.1 metric tons of physical gold bullion for its shareholders.

In early July 2016 when gold first hit $1365, GLD’s holdings ran far higher at 981.3t. That was 217.2t or 28.4% higher than this week’s levels! At that next major $1350 breakout attempt in early September 2017, GLD’s holdings were 836.9t or 9.5% above today’s levels. And at January 2018’s attempt this key metric for gold investment hit 849.3t, or 11.2% higher than this week. There’s lots of room for investors to buy!

GLD’s holdings haven’t really soared since the first half of 2016 when gold rocketed 29.9% higher in this bull’s maiden upleg. That was the last time new bull highs made investors excited about gold. So their potential buying from here is much bigger than the GLD holdings near $1350 breakout attempts suggest. The total GLD build in that huge H1’16 gold upleg was 351.1t or 55.7%. Consider that from recent lows.

In early October GLD’s holdings sunk to a deep 2.6-year secular low of 730.2t. That was before the US stock markets started plunging in Q4’s severe near-bear correction, so gold was deeply out of favor with stock euphoria extreme. A similar total build of 350t from there as gold returns to favor among investors would push GLD’s holdings over 1080 metric tons. That would represent a 47.9% total upleg build, not extreme.

And American stock investors pouring enough capital into GLD to force it to grow its physical-gold-bullion holdings to 1080t isn’t a stretch. Back in early December 2012 fully 15.6 months after gold’s last secular bull peaked, GLD’s holdings hit their all-time high of 1353.3 metric tons. That’s 77% higher than this week’s levels, proving investors have vast room to shift capital back into gold given their current low allocations.

One way of inferring gold investment is looking at the ratio of the value of GLD’s gold holdings to the total market capitalization of all 500 elite S&P 500 companies. From 2009 to 2012 that averaged 0.475%, for an implied gold portfolio allocation near 0.5% for American stock investors. That’s terrible, as every investor needs a 10% allocation in gold and its miners’ stocks! But 0.5% is still far higher than today’s levels.

When the SPX recently peaked at the end of April, this ratio was running around 0.12%. That’s only a quarter of that average from recent years before gold fell deeply out of favor. Today investors are so radically underinvested in gold that their portfolio allocations need to quadruple from here to merely return to quasi-normal levels! So there’s room for great amounts of capital to return to gold, driving it much higher.

Again my data cutoff for this essay was Wednesday’s close, before gold started breaking out. At that point its gold bull to date was 29.9% higher at best as of several years earlier. The last secular gold bull ran between April 2001 to August 2011. Over that 10.4-year span, gold powered a massive 638.2% higher! So gold ultimately doubling or tripling from this bull’s birthing low of $1051 certainly isn’t a stretch at all.

With this gold bull finally breaking out after several years of vexing failures, there are dozens of charts I’d like to share today. But I’m settling with three so you don’t have to read a book. Again June happens to be gold’s weakest time of the year seasonally, which gold’s breakout surge is bucking. But despite the wonderful emerging new-high psychology, gold’s advance isn’t particularly outsized even for summer doldrums.

This chart looks at gold’s average summer performances in all modern bull-market years. Each summer is individually indexed to its final close in May, keeping gold price action perfectly comparable regardless of prevailing levels. The yellow lines show 2001 to 2012 and 2016 to 2017. Last year’s summer action is rendered in light blue for easier comparison. All these lines are then averaged together into the red one.

That reveals the center-mass drift trend of gold in market summers, which include June, July, and August proper. Gold’s current 2019 summer action is superimposed over all that history in dark blue. At least as of gold’s $1360 Wednesday close following the FOMC, it was only up 4.2% summer-to-date. That is still within the typical gold summer trend of +/-5% from May’s close. This gold summer rally is big, but not extreme.

As I continue writing this essay early Thursday afternoon, gold is trading near $1386. That is up 6.2% since the end of May. In the summer of 2016 the last time gold was in favor and enjoying that new-high psychology, it rocketed as high as +12.3% summer-to-date by early July. So while early summers tend to be weak, gold can still power higher in the right conditions. And a major bull-market breakout is definitely it!

The main beneficiary of higher gold prices is the gold miners. They enjoy big profits leverage to gold as its price rallies higher. Last week I wrote a whole essay on this “Gold-Stock Upleg Mounting” where I went into leverage. The leading gold-stock benchmark is the GDX VanEck Vectors Gold Miners ETF. In mid-May I dug into its component gold miners’ latest Q1’19 results, revealing their current fundamentals.

The GDX gold miners’ average all-in sustaining costs last quarter were $893 per ounce mined. When compared to Q1’s average gold price near $1300, at $1400 and $1500 gold the major gold miners’ profits would soar 25% and 49% higher! So naturally gold-stock prices are surging with gold’s awesome bull-market breakout this week. Here’s the latest chart of gold-stock performance per GDX as of Wednesday.

Since late 2016 the gold stocks have been trapped in a giant consolidation by gold remaining mostly out of favor with investors. That manifested in GDX terms in a major trading range running from $21 lower support to $25 upper resistance. On Fed Day as gold rallied to $1360, GDX’s price climbed to $24.00 on close. That was a 16.7-month high for this leading gold-stock benchmark, and nearing its own breakout.

Early Thursday afternoon as I pen this essay, GDX has surged again to $25. That’s right at that major resistance line of recent years. A decisive breakout from here would portend gold stocks finally being off to the races again. And that means enormous gains for contrarian speculators and investors. In essentially the first half of 2016 as gold blasted 29.9% higher, GDX skyrocketed 151.2% for huge 5.1x leverage!

As of Wednesday this current gold-stock upleg per GDX only had 36.6% gains. As gold’s own new-high psychology makes gold stocks alluring again, they should soar dramatically from here. We haven’t seen a real gold-stock upleg in several years. Just like gold, when its miners’ stocks are powering to new highs buying begets buying. Traders love chasing their gains which fuels a glorious virtuous circle of capital inflows.

For years traders have told me they were avoiding gold stocks until something big changed. And there is nothing bigger for this high-potential sector than new gold-bull highs. All the stars are aligning for big gold-stock gains in the coming months, with their technicals, sentiment, and fundamentals all looking very bullish. This is not the summer to check out, but to do your homework and get deployed in great gold stocks.

Unfortunately the major gold miners dominating GDX are failing to grow their production. That along with their large market caps means smaller mid-tier and junior gold miners with superior fundamentals will enjoy far-better upside as gold climbs higher. While GDX should amplify gold’s gains by 2x to 3x, that will be dwarfed by the epic gains in better smaller miners. Major gold uplegs are a gold-stock pickers’ market!

The bottom line is gold is finally breaking out to new bull-market highs! Somehow the FOMC managed to be dovish enough in its rate-cut outlook this week to drive US-dollar selling, which unleashed major gold buying. So gold blasted back over its bull-to-date peak from several years earlier that had oppressed it for so long. Gold hasn’t enjoyed new-high psychology since then, which is a powerfully-bullish motivating force.

New bull highs bring gold back into the limelight, making it attractive again. Traders love chasing winners to ride their upside momentum, and buying begets buying. Gold coming back into favor portends much more upside to come, with room for big buying by both gold-futures speculators and far-more-important investors. As their capital inflows push gold to new bull-market heights, the gold stocks are going to soar!

Adam Hamilton, CPA

June 24, 2019

The gold miners’ stocks have surged powerfully over the past few weeks, challenging upleg highs. Traders started returning to this small contrarian sector as gold blasted back above the psychologically-crucial $1300 line. While such early-summer strength is atypical, gold miners’ technicals, sentiment, and fundamentals all support more gains to come. Gold stocks need to mean revert to much-higher price levels.

Traders usually track gold-stock fortunes with this sector’s most-popular exchange-traded fund, the GDX VanEck Vectors Gold Miners ETF. Launched in May 2006, this was the maiden gold-stock ETF. That big first-mover advantage has helped propel GDX to sector dominance. This week its net assets of $9.7b ran 46.5x larger than the next-biggest 1x-long major-gold-miners ETF! GDX is this sector’s leading benchmark.

And it sure didn’t look pretty in May, with traders wanting nothing to do with gold stocks. GDX spent the great majority of last month languishing near its 200-day moving average. Just a few weeks ago on May 29th, GDX closed at $20.42. That was down 3.2% year-to-date, much worse than gold’s own slight 0.2% YTD decline. The gold stocks were really out of favor, just like the metal they mine which fuels their profits.

This sector started perking up on May 30th, when gold and GDX enjoyed 0.7% and 1.7% rallies. Major gold miners’ inherent profits leverage to gold usually helps their stock prices amplify gold’s gains by 2x to 3x. But there was still no excitement with gold and GDX trading at $1288 and $20.77 heading into June. Early market summers have gold’s weakest seasonals of the year, usually weighing on it and the miners.

But leave it to Trump to unleash a bombshell shaking the status quo. That evening he shocked, tweeting “On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied, at which time the Tariffs will be removed.”

The White House said those tariffs would be ratcheted up 5% each month until they hit their terminal 25% level on October 1st! While Trump later suspended his Mexico-tariff threat, it really surprised traders. Not only was Trump opening up a new front in the trade wars, but he was tying tariffs to non-trade issues as a hardline negotiating tactic. That had serious implications, so Asian traders flooded into gold after that tweet.

The next day that new momentum spilled into the US, driving gold 1.3% higher to $1305. Long-apathetic gold-stock traders rejoiced at seeing gold claw back over $1300. That has proven a crucial level for gold sentiment for years now, the dividing line between popular bearishness and bullishness. GDX shot up 3.9% that day. Asian traders bought gold aggressively heading into the next trading day, driving a $1300 breakout.

That upside action again carried into U.S. markets on June 3rd, when gold powered another 1.5% higher to $1325. The major gold stocks’ gains mounted, with GDX surging another 4.2% to $22.49. In those two trading days following Trump’s Mexico-tariff threat, this leading gold-stock ETF blasted 8.3% higher on a 2.8% gold surge! GDX’s gains were amplifying gold’s breakout rally by a strong 3.0x, rekindling sector interest.

There’s nothing speculators and investors like more than chasing winners, riding the momentum. So that newfound gold and gold-stock buying persisted. By this Wednesday’s data cutoff for this essay, gold had powered 4.1% higher since May 29th. True to form, the major gold stocks as measured by GDX rocketed up 12.4% in that same span for 3.0x leverage. The gold miners’ stocks are starting to return to favor again!

Their strong gains in recent weeks didn’t erupt from major lows, but from a lull in a solid existing upleg. This chart looks at GDX over the past several years or so, across the life of gold’s current bull market. It is important to consider big moves in broader technical context, as that offers clues on what’s likely next. The gold miners’ stocks have lots of room to rally much higher from here, with major-upside-breakout potential.

While this week’s $23ish GDX levels feel high after May’s disheartening 200dma grind, they are actually fairly low. Since late 2016 GDX has mostly meandered in a major consolidation trend running from $21 support to $25 resistance. $23 is right in the middle of that long basing channel, which isn’t noteworthy at all technically. The gold miners’ stocks won’t get exciting again until GDX breaks out decisively above $25.

The past few weeks’ big surge is simply part of an in-progress upleg born in deep despair back in early September. That episode was brutal. All-time-record gold-futures short selling hammered the metal to 19.3-month lows. That unleashed cascading stop-loss selling in gold stocks, an ugly forced capitulation that crushed GDX to deep 2.6-year secular lows. All the gains since are just a normal mean reversion higher.

Gold stocks’ recovery from those anomalous extreme lows has already passed plenty of bullish technical milestones. GDX’s series of higher lows and higher highs carved the nice uptrend rendered above. This leading sector benchmark enjoyed a major triple breakout, climbing back over three key resistance zones including GDX’s 200dma. A powerful Golden Cross buy signal flashed as GDX’s 50dma surged over its 200dma.

By late February this young gold-stock upleg had lifted GDX 33.0% higher to $23.36. But there was no reason for gold stocks’ mean reversion higher to fail there. Those gains remained relatively small by sector standards. Back in essentially the first half of 2016, GDX skyrocketed 151.2% higher in a monster upleg on a parallel 29.9% gold one! And gold-stock uplegs during gold’s last bull averaged bigger gains too.

One was an anomaly, the epic mean-reversion rebound after late 2008’s first-in-a-century stock panic. Excluding it, the other 11 normal gold-stock uplegs in that last bull averaged 80.7% gains over 7.9 months per the HUI! So GDX’s 33.0% upleg-to-date advance as of late February was nothing, way too small to be mature. Odds are it will yet grow much larger in line with past precedent before giving up its ghost.

Mid-upleg selloffs after big surges are normal and healthy to rebalance sentiment. If greed becomes too excessive early in uplegs, it can prematurely exhaust them by pulling forward too much future buying. In most cases mid-upleg pullbacks bounce at upleg support. But that didn’t hold in late April, as GDX fell even farther to its 200dma. That was the result of extreme stock-market euphoria stunting gold demand.

The gold stocks were down but not out, simply awaiting signs of life in gold before traders returned. That came in late May after the stock markets had entered a pullback and Trump’s Mexico-tariff threat rattled traders. GDX quickly leapt back up into its upleg’s uptrend channel, proving it is alive and well. Overall this upleg’s technicals remain very bullish, pushing this leading ETF’s price ever closer to a major upside breakout.

For the better part of several years now, GDX $25 has proven gold stocks’ graveyard in the sky. They’ve challenged it several times, but haven’t been able to decisively break though. They certainly can go much higher. In this gold bull’s monster initial upleg in H1’16, GDX rallied as high as $31.32. And near the end of gold’s last secular bull, this ETF peaked at $66.63 in September 2011. There’s nothing magical about $25.

And it isn’t far away at all. As of the middle of this week, GDX merely had to rally 8.9% more to regain $25! That’s nothing for a sector as volatile as gold stocks. Remember just a few weeks ago GDX surged 8.3% in only two trading days as gold powered back over $1300 after Trump’s Mexico-tariff threat. So a major gold-stock breakout that would radically improve sector psychology is very much within reach today.

The higher gold stocks climb, the more traders will want to buy them to ride that momentum. The more capital they deploy, the more gold stocks will rally. This normal virtuous circle of improving psychology and buying will become even more exaggerated as GDX $25 is surpassed. Seeing the highest gold-stock levels in several years will work wonders to improve sector sentiment, unleashing widespread bullishness.

This gold-stock upleg’s potential gains are massive spanning such a major upside breakout. Remember speculators and investors love chasing winners, so the higher gold stocks rally the more attractive they’ll look. If GDX’s current upleg grows to the last secular bull’s average upleg gain of 80.7%, it would catapult this ETF to $31.75. The major factor almost certain to push GDX well over $25 is gold’s own breakout.

Much like GDX $25, gold’s own bull since December 2015 has been capped near $1350 ever since. Last week I wrote a whole essay explaining why gold is winding closer and closer to blasting through that to new bull-market highs. New-bull-high psychology in gold would spark a frenzied rush to bring neglected gold stocks back into portfolios. Weakening general stock markets should create the necessary gold demand.

Gold stock sentiment is merely decent today, average at best even after recent weeks’ sharp surge. That leaves lots of room for improvement. The more bullish traders get on gold miners’ stocks, the more they will want to buy. Gold miners’ shift back into favor could easily propel GDX back above $25 anytime in the coming months. But we may have to wait until August, after the worst of the gold summer doldrums pass.

Normally this time of year I’d be updating my gold-summer-doldrums research. But that takes a backseat to the recent gold and gold-stock surges. In a nutshell, Junes and Julys are the weakest time of the year seasonally for gold with no recurring outsized gold-demand spikes. Gold and gold stocks can rally during early summers if unexpected demand materializes, but they usually don’t. Will summer 2019 prove an exception?

I sure hope so, but only time will tell. This next chart looks at the HUI’s average summer performances in all modern gold-bull-market years. Each summer is individually indexed to its final close in May, keeping gold-stock price action perfectly comparable regardless of prevailing gold levels. The yellow lines show 2001 to 2012 and 2016 to 2017. Last year’s summer gold-stock action is rendered in light blue for comparison.

All these lines averaged together form the red one, revealing the center-mass drift trend of gold stocks in market summers. Gold stocks’ current 2019 summer action is superimposed over all that in dark blue. As you can see, this sector is off to one of its best summer starts in all modern bull-market years! That could be sustainable like summer 2016’s powerful run, or gold stocks may end up consolidating until August.

Which way this summer plays out depends on gold. If gold keeps climbing on balance, so will the stocks of its miners regardless of seasonal tendencies. Weakening stock markets would spur gold investment demand continuing to push its price higher. A weaker U.S. dollar would also help, motivating gold-futures speculators to buy as well. Only time will tell whether the gold and gold-stock breakouts come sooner or later.

Whatever the timing, the gold miners’ fundamentals remain strong and bullish and support much-higher stock prices. After every quarterly earnings season, I dig deep into the GDX gold miners’ fundamentals. They finished reporting their latest Q1’19 results about a month ago, and I wrote a comprehensive essay analyzing them. There’s no doubt fundamentally that gold stocks should be trading way over GDX $25 levels.

That’s 23.7% and 48.0% higher from Q1’19 levels on mere 7.4% and 15.1% gold gains from that quarter’s average price! And as of the middle of this week, gold had already climbed 2.3% of that. The major gold miners’ fundamentals are already bullish, but improve greatly at higher prevailing gold prices. With earnings growth hard to come by in general stock markets this year, the gold stocks will be even more alluring.

All the stars are aligning for big gold-stock gains in coming months, with their technicals, sentiment, and fundamentals all looking very bullish. This mounting gold-stock upleg has great potential to grow much larger later this year, greatly rewarding contrarian traders buying in early. More and more investors are becoming aware of this sector’s huge potential, including elite billionaires running major hedge funds.

This week one of them, Paul Tudor Jones, gave an interview in New York. He was asked what his best trade over the next year or two will be. He said, “The best trade is going to be gold. If I have to pick my favorite for the next 12 to 24 months it probably would be gold. I think gold goes beyond $1400, it goes to $1700 rather quickly. It has everything going for it in a world where rates are conceivably going to zero…”

This is not the summer to check out, but to do your homework and get deployed in great gold stocks. All portfolios need a 10% allocation in gold and its miners’ stocks! Many smaller mid-tier and junior miners have superior fundamentals and upside potential to the majors of GDX. And by the time the gold stocks get really exciting again in upside breakouts with gold, much of the easy gains will have already been won.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from selloffs, their prices remain relatively low with big upside potential as gold rallies!

If you want to multiply your capital in the markets, you have to stay informed. Our newsletters are a great way, easy to read and affordable. 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. As of Q1 we’ve recommended and realized 1089 newsletter stock trades since 2001, averaging annualized realized gains of +15.8%! That’s nearly double the long-term stock-market average. Subscribe today and take advantage of our 20%-off summer-doldrums sale!

The bottom line is this gold stock upleg is mounting. Despite weak early-summer seasonals, the gold miners’ stocks are rallying with gold and nearing a major breakout above GDX $25. Seeing the best gold-stock prices in several years will really motivate traders to return, fueling a virtuous circle of capital inflows and gains. Gold stock technicals, sentiment, and fundamentals all support much-higher prices ahead.

Gold’s own inexorably-nearing major bull-market breakout will really light a fire under gold stocks. The higher gold climbs, the more investors and speculators will want to own it and its miners. While summer may force a consolidation, softening stock markets could easily overcome gold’s weak seasonals. The potential gold-stock gains as gold returns to favor are massive, so it’s important to get deployed early.

Adam Hamilton, CPA

June 17, 2019

Gold surged sharply over the past week or so, nearing a major bull-market breakout! Nearly everyone was surprised by this violent awakening, which erupted suddenly as gold languished around year-to-date lows. If this dramatic rally has staying power, gold has good odds of achieving decisive new bull-market highs. That would change everything psychologically, ushering gold and its miners’ stocks back into favor.

Gold has largely flown under traders’ radars this year, mostly drowning in apathy. Actually this unique asset had a strong start, climbing 4.6% year-to-date by mid-February to hit $1341. While merely a 10.1-month high, gold was close to a major bull-market breakout. For several years now, gold has faced stiff resistance around $1350. It has repelled gold multiple times, looking like an impregnable Maginot Line.

But gold’s promising ascent was short-circuited from there, unleashing a disheartening slump over the next 10 weeks or so. By early May, gold had retreated 5.2% to $1271. The primary culprit was resurgent euphoria in the US stock markets. Equity exuberance has long proven gold’s mortal nemesis. When stock markets are high and expected to continue climbing on balance, gold investment demand often withers.

The recent gold action can’t be understood without the context of the US stock markets as represented by their flagship S&P 500 index (SPX). Heading into last September, the SPX was marching to a series of new all-time record highs. Since gold tends to climb when stock markets sell off, there was little demand for this essential portfolio diversifier. Why buy gold when stocks seem to do nothing but rally indefinitely?

That who-cares sentiment helped fuel all-time-record short selling in gold futures, hammering gold down to $1174 in mid-August for a 19.3-month low. Stuck in the shadows of euphoric stock markets, gold largely drifted sideways from there averaging $1197 until early October. But on October 10th, hyper-complacent stock traders were finally confronted with a serious selloff as the SPX plunged 3.3% that day alone.

Earlier hawkish comments from the Fed chairman were to blame. With stock markets bleeding, traders remembered gold. The world’s leading and dominant gold exchange-traded fund is the GLD SPDR Gold Shares. According to the latest data from the venerable World Gold Council, GLD’s 784.3 metric tons of gold bullion held in trust for its shareholders at the end of Q1’19 represented 31.6% of global gold ETFs’ total.

In early October with the SPX just fractionally under its recent record peak, GLD’s holdings slumped to a deep 2.6-year secular low of 730.2t. But a few trading days later as the SPX’s sudden and sharp plunge started to kill complacency, GLD enjoyed a big 1.2% holdings build. When stock traders buy GLD shares at a faster pace than gold itself is being bought, GLD’s managers equalize that excess demand by buying gold.

That SPX selloff snowballed into a severe near-bear correction, down 19.8% by Christmas Eve. With the stock markets burning, investors remembered the timeless wisdom of prudently diversifying their stock-heavy portfolios with counter-moving gold. It had rallied 8.1% in 4.3 months by the time a super-oversold SPX was ready to bounce. That gold upleg kept growing, ultimately extending to 14.2% gains by mid-February.

But as gold neared that major $1350 bull-market breakout then, stock euphoria came roaring back with a vengeance. The SPX had rocketed 18.2% higher out of its correction low by then, fueled by a radical shift back to dovishness by the Fed! It completely capitulated and caved to the stock markets, declaring that its quantitative-tightening monetary policy was open for adjustment in contrast to earlier statements on QT.

By that point the SPX had regained nearly 3/4ths of its total correction losses, so exuberant-again traders started to forget gold. Gold investment demand peaked in late January the day before the Fed gave in on QT, capping a 12.8% GLD-holdings build over 3.8 months. The higher the SPX rallied in recent months, the greater stock euphoria grew and the more gold was forgotten. Yet again stock euphoria stunted gold.

The SPX peaked at the end of April at another new all-time-record high. That extended its total monster-bounce rebound rally since late December to a colossal 25.3% in 4.2 months! A couple days later in early May with the SPX still near records, gold fell to that $1271 YTD low. Euphoric stock investors’ exodus from gold persisted another week, when GLD’s holdings slumped to 733.2t. That was down 11.0% in 3.3 months.

Gold failed to break out above its years-old $1350 resistance zone in mid-February because skyrocketing stock markets forced it back out of favor. Between late January and mid-May, fully 97% of GLD’s holdings build fueled by the SPX’s severe near-bear correction largely in Q4 had been erased! Just like late last summer, gold was again hostage to lofty euphoric stock markets. Investors wanted nothing to do with it.

But the SPX started rolling over again in May, slowly at first. It was shoved after Trump got fed up with China backtracking on nearly a year’s worth of trade negotiations with the US. On May 5th he warned that tariffs on $200b of annual Chinese imports would blast from 10% to 25% going effective the following Friday. That gradually drove the SPX lower into mid-May, including serious 1.7% and 2.4% down days.

So once again just like in October the last time the SPX rolled over hard, gold caught a bid. It rallied back up to $1299 in mid-May as investors again remembered stock markets can also fall. GLD’s holdings began modestly recovering as stock-market capital started slowly migrating back into gold. But that nascent trend reversed again in mid-May as stock markets bounced sharply higher, unleashing surging euphoria.

The primary driver of gold in recent years has been stock-market fortunes. Gold often falls out of favor when stock markets are high and rallying, then starts returning to favor when they sell off again. In a very real sense gold is the anti-stock trade. While it doesn’t only climb when stock markets weaken, that’s what mainstream investors remember gold for. Its investment demand is rarely strong near stock-market highs.

So gold again slumped back near $1273 by late May as the SPX rebounded, further demoralizing the few remaining contrarians. This metal felt pretty hopeless heading into its summer doldrums, its weakest time of the year seasonally. Then a Trump bombshell shocked stock traders out of their complacency. He warned the US was levying escalating tariffs on all Mexican imports to force Mexico to fight illegal immigration!

Last Friday May 31 was the first trading day after that surprise, and the SPX fell 1.3% to its lowest close since its all-time-record peak a month earlier. That extended its total recent selloff to 6.6%, so worries mounted. Gold had closed at $1288 in the prior day’s US trading session. Overnight after Trump’s tweet on Mexico tariffs gold rallied to $1297. That upside continued in the U.S., with gold closing 1.3% higher at $1305.

$1300 is a critical psychological line, heavily coloring sentiment especially among hyper-leveraged gold-futures speculators. They tend to buy aggressively when gold regains $1300 from below, and sell hard when gold breaks under $1300 from above. But while gold-futures trading heavily influences short-term gold price action, only sustained investment buying can ultimately grow gold uplegs to major status.

GLD’s holdings are the best daily proxy available of gold investment demand. And last Friday when gold surged, GLD merely saw a small 0.3% holdings build. American stock investors weren’t buying gold, it was the gold-futures speculators. These traders control far-less capital than investors, so their available buying firepower to push gold higher is limited. Gold uplegs never reach potential without investment demand.

The Asian markets were closed last Friday as gold rallied back over $1300 in the States. So when they opened again this past Monday June 3, Asian traders piled on to the gold buying. By the time the U.S. stock markets neared opening that day, gold was already up to $1317 in overnight trading. Once again that global momentum carried into the U.S. session, helping gold surge another 1.5% higher to $1325!

While great to see, that was still just a 3.2-month high. Without investment demand, gold’s new surge was unlikely to last very long on gold-futures buying alone. But something big changed that day in the U.S. markets. American stock traders, which had mostly shunned gold since late January, took notice. They started shifting capital back into gold via GLD shares in a major way, driving a huge 2.2% build in its holdings!

That was the biggest single-day percentage jump in this leading gold ETF’s holdings in 2.9 years, since early July 2016. That happened to be soon after the UK’s surprise pro-Brexit vote, when gold soared on the resulting uncertainty. While one day doesn’t make a trend, such a massive shift in gold investment buying is definitely attention-grabbing. If investors continue returning on balance, gold is heading way higher.

As this chart shows, gold is now within easy striking distance of a major bull-market breakout! It is not only nearing that vexing $1350 resistance zone, but has a high base from which to launch an assault. If gold-investment demand persists, gold doesn’t have far to run to hit new bull-to-date highs. Of course further stock-market weakness on balance would greatly help, but it’s not necessary with new-high psychology.

Blinded by apathy, not many traders realize gold still remains in a secular bull market. It was born from deep 6.1-year secular lows in mid-December 2015, the day after the Fed’s first rate hike in its latest tightening cycle. Over the next 6.7 months gold soared 29.9% higher in a massive upleg, entering new-bull-market territory at 20%+ gains. That left gold very overbought, so it crested at $1365 in early July 2016.

After strong bull-market uplegs big corrections are totally normal to rebalance sentiment, bleeding off the excessive greed at preceding highs. Gold consolidated high just under $1350 after that initial upleg, then fell to its 200-day moving average. It had resumed rallying in October 2016, but reversed sharply after Trump’s surprise election victory in early November. That pivotal event indirectly forced gold into a nosedive.

Gold plummeting in that election’s wake was the result of incredible euphoria, or Trumphoria at that time. Trump not only won the presidency, but Republicans controlled both chambers of Congress. So stock markets soared on hopes for big tax cuts soon. The SPX surged dramatically higher on truly-epic levels of euphoria, which in turn battered gold. Most investors shun gold when stock markets look awesome.

That greatly exacerbated gold’s normal correction to a monster 17.3% over 5.3 months! While very ugly and miserable, that remained shy of the 20%+ selloff necessary to qualify as a new bear market. Thus gold’s bull remained alive and well, albeit wounded by such a serious loss. Still gold recovered to power 20.4% higher over the next 13.3 months into early 2018, despite the SPX continuing to soar dramatically.

In late January 2018 gold peaked at $1358 just a couple days before the SPX’s own extremely-euphoric all-time-record high. While stock euphoria stunts gold investment demand, gold can still rally in lofty stock markets if it has sufficient capital-inflow momentum. But unfortunately buying was exhausted, then gold again consolidated high just under $1350 like it had done a couple summers earlier. It couldn’t break out.

A few months later gold was beaten down into another 13.6% correction over 6.7 months. It started on a sharp rally in the US dollar, which motivated gold-futures speculators to sell aggressively. Then the gold downside persisted on investors exiting as the SPX marched back up towards record highs after a sharp-yet-shallow-and-short 10.2% correction in early February 2018. Gold apathy and despair flared again.

But gold bottomed late last summer as extreme record gold-futures shorting exhausted itself, and started recovering higher again. That young upleg really accelerated when the SPX rolled over into that severe near-bear correction largely in Q4’18. That extended gold’s latest gains to 14.2% over 6.1 months as of that latest major interim high of $1341 in mid-February. Check out this gold bull’s resulting entire chart pattern.

After a strong start hitting $1365 several summers ago, gold couldn’t punch through to new bull highs. It tried several times, but stock-market euphoria and heavy gold-futures selling on U.S.-dollar strength kept batting it back down. Although gold couldn’t make new-high progress, it did carve a nice secular series of higher lows. While higher lows aren’t as exciting and attention-grabbing as higher highs, they are very bullish.

Flat highs combined with rising lows have created a gigantic ascending-triangle technical formation in gold over the past several years. That’s very clear above, gold coiling ever-tighter between climbing lower support and horizontal upper resistance. Ascending triangles are bullish chart patterns that are usually resolved with strong upside breakouts. Gold has spent recent years being accumulated behind the scenes.

No new bull-market highs along with gold being overshadowed by the stock markets surging to their own all-time-record highs in recent years has left this gold bull in stealth mode. Few investors realize it is still underway, and nearing a major bull-market breakout. But once that process become apparent, gold will quickly return to radars and become big financial news. Then gold enthusiasm will rapidly mushroom.

Any close over that vexing multi-year $1350 upper-resistance line will catch attention. But gold will have to break out decisively above there, exceeding $1350 by 1%+, to really attract the limelight. That would be $1364 gold. This Wednesday at the data cutoff for this essay, gold closed at $1331. That only left another 2.4% to climb to hit that decisive-breakout level. That’s trivial when investment capital is returning.

This gold bull’s first two uplegs averaged 25.2% gains. Today’s third upleg only ran 14.2% back in mid-February before the monster stock-market bounce’s extreme euphoria temporarily derailed it. All it would take for gold to extend to that key $1364 level is for this upleg to grow to 16.2%. That would still be modest, well behind the first two uplegs’ 29.9% and 20.4% gains. A decisive breakout is very close from here!

And once gold heads over its $1365 bull-to-date peak of July 2016, gold investment will start becoming popular again. Financial-media coverage will explode, and be overwhelmingly positive. Investors love chasing winners, and nothing motivates them to buy more than new bull-market highs. We’ve seen that in spades in the stock markets in recent years. Major buying from highs often becomes self-feeding.

The virtuous circle of inflows driven by new-high psychology can get very powerful. The more gold rallies, the more traders want to buy it to chase the momentum. The more they buy, the faster gold rallies. Gold hasn’t enjoyed positive capital-inflow dynamics like this since summer 2016. The potential gold upside from here as this unique investment returns to favor is big, supported by key tailwinds not enjoyed in years.

Starting from mid-August’s deep gold low, 20% and 30% total uplegs would catapult this metal way up to $1408 and $1526! Major new bull-market highs in gold would happen with a backdrop of dangerously-overvalued stock markets rolling over, greatly increasing the investment appeal of gold. And since the SPX is unlikely to keep surging to more record highs, stock euphoria shouldn’t arise to retard gold’s ascent.

The amount of gold buying investors need to do is staggering, as they are radically underinvested. Every investor needs a 10% portfolio allocation in gold and its miners’ stocks, period. Their current allocations to gold are virtually nonexistent per the leading proxy. For Americans it is the ratio between the total value of GLD’s gold-bullion holdings and all 500 SPX stocks’ collective market capitalizations. This is super-low.

At the end of April at the SPX’s latest peak, its stocks commanded a total $26,048.3b market cap. That is colossal beyond belief. Meanwhile GLD’s 746.7t of gold that day were only worth $30.8b at $1283. That implies American stock investors had a gold portfolio allocation around 0.12%, effectively nothing! Merely to boost that to even 0.5%, their gold holdings would have to quadruple. There’s vast potential for gold buying.

Another thing going in gold’s favor is the high U.S.-dollar levels. Its leading benchmark the U.S. Dollar Index hit 23.3-month highs in late April, then revisited those levels in late May. Gold-futures speculators tend to sell gold on a strengthening dollar and buy gold on a weakening dollar. The dollar is likely to drift lower in future months too, adding to gold’s momentum. The high dollar irks the Trump Administration, hurting U.S. exports.

So gold is nearing a major bull-market breakout that will change everything, wildly improving investors’ gold outlook and thus investment demand! The main beneficiary of higher gold prices will be the stocks of its miners. This chart shows the same gold-bull timeframe in the leading GDX VanEck Vectors Gold Miners ETF. I analyzed the latest Q1’19 fundamental results from its miners in depth just several weeks ago.

This article is focused on gold so I’ll discuss gold stocks in a future one. For our purposes today, note how GDX is positioning for a major breakout of its own above years-old $25 upper resistance. So far GDX’s current upleg is only 33.0% higher at best, small for this volatile high-potential sector. When gold powered 29.9% higher in essentially the first half of 2016, GDX amplified its gains with a monster 151.2% upleg!

So with gold on the verge of a major bull-market breakout, the beaten-down gold stocks are the place to be to greatly leverage gold’s upside. Since the gold-stock ETFs are burdened with underperformers at higher weightings, the best gains will be won in individual gold stocks with superior fundamentals. The kind of upside they can accrue during major gold uplegs is amazing, really multiplying wealth rapidly.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from deep lows, their prices remain relatively low with big upside potential as gold rallies!

The bottom line is gold just surged near a major bull-market breakout. The $1350 resistance zone that has vexed gold for years is once again within easy range. All it will take to drive gold to new bull highs over $1365 is sustained investment buying. And that’s not a tall order with the stock markets starting to roll over again after record highs. GLD just enjoyed its biggest daily build in several years this past Monday.

Once gold gets to new bull-market highs, psychology will shift rapidly in its favor. Gold financial-media coverage will soar, and will be overwhelmingly positive. This will motivate investors and speculators alike to shift capital back into gold to chase its upside momentum. The potential gold and gold-stock gains with sentiment turning favorable are massive. It’s best to get deployed before gold’s breakout unleashes this.

Adam Hamilton, CPA

June 10, 2019

The silver miners’ stocks have been pummeled in recent months, plunging near major secular lows in late May. Sentiment in this tiny sector is miserable, reflecting silver prices continuing to languish relative to gold. This has forced traditional silver miners to increasingly diversify into gold, which has far-superior economics. The major silver miners’ ongoing shift from silver is apparent in their recently-released Q1’19 results.

The definitive list of major silver-mining stocks to analyze comes from the world’s most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. Launched way back in April 2010, it has maintained a big first-mover advantage. SIL’s net assets were running $294m in mid-May near the end of Q1’s earnings season, 5.6x greater than its next-biggest competitor’s. SIL is the leading silver-stock benchmark.

In mid-May SIL included 24 component stocks, which are weighted somewhat proportionally to their market capitalizations. This list includes the world’s largest silver miners, including the biggest primary ones. Every quarter I dive into the latest operating and financial results from SIL’s top 17 companies. That’s simply an arbitrary number that fits neatly into the table below, but still a commanding sample.

As of mid-May these major silver miners accounted for fully 94.4% of SIL’s total weighting. In Q1’19 they collectively mined 70.9m ounces of silver. The latest comprehensive data available for global silver supply and demand came from the Silver Institute in April 2019. That covered 2018, when world silver mine production totaled 855.7m ounces. That equates to a run rate around 213.9m ounces per quarter.

Assuming that mining pace persisted in Q1’19, SIL’s top 17 silver miners were responsible for about 33% of world production. That’s relatively high considering just 26% of 2018’s global silver output was produced at primary silver mines! 38% came from lead/zinc mines, 23% from copper, and 12% from gold. Nearly 3/4ths of all silver produced worldwide is just a byproduct. Primary silver mines and miners are fairly rare.

Silver price levels are best measured relative to prevailing gold prices, which overwhelmingly drive silver price action. In late May the Silver/Gold Ratio continued collapsing to its worst levels witnessed in 26.1 years, since April 1993! These secular extremes of the worst silver price levels in over a quarter century are multiplying the endless misery racking this once-proud sector. This silver environment is utterly wretched.

The largest silver miners dominating SIL’s ranks are scattered around the world. 10 of the top 17 mainly trade in U.S. stock markets, 3 in the United Kingdom, and 1 each in South Korea, Mexico, Peru, and Canada. SIL’s geopolitical diversity is good for investors, but makes it difficult to analyze and compare the biggest silver miners’ results. Financial-reporting requirements vary considerably from country to country.

In the U.K. companies report in half-year increments instead of quarterly. Some silver miners still publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q1 approximation. Canada has quarterly reporting, but the deadlines are looser than in the States. Some Canadian miners really drag their feet, publishing their quarterlies close to legal limits.

The big silver companies in South Korea, Mexico, and Peru present other problems. Their reporting is naturally done in their own languages, which I can’t decipher. Some release limited information in English, but even those translations can be difficult to interpret due to differing accounting standards and focuses. It’s definitely challenging bringing all the quarterly data together for the diverse SIL-top-17 silver miners.

But analyzing them in the aggregate is essential to understand how they are faring. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. Some highlights make it into this table. Blank fields mean a company hadn’t reported that data by mid-May, as Q1’s earnings season wound down. Some of SIL’s components report in gold-centric terms.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-May. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each miner’s Q1’19 silver production in ounces, along with its absolute year-over-year change. Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold! That’s truly a double-edged sword. While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. So the next column reveals how pure these elite silver miners are, approximating their percentages of Q1’19 revenues actually derived from silver. This is calculated one of two ways.

The large majority of these top SIL silver miners reported total Q1 revenues. Quarterly silver production multiplied by silver’s average price in Q1 can be divided by these sales to yield an accurate relative-purity gauge. When Q1 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. But that’s less optimal, as it ignores any base-metals byproducts.

Next comes the major silver miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drives profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated and hard GAAP earnings, with a couple exceptions necessary.

It offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry and individually. The crazy-low silver prices really weighed on operating cash flows and earnings in Q1, and the silver miners’ years-old shift into gold continued. These companies are having no problem just surviving this silver-sentiment wasteland, but they probably won’t be thriving again before silver recovers.

SIL’s poor performance certainly reflects the challenges of profitably mining silver with its price so darned cheap. Year-to-date in late May, SIL had already lost 12.2%. Silver itself was down 7.2% YTD at worst, starting to threaten mid-November 2018’s 2.8-year secular low of $13.99. And that just extended last year’s losing trend, where SIL plunged 23.3% amplifying silver’s own 8.6% loss by 2.7x. This sector looks ugly.

Silver’s weakest prices relative to gold in over a quarter century have continued to devastate silver-mining sentiment. Investors understandably want nothing to do with the forsaken silver miners, so their stock prices languish near major lows. Even their own managements seem really bearish, increasingly betting their companies’ futures on gold rather than silver. Silver’s Q1 price action further supports this decision.

During Q1’19 silver ground another 2.3% lower despite a 0.8% gold rally, bucking its primary driver. Q1’s average silver price of $15.54 fell 7.1% YoY from Q1’18’s average. That was way worse than gold’s mere 1.9% YoY average-price decline. The silver-mining industry is laboring under a pall of despair. Although production decisions aren’t made quarter by quarter, the chronically-weak silver prices are choking off output.

Production is the lifeblood of silver miners, and it continued to slide. The SIL top 17 that had reported their Q1 results by mid-May again mined 70.9m ounces of silver. That was down 3.1% YoY from Q1’18’s silver production, excluding Silvercorp Metals. SVM’s fiscal years end after Q1s, and it doesn’t report its longer more-comprehensive annual results until well after Q1’s normal quarterly earnings season wraps up.

It’s not just these major silver miners producing less of the white metal, the entire industry is according to the Silver Institute’s latest World Silver Survey. 2018 was the third year in a row of waning global silver mine production. This shrinkage is accelerating too as silver continues to languish, running 0.0% in 2016, 1.8% in 2017, and 2.4% in 2018! Peak silver may have been seen with this metal so unrewarding to mine.

The traditional major silver miners aren’t taking silver’s vexing fading lying down. They’ve spent recent years increasingly diversifying into gold, which has way-superior economics with silver prices so bombed out. The SIL top 17’s total gold production surged 10.9% YoY to 1387k ounces in Q1! This producing-less-silver-and-more-gold trend will continue to grow as long as silver prices waste away in the gutter.

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But silver generates much-lower cash flows than gold due its lower price. Silver miners have been forced to adapt.

This is readily evident in the top SIL miners’ production in Q1’19. SIL’s largest component in mid-May as this latest earnings season ended was the Russian-founded but UK-listed Polymetal. Its silver production fell 15.0% YoY in Q1, but its gold output surged 41.1%! Just 17.5% of its Q1 revenues came from silver, making it overwhelmingly a primary gold miner. Its newest mine ramping up is another sizable gold one.

SIL’s second-largest component is Wheaton Precious Metals. It used to be a pure silver-streaming play known as Silver Wheaton. Silver streamers make big upfront payments to miners to pre-purchase some of their future silver production at far-below-market unit prices. This is beneficial to miners because they use the large initial capital infusions to help finance mine builds, which banks often charge usurious rates for.

Back in May 2017 Wheaton changed its name and symbol to reflect its increasing diversification into gold streaming. In Q1’19 WPM’s silver output collapsed 24.4% YoY, but its gold surged 17.4% higher! That pushed its silver-purity percentage in sales terms to just 38.8%, way below the 50%+ threshold defining primary silver miners. WPM’s 5-year guidance issued in February forecasts this gold-heavy ratio persisting.

Major silver miners are becoming so scarce that SIL’s third-largest component is Korea Zinc. Actually a base-metals smelter, this company has nothing to do with silver mining. It ought to be kicked out of SIL post-haste, as its presence and big 1/9th weighting really retards this ETF’s performance. Korea Zinc smelted about 64.0m ounces of silver in 2018, which approximates roughly 17% of its full-year revenue.

Global X was really scraping the bottom of the barrel to include a company like Korea Zinc in SIL. I’m sure there’s not a single SIL investor who wants base-metals-smelting exposure in what is advertised as a “Silver Miners ETF”. The weighting and capital allocated to Korea Zinc can be reallocated and spread proportionally across the other SIL stocks. The ranks of major silver miners are becoming more rarefied.

SIL’s fourth-largest component in mid-May is Pan American Silver, which has a proud heritage mining its namesake metal. In Q1’19 its silver production was flat with a negligible 0.4% YoY increase, yet its gold output soared 74.2%! Thus PAAS’s silver purity slumped to 40.9%, the lowest by far seen in the years I’ve been doing this quarterly research. And it’s going to get much more gold-centric in coming quarters.

PAAS acquired troubled silver miner Tahoe Resources back in mid-November. Tahoe had owned what was once the world’s largest silver mine, Escobal in Guatemala. It had produced 5.7m ounces in Q1’17 before that country’s government unjustly shut it down after a frivolous lawsuit on a trivial bureaucratic misstep by the regulator. PAAS hopes to work through the red tape to win approval for Escobal to restart.

But the real prize in that fire-sale buyout was Tahoe’s gold production from other mines. That deal closed in late February, so that new gold wasn’t fully reflected in PAAS’s Q1 results. Now this former silver giant is forecasting midpoint production of 27.1m ounces of silver and 595.0k ounces of gold in 2019! That is way into mid-tier-gold territory and a far cry from 2018’s output of 24.8m and 178.9k. PAAS has turned yellow.

Pan American will probably soon follow in Wheaton’s footsteps and change its name and symbol to reflect its new gold-dominated future. As miserable as silver has been faring, I’m starting to wonder if the word “silver” in a miner’s name is becoming a liability with investors. The major primary silver miners are going extinct, forced to adapt by diversifying out of silver and into gold as the former languishes deeply out of favor.

In Q1’19 the SIL-top-17 miners averaged only 35.4% of their revenues derived from silver. That’s also the lowest seen since I started this thread of research with Q2’16 results. Only two of these miners remained primary silver ones, and their silver-purity percentages over 50% are highlighted in blue. They are First Majestic Silver and Fortuna Silver Mines, which together accounted for just 7.6% of SIL’s total weighting.

With SIL-top-17 silver production sliding 3.1% YoY in Q1’19, the per-ounce mining costs should’ve risen proportionally. Silver-mining costs are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. So the lower production, the fewer ounces to spread mining’s big fixed costs across. SIL’s major silver miners indeed reported higher costs last quarter.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q1’19 these SIL-top-17 silver miners reported cash costs averaging $7.39 per ounce. While that surged 23.6% YoY, it still remains far below prevailing prices. Silver miners face no existential threat.

The major silver miners’ average cash costs vary considerably quarter-to-quarter, partially depending on whether or not Silvercorp Metals happens to have edged into the top 17. This Canadian company mining in China has negative cash costs due to massive byproduct credits from lead and zinc. So over the past couple years, SIL-top-17 average cash costs have swung wildly ranging all the way from $3.95 to $6.75.

The SIL-top-17 silver miners reporting AISCs in Q1’19 averaged $12.70 per ounce, 7.2% higher YoY. That remained considerably below last quarter’s average silver price of $15.54, as well as late May’s ugly silver low of $14.34. So the silver-mining industry as a whole is still profitable even with silver drifting near quarter-century-plus lows relative to gold. And those AISCs are skewed higher by SSR Mining’s outlying read.

Another traditional silver miner that changed its name, this company used to be known as Silver Standard Resources. SSRM has shifted into gold too, gradually winding down its old Pirquitas silver mine resulting in abnormally-high AISCs of $19.76 per ounce. Excluding these, the SIL-top-17 average in Q1 falls to $10.94 which is a much-more-comfortable profits cushion between production costs and low silver prices.

Interestingly SSRM has been ramping up a new mine close to its old Pirquitas mill, and is starting to run that ore through. That makes SSR Mining one of the rare silver miners that’s going to see growing output this year. It is forecasting a midpoint of 4.9m ounces of silver production in 2019, a 74% jump from last year’s levels! Higher production should lead to lower AISCs going forward, pulling the average back down.

As hopeless as silver has looked in recent months, it won’t stay down forever. Sooner or later gold will catch a major bid, probably on surging investment demand as these dangerous stock markets roll over. Capital will start migrating back into silver like usual once gold rallies long enough and high enough to convince traders its uptrend is sustainable. Since the silver market is so small, that portends much-higher prices.

At Q1’19’s average silver price of $15.54 and average SIL-top-17 AISCs of $12.70, these miners were earning $2.84 per ounce. That’s not bad for a sector that investors have left for dead, convinced it must be doomed. Being so wildly undervalued relative to gold, silver has the potential to surge much higher in the next gold upleg. The average Silver/Gold Ratio since Q1’16 right after today’s gold bull was born was 77.1x.

At $1400 and $1500 gold which are modest upleg gains, silver mean reverting to recent years’ average SGR levels would yield silver targets of $18.16 and $19.46. That’s conservative, ignoring the high odds for a mean-reversion overshoot, and only 16.9% and 25.2% above Q1’s average price. Yet with flat AISCs that would boost the SIL top 17’s profits by 92.3% and 138.0%! Their upside leverage to silver is amazing.

The caveat is the degree to which silver miners’ earnings amplify this metal’s upside is dependent on how much of their sales are still derived from silver when it turns north. If the SIL top 17 are still getting 35% of their sales from silver, their stocks should surge with silver. But the more they diversify into gold, the more dependent they will be on gold-price moves. Those aren’t as big as silver’s since gold is a far-larger market.

On the accounting front the top 17 SIL silver miners’ Q1’19 results highlighted the challenges of super-low silver prices. These companies collectively sold $3.0b worth of metals in Q1, which actually clocked in at an impressive 10.8% YoY increase. That was totally the result of these companies mining 10.9% more gold in Q1. Though it dilutes their silver-price exposure, shifting into gold really strengthens them financially.

But operating-cash-flow generation looked much worse, collapsing 55.1% YoY to $237m across the SIL top 17 that reported them for Q1. There was no single-company disaster, but Q1’s average silver prices being 7.1% lower YoY eroded OCFs universally. That led to these miners’ collective treasuries shrinking 22.9% YoY to $2.3b. That’s plenty to operate on, but not that much to fund many mine builds or expansions.

Hard GAAP profits reported by the SIL top 17 silver miners were very weak too in Q1’19, plunging 54.9% YoY to $123m. But there were no major writedowns from these low silver prices impairing the value of silver mines and deposits. Investors don’t buy silver stocks for how they are doing today, but for what they are likely to do as silver mean reverts higher. Silver-mining earnings surge dramatically as silver recovers.

The key takeaway here is avoid SIL. The world’s leading “Silver Miners ETF” is increasingly burdened with primary gold miners with waning silver exposure. And having over 1/9th of your capital allocated to silver miners squandered in Korea Zinc is sheer madness! If you want to leverage silver’s long-overdue next mean reversion higher relative to gold, it’s far better to deploy in smaller purer primary silver miners alone.

One of my core missions at Zeal is relentlessly studying the silver-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as these stocks recovered from deep lows, their prices remain relatively low with big upside potential as gold rallies!

The bottom line is the major silver miners are still struggling. With silver continuing to languish at quarter-century-plus lows relative to gold, the economics of extracting it remain challenging. That led to slowing silver production and higher costs in Q1. The traditional major silver miners continued their years-long trend of increasingly diversifying into gold. Their percentage of sales derived from silver is still shrinking.

There aren’t enough major primary silver miners left to flesh out their own ETF, which is probably why SIL is dominated by gold miners. While it will rally with silver amplifying its gains, SIL’s upside potential is just dwarfed by the remaining purer silver stocks. Investors will be far-better rewarded buying them instead of settling for a watered-down silver-miners ETF. Their stocks will really surge as silver mean reverts much higher.

Adam Hamilton, CPA

June 4, 2019

The mid-tier gold miners’ stocks in the sweet spot for price-appreciation potential have been struggling in recent months, grinding lower with gold. Their strong early-year momentum has been sapped by recent stock-market euphoria. But gold-mining stocks are more important than ever for prudently diversifying portfolios. The mid-tiers’ recently-reported Q1’19 results reveal their fundamentals remain sound and bullish.

The wild market action in Q4’18 emphasized why investors shouldn’t overlook gold stocks. All portfolios need a 10% allocation in gold and its miners’ stocks! As the flagship S&P 500 broad-market stock index plunged 9.2% in December alone, nearly entering a new bear market, the leading mid-tier gold-stock ETF surged 13.7% higher that month. That was a warning shot across the bow that these markets are changing.

The definitive list of mid-tier gold miners to analyze comes from the GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its misleading name, GDXJ is largely dominated by mid-tier gold miners and not juniors. GDXJ is the world’s second-largest gold-stock ETF, with $3.6b of net assets this week. That is only behind its big-brother GDX VanEck Vectors Gold Miners ETF that includes the major gold miners.

Gold stocks soared in price and popularity in the first half of 2016, ignited by a new bull market in gold. The metal itself awoke from deep secular lows and surged 29.9% higher in just 6.7 months. GDXJ and GDX skyrocketed 202.5% and 151.2% higher in roughly that same span, greatly leveraging gold’s gains. As capital flooded into GDXJ to own junior miners, this ETF risked running afoul of Canadian securities laws.

Canada is the center of the junior-gold universe, where most juniors trade. Once any investor including an ETF buys up a 20%+ stake in a Canadian stock, it is legally deemed a takeover offer. This may have been relevant to a single corporate buyer amassing 20%+, but GDXJ’s legions of investors certainly weren’t trying to take over small gold miners. GDXJ diversified away from juniors to comply with that archaic rule.

Smaller juniors by market capitalization were abandoned entirely, cutting them off from the sizable flows of ETF capital. Larger juniors were kept, but with their weightings within GDXJ greatly demoted. Most of its ranks were filled with mid-tier gold miners, as well as a handful of smaller majors. That was frustrating, but ultimately beneficial. Mid-tier gold miners are in the sweet spot for stock-price-appreciation potential!

Every quarter I dive into the latest results from the top 34 GDXJ components. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample. These companies represented 82.7% of GDXJ’s total weighting this week, even though it contained a whopping 72 stocks! 3 of the top 34 were majors mining 250k+ ounces, 21 mid-tiers at 75k to 250k, 7 “juniors” under 75k, and 3 explorers with zero.

These majors accounted for 13.0% of GDXJ’s total weighting, and really have no place in a “Junior Gold Miners ETF” when they could instead be exclusively in GDX. These mid-tiers weighed in at 57.6% of GDXJ. The “juniors” among the top 34 represented just 8.9% of GDXJ’s total. But only 4 of them at a mere 4.4% of GDXJ are true juniors, meaning they derive over half their revenues from actually mining gold.

The rest include a primary silver miner, gold-royalty company, and gold streamer. GDXJ has become a full-on mid-tier gold miners ETF, with modest major and tiny junior exposure. Traders need to realize it is not a junior-gold investment vehicle as advertised. GDXJ also has major overlap with GDX. Fully 29 of these top 34 GDXJ gold miners are included in GDX too, with 23 of them also among GDX’s top 34 stocks.

The GDXJ top 34 accounting for 82.7% of its total weighting also represent 37.4% of GDX’s own total weighting! The GDXJ top 34 mostly clustered between the 10th- to 40th-highest weightings in GDX. Thus over 3/4ths of GDXJ is made up by almost 3/8ths of GDX. But GDXJ is far superior, excluding the large gold majors struggling with production growth. GDXJ gives much-higher weightings to better mid-tier miners.

The average Q1’19 gold production among GDXJ’s top 34 was 149k ounces, a bit over half as big as the GDX top 34’s 267k average. Despite these two ETFs’ extensive common holdings, GDXJ is increasingly outperforming GDX. GDXJ holds many of the world’s best mid-tier gold miners with big upside potential as gold’s own bull resumes powering higher. Thus it is important to analyze GDXJ miners’ latest results.

So after every quarterly earnings season I wade through all available operational and financial results and dump key data into a big spreadsheet for analysis. Some highlights make it into these tables. Any blank fields mean a company hadn’t reported that data as of this Wednesday. The first couple columns show each GDXJ component’s symbol and weighting within this ETF as of this week. Not all are US symbols.

18 of the GDXJ top 34 primarily trade in the U.S., 5 in Australia, 8 in Canada, and 3 in the U.K. So some symbols are listings from companies’ main foreign stock exchanges. That’s followed by each gold miner’s Q1’19 production in ounces, which is mostly in pure-gold terms excluding byproducts often found in gold ore like silver and base metals. Then production’s absolute year-over-year change from Q1’18 is shown.

Next comes gold miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drives profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated, hard GAAP earnings, revenues, and cash on hand with a couple exceptions.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. In cases where foreign GDXJ components only released half-year data, I used that and split it in half where appropriate. That offers a decent approximation of Q1’19 results.

Symbols highlighted in light blue newly climbed into the ranks of GDXJ’s top 34 over this past year. And symbols highlighted in yellow show the rare GDXJ-top-34 components that aren’t also in GDX. If both conditions are true blue-yellow checkerboarding is used. Production bold-faced in blue shows the handful of junior gold miners in GDXJ’s higher ranks, under 75k ounces quarterly with over half of sales from gold.

This whole dataset together compared with past quarters offers a fantastic high-level read on how mid-tier gold miners as an industry are faring fundamentally. While slightly-lower gold prices made Q1 somewhat challenging, the GDXJ miners generally fared quite well. They mostly kept costs in check, paving the way for profits to soar and really amplify gold’s overdue-to-resume bull market. That’s very bullish for their stocks.

GDXJ’s managers have continued to fine-tune its ranks over this past year, making some good changes. For some inexplicable reason, one of the world’s largest gold miners AngloGold Ashanti was one of this ETF’s top holdings as discussed in Q3’18. AU was finally kicked out and replaced with a smaller major gold miner Kinross and a mid-tier Buenaventura. Together they now account for 12.3% of GDXJ’s weighting.

Reshuffling at the top makes year-over-year changes less comparable, particularly given KGC’s larger size relative to most of the rest of GDXJ’s stocks. 4 other smaller stocks also climbed into this ETF’s top-34 ranks. As GDXJ is largely market-cap weighted, it is normal for companies to rise into and fall out of the top 34’s lower end. All these year-over-year comparisons are across somewhat-different top-34 stocks.

Production has always been the lifeblood of the gold-mining industry. Gold miners have no control over prevailing gold prices, their product sells for whatever the markets offer. Thus growing production is the only manageable way to boost revenues, leading to amplified gains in operating cash flows and profits. Higher production generates more capital to invest in expanding existing mines and building or buying new ones.

Gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential. The top 34 GDXJ gold miners excelled in that department, growing their aggregate Q1 output by a big 15.6% YoY to 4.6m ounces! That’s impressive, trouncing both the major gold miners dominating GDX as well as the entire world’s gold-mining industry.

Last week I analyzed the GDX majors’ Q1’19 results, showing they are still struggling to replace depleting production. The GDX top 34’s total output plunged a sharp 6.3% YoY to 8.8m ounces, but if adjusted for a recent in-process mega-merger that decline moderates to 0.2% YoY. That’s still much worse than the world gold-mining industry as a whole, as reflected in the World Gold Council’s comprehensive quarterly data.

Total global gold production in Q1’19 climbed 1.1% YoY to 27.4m ounces, which the majors still fell well short of. The GDXJ mid-tiers were able to enjoy very-strong growth because this ETF isn’t burdened by the struggling majors. Again GDXJ’s components start at the 10th-highest weighting in GDX. The 9 above that averaged huge Q1 production of 537k ounces, which is fully 3.6x bigger than the GDXJ-top-34 average!

Their awesome Q1 production surge wasn’t just from the new components climbing into the ranks of the top 34 over this past year. The average growth rate of all these companies producing weighed in at 16.1% YoY, right in line with the 15.6% total growth. The law-of-large-numbers growth limitations also apply to gold miners’ market capitalizations. The GDXJ top 34 averaged just $1.7b in the middle of this week.

Last week the GDX top 34 sported a far-higher average of $5.2b. With the mid-tiers generally less than a third as big as the majors, their stock prices have much-less inertia. Capital inflows as gold stocks return to favor on gold rallying propel mid-tier stocks to much-higher levels faster than majors. They truly are the sweet spot of the gold-stock realm, not bogged down like the majors with way less risk than the juniors.

Also interesting on the GDXJ production front last quarter was silver. This “Junior Gold Miners ETF” also includes major silver miners, both primary and byproduct ones. The GDXJ top 34’s silver mined surged 13.8% higher YoY to 26.5m ounces! For comparison the GDX top 34’s total reported silver output of 27.3m actually plunged 25.2% YoY. Even mega-merger-adjusted their silver production still fell 8.0% YoY.

The mid-tier gold miners continue to prove all-important production growth is achievable off smaller bases. With a handful of mines or less to operate, mid-tiers can focus on expanding them or building a new mine to boost their output beyond depletion. But the majors are increasingly failing to do this from the already-high production bases they operate at. As long as majors are struggling, it is prudent to avoid them.

GDXJ investors would be better served if this ETF contained no major gold miners producing over 250k ounces a quarter on average. They still command over 1/8th of its weighting, which could be far better reallocated in mid-tiers and juniors. If VanEck kept the major gold miners in GDX where they belong, it would give GDXJ much-better upside potential. That would make this ETF more popular and successful.

In gold mining, production and costs are generally inversely related. Gold-mining costs are largely fixed quarter after quarter, with actual mining requiring about the same levels of infrastructure, equipment, and employees. So the higher production, the more ounces to spread mining’s big fixed costs across. Thus with sharply-higher YoY production in Q1’19, the GDXJ top 34 should’ve seen proportionally-lower costs.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q1’19 these top-34-GDXJ-component gold miners that reported cash costs averaged $730 per ounce. That was up a sizable 5.4% YoY, and much worse than the GDX top 34’s $616 average.

These were the highest average mid-tier cash costs seen in the 12 quarters I’ve been doing this research, which was potentially concerning. Thankfully that was heavily skewed by some extreme outliers relative to this sector and their own history. Peru’s Buenaventura saw cash costs soar 33% YoY to $1049! That was a one-off anomaly driven by the company halting one of its key mines in January to centralize operations.

Two major South African miners saw really-high cash costs too, Sibanye’s eye-popping $1956 per ounce and Harmony’s $1017. South Africa’s former gold juggernaut has been struggling for years, facing endless government corruption and very-deep and expensive mines. Sibanye in particular really needs to get kicked out of GDXJ, as it is now a primary platinum-group-metals miner at well over 5/8ths of Q1 revenues.

Finally Hecla’s cash costs skyrocketed 54% YoY to $1277 in Q1, mainly due to ongoing problems at its Nevada operations. It actually suspended 2019 production and cost guidance on these, which certainly isn’t a good sign! None of these 4 gold miners represent mid-tiers as a whole. Excluding them, the rest of the GDXJ top 34 averaged excellent cash costs of just $622 last quarter. That’s on the low end of the range.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

The GDXJ-top-34 AISC picture in Q1’19 looked much like the cash-cost one. Average AISCs defied much-higher production to surge 6.0% higher YoY to $1002 per ounce! While still far below Q1’s average gold price of $1303, those were the highest AISCs seen by far since at least Q2’16 when I started this thread of research. But again that was heavily skewed by those same 4 gold miners struggling with sky-high costs.

Excluding BVN’s $1382, SBGL’s insane $2030, HMY’s $1286, and HL’s extreme $1760, the rest of the GDXJ top 34 averaged a far-better $891 per ounce. That was 5.8% lower than Q1’18’s average, indeed reflecting fast-growing output. It was also right in line with the 2017-and-2018 quarterly average of $903, as well as the top 34 GDX majors’ Q1’19 average of $893. Most mid-tier golds are keeping costs under control.

Interestingly gold-mining costs tend to peak in Q1s before drifting lower in subsequent quarters. That’s because gold miners often make capital improvements and sequence mining in such a way that Q1s see the lowest ore grades and thus lowest production. I discussed this in some depth last week in my GDX Q1’19 essay. Odds are the GDXJ mid-tiers’ costs will decline significantly in coming quarters as output ramps.

Yet even at that distorted artificially-high Q1 average AISC of $1002, the elite GDXJ gold miners have great potential to enjoy surging profits and hence stock prices as gold recovers. The average gold price in Q1’19 drifted 1.9% lower YoY to $1303. That implies the mid-tier miners were averaging profits around $301 per ounce. Gold is due to head far higher as these bubble-valued stock markets face an overdue bear.

That will rekindle gold investment demand like usual, those new capital inflows fueling a major gold upleg. A mere 7.7% advance from $1300 would carry gold to $1400, and just 15.4% would hit $1500. Those are modest and easily-achievable gains by past-gold-upleg standards. During essentially the first half of 2016 after major stock-market selloffs, gold blasted 29.9% higher in 6.7 months! Gold can rapidly return to favor.

At $1300 and Q1’s $1002 average AISCs, the major gold miners are still earning a very-healthy $298 per ounce. But at $1400 and $1500 gold, those profits soar to $398 and $498. That’s 33.6% and 67.1% higher on relatively-small 7.7% and 15.4% gold uplegs from here! And if the mid-tiers’ average AISCs retreat back near $900 without the outliers, that profits growth rockets to 67.8% at $1400 and 101.3% at $1500!

The gold miners’ awesome inherent profits leverage to gold is why this beaten-down forsaken sector is so darned attractive. The major gold stocks of GDX tend to amplify gold uplegs by 2x to 3x, and the mid-tier miners of GDXJ usually do much better. As gold rallies on renewed investment demand as stock markets weaken, better mid-tier gold stocks soar dramatically multiplying investors’ wealth. This is a must-own sector.

While investors continue to harbor serious apathy for gold stocks, the mid-tier miners’ costs remain well-positioned to fuel monster profits growth in a higher-gold-price environment. This is a stark contrast to the rest of the markets, where rising earnings are looking to be scarce. Investors love higher profits, and few if any sectors will rival the gold miners’ earnings growth. It was already underway in Q1 on higher production.

In terms of hard accounting numbers, the GDXJ top 34’s total sales grew 5.0% YoY to $4.9b in Q1’19. That was the result of 15.6%-higher gold output easily offsetting the 1.9%-lower average gold price last quarter. Again the mid-tiers just trounced the majors, with the GDX top 34’s sales dropping a sharp 5.2% YoY when adjusted for the in-progress mega-merger between elite gold majors Newmont and Goldcorp.

The higher sales among the top 34 GDXJ stocks also drove impressive 22.2% YoY GAAP profits growth to a total of $197m in Q1! That again reveals the rising-cost problems are isolated in a handful of GDXJ components, not mid-tier miners as a whole. The majors of GDX again fared much worse last quarter, seeing earnings fall 7.2% YoY when accounting for that mega-merger. Mid-tiers are really outperforming.

The one blemish on the accounting front was operating cash flows generated, which fell 17.7% YoY in total among the GDXJ-top-34-component stocks to $1.1b. There were no individual-company disasters which stood out, just weaker cash flows across the board. Still the mid-tier miners were producing healthy amounts of cash as the big profits gap between their AISCs and prevailing gold prices last quarter implied.

The GDXJ top 34’s overall cash treasuries fell a similar 20.4% YoY in Q1 to $5.1b, reflecting lower OCFs. But less cash isn’t necessarily negative, as gold miners tap their cash hoards when they are building or buying expansions or mines. So declining cash balances suggest more investment to grow production in future quarters, which is always good news in this sector. The mid-tier golds’ Q1’19 results were bullish.

GDXJ’s mostly-mid-tier component list of great gold miners is really faring well, especially compared to the struggling large gold miners. Investors looking to ride this gold-stock bull should avoid the world’s biggest gold producers and instead deploy their capital in the mid-tier realm. The best gains will be won in individual smaller gold miners with superior fundamentals, plenty of which are included within GDXJ.

Despite being the world’s leading gold-stock ETF, GDX needs to be avoided. The major gold miners that dominate its weightings are struggling too much fundamentally, unable to grow their production. Capital will instead flow into the mid-tiers, juniors, and maybe a few smaller majors still able to boost their output and thus earnings going forward. None of this is new, but the major and mid-tier disconnect continues to worsen.

Again back in essentially the first half of 2016, GDXJ skyrocketed 202.5% higher on a 29.9% gold upleg in roughly the same span! While GDX somewhat kept pace then at +151.2%, it is lagging GDXJ more and more as its weightings are more concentrated in stagnant gold mega-miners. The recent big mergers are going to worsen that investor-hostile trend. Investors should buy better individual gold stocks, or GDXJ.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from deep lows, their prices remain relatively low with big upside potential as gold rallies!

The bottom line is the mid-tier gold miners are thriving fundamentally. They are still rapidly growing their production while majors suffer chronic output declines. Most mid-tiers are holding the line on costs, which portends strong leveraged profits growth as gold continues grinding higher on balance. The performance gap between the smaller mid-tier and junior gold miners and larger major ones is big and still mounting.

Investors and speculators really need to pay attention to this intra-sector disconnect. Gold and its miners’ stocks should power far higher in coming years as the lofty general stock markets roll over. But the vast majority of the gains will be concentrated in growing gold miners, not shrinking ones. This means the mid-tier and junior gold miners will far outperform the majors as gold powers higher on weaker stock markets.

Adam Hamilton, CPA

May 27, 2019

The major gold miners’ stocks are drifting sideways with gold, their early-year momentum sapped by the recent stock-market euphoria. But they are more important than ever for prudently diversifying portfolios, a rare sector that surges when stock markets weaken. Their just-reported Q1’19 results reveal how gold miners are faring as a sector, and their current fundamentals are way better than bearish psychology implies.

The wild market action in Q4’18 again emphasized why investors shouldn’t overlook gold stocks. Every portfolio needs a 10% allocation in gold and its miners’ stocks. As the flagship S&P 500 broad-market stock index plunged 19.8% largely in that quarter to nearly enter a bear market, the leading gold-stock ETF rallied 11.4% higher in that span. That was a warning shot across the bow that these markets are changing.

The definitive list of major gold-mining stocks to analyze comes from the world’s most-popular gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF. Launched way back in May 2006, it has an insurmountable first-mover lead. GDX’s net assets running $9.0b this week were a staggering 46.6x larger than the next-biggest 1x-long major-gold-miners ETF! GDX is effectively this sector’s blue-chip index.

It currently includes 46 component stocks, which are weighted in proportion to their market capitalizations. This list is dominated by the world’s largest gold miners, and their collective importance to this industry cannot be overstated. Every quarter I dive into the latest operating and financial results from GDX’s top 34 companies. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample.

As of this week these elite gold miners accounted for fully 94.3% of GDX’s total weighting. Last quarter they combined to mine 274.4 metric tons of gold. That was 32.2% of the aggregate world total in Q1’19 according to the World Gold Council, which publishes comprehensive global gold supply-and-demand data quarterly. So for anyone deploying capital in gold or its miners’ stocks, watching GDX miners is imperative.

The largest primary gold miners dominating GDX’s ranks are scattered around the world. 20 of the top 34 mainly trade in US stock markets, 6 in Australia, 5 in Canada, 2 in China, and 1 in the United Kingdom. GDX’s geopolitical diversity is excellent for investors, but makes it more difficult to analyze and compare the biggest gold miners’ results. Financial-reporting requirements vary considerably from country to country.

In Australia, South Africa, and the UK, companies report in half-year increments instead of quarterly. The big gold miners often publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q1 approximation. While Canada has quarterly reporting, the deadlines are looser than in the States. Some Canadian gold miners drag their feet in getting results out.

The first couple columns of these tables show each GDX component’s symbol and weighting within this ETF as of this week. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each gold miner’s Q1’19 production in ounces, which is mostly in pure-gold terms. That excludes byproduct metals often present in gold ore.

Those are usually silver and base metals like copper, which are valuable. They are sold to offset some of the considerable expenses of gold mining, lowering per-ounce costs and thus raising overall profitability. In cases where companies didn’t separate out gold and lumped all production into gold-equivalent ounces, those GEOs are included instead. Then production’s absolute year-over-year change from Q1’18 is shown.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. Companies with symbols highlighted in light-blue have newly climbed into the elite ranks of GDX’s top 34 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-level read on how the major gold miners are faring fundamentally as an industry and individually. While the endless challenge of growing production continues to vex plenty of the world’s larger gold miners, they generally performed much better in Q1’19 than today’s low gold-stock prices reflect. Last quarter was also a big transition one as the recent gold-stock mega-mergers continued to settle out.

Production has always been the lifeblood of the gold-mining industry. Gold miners have no control over prevailing gold prices, their product sells for whatever the markets offer. Thus growing production is the only manageable way to boost revenues, leading to amplified gains in operating cash flows and profits. Higher output generates more capital to invest in expanding existing mines and building or buying new ones.

Gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential. But for several years now the major gold miners have been struggling to grow production. Large economically-viable gold deposits are getting increasingly harder to find and more expensive to exploit, with the low-hanging fruit long since picked.

Gold miners’ exploration budgets have cratered since gold collapsed in Q2’13, plummeting 22.8%! That was the yellow metal’s worst quarter in an astounding 93 years, which devastated sentiment and scared investors away from this sector. Much less capital to explore shrank the pipeline of new finds to replace relentless depletion at existing mines. That left major gold miners just one viable option to grow their output.

They either have to buy existing mines and/or deposits from other companies, or acquire those outright. That’s unleashed a merger-and-acquisition wave that culminated in recent quarters. In September 2018 gold giant Barrick Gold announced it was merging with Randgold. Not to be outdone, in January 2019 the other gold behemoth Newmont Mining declared it was acquiring Goldcorp in another colossal mega-deal.

I wrote a whole essay analyzing these mega-mergers in mid-February, and believe they are bad for this sector for a variety of reasons. For our purposes today, Q1’19 was the first quarter fully reflecting the new Barrick including Randgold. But Newmont’s acquisition of Goldcorp wasn’t finalized until April 2019, so that isn’t included in NEM’s Q1’19 results. And unfortunately Goldcorp’s weren’t published separately either.

That makes analyzing the GDX top 34’s gold production last quarter more complicated than usual. As far as I can tell, Newmont released nothing on Goldcorp’s Q1 operations. As usual when one company buys out another, the acquired company’s website is quickly effectively deleted. It is replaced with a tiny new website largely devoid of useful information, that redirects to the new combined company’s main website.

So Goldcorp’s Q1 results were apparently cast into a black hole, never to be seen by investors. Across last year’s four quarters, Goldcorp ranked as the 5th-to-7th-largest GDX component. So excluding it from this leading gold-stock ETF skews all kinds of Q1 numbers. This discontinuity will resolve itself over the next couple quarters as Newmont and Goldcorp are fully integrated into the new, wait for it, “Newmont Goldcorp”.

In Q1’19 these top 34 GDX gold miners produced 8.8m ounces of gold, which was down a sharp 6.3% from Q1’18’s levels. But Goldcorp averaged 574k ounces of quarterly production in 2018. If that is added in, Q1’19’s climbs to 9.4m ounces which is only off a slight 0.2% YoY. Stable gold output is a victory for the major gold miners, as there have been plenty of recent quarters where their production has declined.

But depletion is still a huge challenge for them, as they are losing market share to smaller gold miners that aren’t so unwieldy to manage. The World Gold Council publishes the best global gold fundamental supply-and-demand data quarterly. According to its latest Q1’19 Gold Demand Trends report, total world mine production actually climbed 1.1% YoY in Q1. So the larger gold miners continue to underperform.

On a quarter-over-quarter basis since Q4’18, the GDX top 34’s gold production plunged 8.8%! But again that is overstated by Goldcorp’s missing-in-action Q1 output. Add in that 2018 quarterly approximation, and that decline moderates to 2.8% QoQ. The quarter-to-quarter output dynamics among the major gold miners are somewhat surprising. Gold is not produced at a steady pace year-round as logically assumed.

Going back to 2010, the world gold mine production per the WGC has averaged sharp 7.2% QoQ drops from Q4s to Q1s! For many if not most major gold miners, calendar years’ first quarters mark the low ebb in their annual output. The gold miners attribute this Q1 lull to new capital spending that slows production as mine infrastructure is upgraded. That weaker output in Q1s is regained with big jumps in following quarters.

In that same decade-long WGC dataset, Q2s saw world mine production average big 5.4% QoQ surges from Q1s! That sharp acceleration trend continued in Q3s, which averaged additional 5.3% QoQ growth from Q2s. Then that petered out on average in Q4s, which were only 0.5% better than Q3s. So it is normal for gold miners’ production to fall sharply in years’ Q1s before rebounding strongly in Q2s and Q3s.

There’s more to this intra-year seasonality than capital spending though. Mine managers play a big role in how they plan their ore sequencing. Individual gold deposits are not homogenous, but have varying richness throughout their orebodies. Mine managers have to decide which ore to mine in any quarter, which is fed through their fixed-capacity mills for crushing and gold recovery. Ore grade determines output.

The more gold per ton of ore dug and hauled in any quarter, the more gold produced. Mine managers choose to process more lower-grade ores in Q1s, then move to higher-grade ore mixes in Q2s and Q3s. That helps maximize their incentive bonuses. Q3 results are reported in early-to-mid Novembers soon before year-ends. Higher production boosts stock prices heading into that year-end bonus-calculation time!

Realize that Q1 results reported from early-to-mid Mays generally show a year’s weakest gold output. It is surprising to see investors sell gold stocks hard when Q1’s production declines from Q4’s, as this is par for the course in this industry. The bright side is excitement later builds throughout the year as Q2’s and Q3’s production grows fast. The gold miners look better fundamentally later in years than earlier in them!

With year-over-year gold production among the GDX top 34 effectively flat in Q1’19 with Goldcorp’s likely output added back in, odds argued against much of a change in gold-mining costs. They are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. These big fixed costs are spread across production, making unit costs inversely proportional to it.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q1’19 these top-34-GDX-component gold miners that reported cash costs averaged $616 per ounce. That actually fell a sharp 7.7% YoY, down on the low side of recent years’ cash-cost range.

Investor sentiment in gold-stock land has been really poor, as recent months’ extreme stock euphoria has really stunted interest in gold. If stock markets seemingly do nothing but rally indefinitely, then why bother prudently diversifying stock-heavy portfolios with counter-moving gold? There’s been increasing chatter lately about the gold-mining industry’s viability, which isn’t unusual when psychology waxes quite bearish.

Those worries are ridiculous with the major gold miners’ cash costs averaging in the low $600s even in Q1’s low-quarterly-output ebb. As long as gold remains well above $616, this neglected sector faces no existential threat. And Q1’s top-34-GDX-average cash costs are even skewed higher by one struggling gold miner, Peru’s Buenaventura. In Q1’19 it suffered a sharp 22.2% YoY plunge in gold production.

That was primarily due to the company stopping extraction operations at one of its key mines in January to rejigger and centralize it. That lower output to spread mining’s big fixed costs across was enough to catapult BVN’s Q1 cash costs 33.1% higher YoY to an extreme $1049 per ounce. Those are expected to mean revert much lower in coming quarters. Ex-BVN the rest of the GDX top 34 averaged merely $600.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

The GDX-top-34 gold miners reported average AISCs of $893 per ounce in Q1’19, up merely 1.0% YoY. These flat AISCs are right in line with flat production when Goldcorp’s likely output is added back in. The big operational challenges at Buenaventura also rocketed its AISCs an incredible 82.3% higher YoY to an anomalous $1382 per ounce. Excluding BVN, the rest of the GDX top 34 averaged $874 AISCs in Q1.

That’s right in line with the past couple calendar years’ quarterly average of $872. The major gold miners, despite still struggling to grow their production enough to exceed depletion, are still holding the line on all-important costs. Those stable costs regardless of prevailing gold prices are what make the gold stocks so attractive. They have massive upside potential as their profits amplify the higher gold prices still coming.

The gold price averaged $1303 in Q1’19. Subtracting the major gold miners’ average $893 AISCs from that yields strong profits of $410 per ounce. While recent years’ universal stock-market euphoria has capped gold at $1350 resistance, it has still been grinding higher on balance carving higher lows. Gold is getting wound tighter and tighter towards a major upside breakout to new bull highs well above $1350.

Like usual gold investment demand will be rekindled when the stock markets inevitably roll over materially again, propelling gold higher. A mere 7.7% upleg from $1300 would carry gold to $1400, and just 15.4% would hit $1500. Those are modest and easily-achievable gains by past-gold-upleg standards. During essentially the first half of 2016 after major stock-market selloffs, gold blasted 29.9% higher in 6.7 months!

At $1300 and Q1’s $893 average AISCs, the major gold miners are earning $407 per ounce. But at $1400 and $1500 gold, those profits soar to $507 and $607. That’s 24.6% and 49.1% higher on relatively-small 7.7% and 15.4% gold uplegs from here! This inherent profits leverage to gold is why the major gold stocks of GDX tend to amplify gold uplegs by 2x to 3x or so. Investors enjoy large gains as gold rallies.

Despite investors’ serious apathy for this sector, the gold miners’ costs remain well-positioned to fuel big profits growth in a higher-gold-price environment. Investors love rising earnings, which are looking to be scarce in the general stock markets this year. The better gold miners’ stocks are likely to see big capital inflows as gold continues climbing on balance, which will drive them and to a lesser extent GDX much higher.

The GDX top 34’s accounting results weren’t as impressive as their flat production and costs in Q1. The lack of Goldcorp’s operations being accounted for last quarter again distorted normal annual comparisons. So all these Q1’19 numbers are compared to Q1’18’s excluding Goldcorp. Last quarter’s average gold price being 1.9% lower than Q1’18’s average also played a role in weaker year-over-year performance.

The GDX top 34’s total revenues fell 5.2% YoY ex-Goldcorp to $9.2b in Q1’19. That’s reasonable given the slightly-lower production and gold prices. Lower byproduct silver output also contributed, as a half-dozen of these elite major gold miners also produce sizable amounts of silver. Again without Goldcorp, the total silver output among the GDX top 34 fell 8.0% YoY to 27.3m ounces in Q1 weighing on total sales.

Their overall cash flows generated from operations mirrored this weakening trend, down 9.1% YoY to $2.8b last quarter. Still the GDX-top-34 gold miners were producing lots of cash as the big profits gap between their AISCs and prevailing gold prices implied. Only two of these major gold miners suffered significant negative OCFs, and one of those was naturally Buenaventura with all its production struggles.

These elite gold miners remained flush with cash at the end of Q1, reporting $11.1b on their books. That is 11.3% lower YoY without Goldcorp. The gold miners tap into their cash hoards when they are building or buying mines, so declines in overall cash balances suggest more investment in growing future output. Investors fretting about the gold-mining industry today aren’t following their strong operating cash flows.

Last but not least are the GDX top 34’s hard accounting profits under Generally Accepted Accounting Principles. These are the actual quarterly earnings reported to the SEC and other regulators. Overall profits excluding Goldcorp only declined 7.2% YoY to $731m in Q1’19. That’s really impressive in light of the 5.2%-lower revenues. Prior quarters’ big mine-impairment charges on lower gold prices also dried up.

So the major gold miners included in this sector’s leading ETF are doing a lot better than investors are giving them credit for. There’s no fundamental reason for this critical portfolio-diversifying contrarian sector to be shunned. Gold stocks’ only problem is the lack of upside action in gold, which will quickly change once the stock markets decisively roll over again. December 2018 proved these relationships still work.

As the S&P 500 plunged 9.2% that month, investors remembered the timeless wisdom of keeping some gold and gold miners’ stocks in their portfolios. So they started shifting capital back in, driving gold 4.9% higher that month which GDX leveraged to a big 10.5% gain! Gold and its miners’ stocks act like portfolio insurance when stock markets sell off. Everyone really needs a 10% allocation in gold and gold stocks!

That being said, GDX isn’t the best way to do it. This ETF’s potential upside is retarded by the large gold miners struggling to grow their production. Investment capital will seek out the smaller mid-tier and junior gold miners actually able to increase their output. It’s far better to invest in these great individual miners with superior fundamentals. While plenty are included in GDX, their relatively-low weightings dilute their gains.

GDX’s little-brother ETF GDXJ is another option. While advertised as a “Junior Gold Miners ETF”, it is really a mid-tier gold miners ETF. It includes most of the better GDX components, with higher weightings since the largest gold majors are excluded. I wrote an entire essay in mid-January explaining why GDXJ is superior to GDX, and my next essay a week from now will delve into the GDXJ gold miners’ Q1’19 results.

Back in essentially the first half of 2016, GDXJ rocketed 202.5% higher on a 29.9% gold upleg in roughly the same span! While GDX somewhat kept pace then at +151.2%, it is lagging GDXJ more and more as its weightings are more concentrated in stagnant gold super-majors. The recent mega-mergers are going to worsen that investor-hostile trend. Investors should buy better individual gold stocks, or GDXJ, instead of GDX.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from deep lows, their prices remain relatively low with big upside potential as gold rallies!

The bottom line is the major gold miners performed pretty well last quarter. Their production held steady despite lower prevailing gold prices and inexorable depletion. That led to flat costs right in line with prior years’ average levels. That leaves gold-mining earnings positioned to soar higher in future quarters as gold continues slowly grinding higher on balance. Another major stock-market selloff will accelerate that trend.

Stock investors are making a serious mistake ignoring gold and its miners’ stocks. The bearish sentiment plaguing this sector today is irrational given miners’ solid fundamentals. Diversifying is best done before it is necessary, buying low with gold-stock prices so beaten-down. This is the only sector likely to rally fast amplifying gold’s upside when stock markets inevitably swoon again. Don’t overlook the great opportunity here!

Adam Hamilton, CPA

May 21, 2019

The U.S. stock markets sure feel inflectiony, at a major juncture. After achieving new all-time record highs, sentiment was euphoric heading into this week. But those latest heights could be a massive triple top that formed over 15 months. Then heavy selling erupted in recent days as the U.S.-China trade war suddenly went hostile. The big U.S. stocks just-reported Q1’19 fundamentals will help determine where markets go next.

The deadline for filing 10-Qs for “large accelerated filers” is 40 days after fiscal quarter-ends. The SEC defines this as companies with market capitalizations over $700m. That currently includes every stock in the flagship S&P 500 stock index (SPX), which contains the biggest and best American companies. The middle of this week marked 38 days since the end of Q1, so almost all the big U.S. stocks have reported.

The SPX is the world’s most-important stock index by far, with its components commanding a staggering collective market cap of $24.9t at the end of Q1! The vast majority of investors own the big U.S. stocks of the SPX, as some combination of them are usually the top holdings of nearly every investment fund. That includes retirement capital, so the fortunes of the big U.S. stocks are crucial for Americans’ overall wealth.

The major ETFs that track the S&P 500 dominate the increasingly-popular passive-investment strategies as well. The SPY SPDR S&P 500 ETF, IVV iShares Core S&P 500 ETF, and VOO Vanguard S&P 500 ETF are among the largest in the world. This week they reported colossal net assets running $271.9b, $175.1b, and $111.5b respectively! The big SPX companies overwhelmingly drive the entire stock markets.

Q1’19 proved extraordinary, the SPX soaring 13.1% higher in a massive rebound rally after suffering a severe correction largely in Q4. That pummeled this key benchmark stock index 19.8% lower in jU.S.t 3.1 months, right on the verge of entering a new bear market at -20%. By the end of Q1, fully 5/6ths of those deep losses had been reversed. Did the big U.S. stocks’ fundamental performances support such huge gains?

Corporate-earnings growth was expected to slow dramatically in Q1, stalling out after soaring 20.5% last year. 2018’s four quarters straddled the Tax Cuts and Jobs Act, which became law right when that year dawned. Its centerpiece was slashing the U.S. corporate tax rate from 35% to 21%, which naturally greatly boosted profits from pre-TCJA levels. Q1’19 would be the first quarter with post-TCJA year-over-year comparisons.

Big U.S. stocks’ valuations, where their stock prices are trading relative to their underlying earnings, offer critical clues on what is likely coming next. By late April the epic stock-market bull as measured by the SPX extended to huge 335.4% gains over 10.1 years! That clocked in as the second-largest and first-longest bull in U.S. stock-market history. With the inevitable subsequent bear overdue, valuations really matter.

Every quarter I analyze the top 34 SPX/SPY component stocks ranked by market cap. This is just an arbitrary number that fits neatly into the tables below, but a dominant sample of the SPX. As Q1 waned, these American giants alone commanded fully 43.7% of the SPX’s total weighting! Their $10.9t collective market cap exceeded that of the bottom 437 SPX companies. Big U.S. stocks’ importance cannot be overstated.

I wade through the 10-Q or 10-K SEC filings of these top SPX companies for a ton of fundamental data I feed into a spreadsheet for analysis. The highlights make it into these tables below. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q1’19. That’s followed by the year-over-year change in each company’s market capitalization, an important metric.

Major U.S. corporations have been engaged in a wildly-unprecedented stock-buyback binge ever since the Fed forced interest rates to deep artificial lows during 2008’s stock panic. Thus, the appreciation in their share prices also reflects shrinking shares outstanding. Looking at market-cap changes instead of just underlying share-price changes effectively normalizes out stock buybacks, offering purer views of value.

Next are the actual hard quarterly earnings that must be reported to the SEC under Generally Accepted Accounting Principles. Lamentably companies now tend to use fake pro-forma earnings to downplay real GAAP results. These are derided as EBS profits, Everything but the Bad Stuff! Certain expenses are simply ignored on a pro-forma basis to artificially inflate reported corporate profits, often misleading traders.

While we’re also collecting the earnings-per-share data Wall Street loves, it’s more important to consider total profits. Stock buybacks are executed to manipulate EPS higher, because the shares-outstanding denominator of its calculation shrinks as shares are repurchased. Raw profits are a cleaner measure, again effectively neutralizing the impacts of stock buybacks. They better reflect underlying business performance.

Finally the trailing-twelve-month price-to-earnings ratios as of the end of Q1’19 are noted. TTM P/Es look at the last four reported quarters of actual GAAP profits compared to prevailing stock prices. They are the gold-standard metric for valuations. Wall Street often intentionally conceals these real P/Es by using the fictional forward P/Es instead, which are literally mere guesses about future profits that often prove far too optimistic.

These are mostly calendar-Q1 results, but some big U.S. stocks use fiscal quarters offset from normal ones. Walmart, Home Depot, and Cisco have lagging quarters ending one month after calendar ones, so their results here are current to the end of January instead of March. Oracle uses quarters that end one month before calendar ones, so its results are as of the end of February. Offset reporting ought to be banned.

Stocks with symbols highlighted in blue have newly climbed into the ranks of the SPX’s top 34 companies over the past year, as investors bid up their stock prices and thU.S. market caps relative to their peers. Overall the big U.S. stocks’ Q1’19 results looked pretty mixed, with slight sales growth and strong earnings growth. But these growth rates are really slowing, and valuations remain extreme relative to underlying profits.

From the ends of Q1’18 to Q1’19, the S&P 500 rallied 7.3% higher. While solid, that’s not much relative to the extreme euphoria and complacency during this latest earnings season. These stock markets could really be in a massive-triple-top scenario after this record bull run, a menacing bearish omen. The SPX initially peaked at 2872.9 in late January 2018, mere weeks after those record corporate tax cuts went into effect.

Then it quickly plunged 10.2% in 0.4 months, a sharp-yet-shallow-and-short correction. But with overall SPX earnings growth exceeding 20% YoY comparing post-tax-cut quarters to pre-tax-cut ones, this key benchmark clawed back higher and hit 2930.8 in late September 2018. That was merely a 2.0% marginal gain over 7.8 months which saw some of the strongest corporate-profits surges ever from already-high levels.

From there the SPX plummeted 19.8% in 3.1 months in that severe near-bear correction largely in Q4. This trend of slightly-better record highs followed by far-worse selloffs is troubling. By late April 2019 the SPX had stretched to 2945.8, jU.S.t 2.5% above its initial peak 15.1 months earlier. Such paltry gains in a span with record corporate tax cuts and resulting torrid earnings growth should really give traders pause.

Technically these three major record highs look like a massive triple top. The big U.S. stocks’ Q1 results are critical to supporting or refuting this bearish technical picture. The SPX/SPY top 34 did enjoy superior market-cap appreciation from the ends of Q1’18 to Q1’19, averaging 12.8% gains which ran 1.7x those of the entire SPX. That exacerbated the concentration of capital in the largest SPX stocks, the mega-cap techs.

As Q1 ended, 5 of the 6 largest SPX stocks were Microsoft, Apple, Amazon, Alphabet, and Facebook. Together they accounted for a staggering 15.8% of this flagship index’s entire market cap, closing in on 1/6th! These companies are universally adored by investors, owned by the vast majority of all funds and constantly extolled in glowing terms in the financial media. Investors think mega-cap techs can do no wrong.

Last summer these incredible businesses were viewed as recession-proof, effectively impregnable. But even if there’s some truth to that, it doesn’t guarantee mega-cap-tech stock prices will weather a stock-market selloff. During that 19.8% SPX correction mostly in Q4, these 5 dominant SPX stocks and another SPX-top-34 tech darling Netflix averaged ugly 33.3% selloffs! They amplified the SPX’s decline by 1.7x.

No matter how amazing the sales growth among the mega-cap techs, they aren’t only not immune to SPX selloffs but their lofty stock prices make them more vulnerable. Overall the SPX/SPY top 34 companies reported Q1’19 revenues of $969.3b, which was 0.9% YoY higher than the top 34’s in Q1’18. That’s not great performance considering how universally-loved and -owned these companies are among nearly all funds.

Those 6 mega-cap tech stocks did far better, enjoying order-of-magnitude-better revenues growth of 9.9% YoY! Excluding them the rest of the SPX top 34 actually saw total sales slump 1.8% lower YoY, which sure doesn’t sound like a strong economy. If this trend of stalling or slowing revenue growth continues, profits growth will have to start falling sharply in future quarters. Earnings ultimately amplify sales trends.

Even more bearish, Wall Street analysts headed into Q1’19’s earnings season expecting all 500 SPX companies to enjoy 4.7% total revenues growth. But the top 34 that dominate the U.S. stock markets did much worse at 0.9% even with mega-cap techs included. That was definitely a sharp slowdown too, as the SPX top 34 saw 4.2% YoY sales growth in Q4’18. Slowing revenue growth is a real threat to the stock markets.

Remember the SPX surged dramatically in Q1, fueling quite-euphoric sentiment leading into quarter-end. At the same time traders mostly believed that a U.S.-China trade deal would soon be signed, removing the trade-war risks. High tariffs are a serious problem for the gigantic multinational companies leading the SPX, potentially heavily impacting sales. Yet revenue growth was already slowing even before this week!

Trump had twice delayed hiking U.S. tariffs on Chinese imports from 10% to 25%, a good-faith sign giving time for real trade-deal negotiations. But his patience ran out this past Sunday after China backtracked on key previoU.S. commitments. So Trump tweeted the current 10% U.S. tariffs on $200b of annual Chinese imports would surge to 25% today, and warned that 25% tariffs were coming “shortly” on another $325b!

China will retaliate as long as high U.S. tariffs remain in effect. That will really retard U.S. sales from top-34 SPX companies in that country. Beloved market-darling Apple is a great example. This second-biggest stock in the S&P 500 did $10.2b or 17.6% of its Q1’19 sales in China! The U.S.-China trade war heating up in a serious way portends even-weaker revenues going forward for the big U.S. stocks dominating the SPX.

The total operating cash flows generated by the top 34 SPX/SPY companies looked like a disaster in Q1, plummeting 64.4% YoY to $67.8b. Thankfully that is heavily skewed by a couple of the major U.S. banks. JPMorgan Chase and Citigroup reported staggering negative OCFs of $80.9b and $37.6b in Q1, due to colossal $123.1b and $30.4b negative changes in trading assets! This seems really confusing to me.

Mega-bank financials are fantastically-complex, and no one can hope to understand them unless deeply immersed in that world. I’ve been a certified public accountant for decades now, spending vast amounts of time buried in 10-Qs and 10-Ks to fuel my stock trading. Yet even with my background and experience I can’t interpret mega-bank results. It seems weird trading assets plummeted in Q1 as the SPX surged sharply.

But rather than getting bogged down in mega-bank arcania that may be impossible to comprehend by outsiders, we can just exclude the four SPX-top-34 mega-banks from our OCF analysis. They include JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. Without them, the rest of the SPX top 34 reported total OCFs of $163.2b in Q1’19. That was dead-flat ex-banks, up just 0.3% YoY from Q1’18’s OCFs.

So the big U.S. stocks’ operating-cash-flow generation really slowed too in Q1, stalling out compared to hefty 11.5% YoY growth in Q4’18. That’s another sign that the U.S. economy must be slowing despite the red-hot stock markets. That’s ominous and bearish considering the coming headwinds if the trade wars continue and if the stock markets roll over decisively. Future quarters’ business environments won’t be as good.

Earnings were a different story entirely last quarter, soaring dramatically among the SPX/SPY top 34. They totaled $149.8b, surging an enormous 36.1% YoY! But that was skewed way higher by Warren Buffett’s famous Berkshire Hathaway, the biggest SPX stock after the mega-cap techs. BRK reported a monster Q1 profit of $21.7b, compared to a $1.1b loss a year earlier. That accounted for 1/7th of the top 34’s total.

But Berkshire’s epic profits are due to the sharp stock-market rebound rally, not underlying operations. A new accounting rule that Warren Buffett hates and rails against at every opportunity requires unrealized capital gains and losses to be flushed through quarterly profits. Thus when the SPX plunged in Q4’18, BRK reported a colossal $25.4b GAAP loss. That was largely reversed in Q1’19 with its gigantic $21.7b gain.

Excluding the $16.1b of BRK’s Q1 profits that were mark-to-market stock-price gains, the SPX top 34’s total profits grew 21.5% YoY to $133.6b in Q1. That’s still impressive, but it masks some big problems on the corporate-earnings front. Those 6 elite mega-cap tech companies dominating the SPX actually saw their collective Q1 GAAP profits plunge 11.2% YoY! Apple, Alphabet, and Facebook suffered sharp declines.

Usually mega-cap tech stocks are the profits engine driving the entire SPX higher. If these market-darling companies that are universally-loved and -held struggled with earnings growth in Q1, what does that say about profits going forward? And again profits can be manipulated quarter-to-quarter by playing with all kinds of accounting estimates. So if anything corporate profits are overstated instead of understated.

One of Wall Street’s great farces is the game of comparing quarterly results to expectations instead of what they were in the comparable quarter a year earlier. Mighty Apple is a great example, reporting after the close on April 30th. Its Q1 earnings per share and sales of $2.47 and $58.0b came in ahead of Wall Street expectations of $2.37 and $57.5b. So Apple’s stock surged 4.9% the next day on those “great results”.

But that expectations bar had been lowered dramatically, which is the only reason Apple beat. On an absolute year-over-year basis compared to Q1’18, Q1’19 saw sales drop 5.1%, OCFs plummet 26.3%, and earnings plunge 16.4% YoY! That was quite weak, and couldn’t be considered good by any honest measure. In this recent Q1 earnings season, the fake expectations game obscured plenty of real weakness.

Yet overall SPX-top-34 profits growth still remained strong, with companies suffering drops offset by other companies seeing big jumps. But earnings can’t be considered in isolation, they are only relevant relative to underlying stock prices. Imagine you own a rental house and someone offers you $1000 a month to move in. The reasonableness of that earnings stream is totally dependent on the value of your property.

If your house is worth $100k, $1k a month looks great. But if it’s worth $1m, $1k a month is terrible. The profits anything generates are only measurable relative to the capital invested in that asset. The classic trailing-twelve-month price-to-earnings ratios show how expensive stock prices are relative to underlying corporate profits. Big SPX-top-34 earnings growth isn’t bullish if overall profits are low compared to stock prices.

At the end of Q1’19 proper before these Q1 results were reported, the SPX/SPY top 34 component stocks averaged TTM P/Es of 30.4x. That is definitely improving compared to the prior four quarters’ trend of 46.0x, 53.4x, 49.0x, and 39.7x. But 30.4x is still dangerously high absolutely. Over the past century-and-a-quarter or so, fair value for the U.S. stock markets was 14x. Double that at 28x is where bubble territory begins.

So the big U.S. stocks were literally trading at bubble valuations exiting Q1! Their stock prices were far too high relative to their underlying earnings production compared to almost all of U.S. stock-market history. And this wasn’t just a mega-cap-tech-stock thing, with these elite companies often being bid to really-high valuations compared to other sectors. The 6 mega-cap techs we’ve discussed indeed averaged a crazy 52.0x.

But the other 28 top-34-SPX companies remained very expensive near bubble territory even excluding the tech giants, averaging 25.8x! Even the strong Q1’19 earnings growth didn’t help much. At the end of April as those Q1 results started to work into TTM P/E calculations, the SPX top 34 averaged a slightly-higher P/E of 31.0x. Literal bubble valuations with stock markets trading near all-time record highs are ominous.

Just last Friday when the SPX closed right at its highest levels in history, I wrote a contrarian essay on these “Dangerous Stock Markets”. It explained how high valuations kill bull markets, summoning bears that are necessary to maul stock prices sideways to lower long enough for profits to catch up with lofty stock prices. These fearsome beasts are nothing to be trifled with, yet complacent traders mock them.

The SPX’s last couple bears that awoke and ravaged due to high valuations pummeled the SPX 49.1% lower in 2.6 years leading into October 2002, and 56.8% lower over 1.4 years leading into March 2009! Seeing big U.S. stocks’ prices cut in half or worse is common and expected in major bear markets. And there’s a decent chance the current bubble valuations in U.S. stock markets will soon look even more extreme.

Over the past several calendar years, earnings growth among all 500 SPX companies ran 9.3%, 16.2%, and 20.5%. This year even Wall Street analysts expect it to be flat at best. And if corporate revenues actually start shrinking due to mounting trade wars or rolling-over stock markets damaging confidence and spending, profits will amplify that downside. Declining SPX profits will proportionally boost valuations.

If the big U.S. stocks’ fundamentals deteriorate, the overdue bear reckoning after this monster bull is even more certain. Cash is king in bear markets, since its buying power grows. Investors who hold cash during a 50% bear market can double their holdings at the bottom by buying back their stocks at half-price. But cash doesn’t appreciate in value like gold, which actually grows wealth during major stock-market bears.

Gold investment demand surges as stock markets weaken, as we got a taste of in December. While the SPX plunged 9.2%, gold rallied 4.9% as investors flocked back. The gold miners’ stocks which leverage gold’s gains fared even better, with their leading index surging 10.7% higher. The last time a major SPX selloff awakened gold in the first half of 2016, it soared 30% higher fueling a massive 182% gold-stock upleg!

Absolutely essential in bear markets is cultivating excellent contrarian intelligence sources. That’s our specialty at Zeal. After decades studying the markets and trading, we really walk the contrarian walk. We buy low when few others will, so we can later sell high when few others can. While Wall Street will deny this coming stock-market bear all the way down, we will help you both understand it and prosper during it.

We’ve long published acclaimed weekly and monthly newsletters for speculators and investors. 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. As of Q1 we’ve recommended and realized 1089 newsletter stock trades since 2001, averaging annualized realized gains of +15.8%! That’s nearly double the long-term stock-market average. Subscribe today for just $12 per issue!

The bottom line is the big U.S. stocks’ Q1’19 results were pretty mixed despite the surging stock markets. Revenues and operating cash flows only grew slightly, which were sharp slowdowns from big surges in previous quarters. While earnings somehow defied sales to soar dramatically again, that disconnect can’t persist. A slowdown looked to be underway even before the U.S.-China trade war flared much hotter this week.

Even the surging corporate profits weren’t enough to rescue super-expensive stock markets from extreme bubble valuations. They are what spawn major bear markets, which are necessary to maul stock prices long enough for valuations to mean revert lower. Make no mistake, these overvalued stock markets are still an accident waiting to happen. Stock investors should diversify, adding substantial gold allocations.

Adam Hamilton, CPA

May 15, 2019

These record U.S. stock-market levels are very dangerous, riddled with extreme levels of euphoria and complacency. Largely thanks to the Fed, traders are convinced stocks can rally indefinitely. But stock prices are very expensive relative to underlying corporate earnings, with valuations back up near bubble levels. These are classic topping signs, with profits growth stalling and the Fed out of easy dovish ammunition.

Stock markets are forever cyclical, meandering in an endless series of bulls and bears. The latter phase of these cycles is inevitable, like winter following summer. Traders grow too excited in bull markets, and bid up stock prices far higher than their fundamentals support. Subsequent bear markets are necessary to eradicate unsustainable valuation excesses, forcing stock prices sideways to lower until profits catch up.

This latest bull market grew into a raging monster largely fueled by extreme Fed easing. At its latest all-time record peak hit just this week, the flagship US S&P 500 broad-market stock index (SPX) has soared 335.4% higher over 10.1 years! That makes for the second-biggest and first-longest bull in US history, only possible because it gorged on $3625b of quantitative-easing money printing by the Fed over 6.7 years.

That epic 5.3x mushrooming of the Fed’s balance sheet peaked in February 2015, when the SPX was just clawing over 2100. It soon coasted to a 2130.8 topping in May 2015, before trading sideways to lower for 13.7 months without Fed QE. Modest new highs weren’t seen until July 2016, after the U.K.’s Brexit-vote surprise kindled hopes for more central-bank easing. Another surprise event drove the final third of this bull.

The November 2016 elections were a Republican sweep, with Trump winning the presidency while his party controlled both chambers of Congress. So the SPX started surging to new record highs, initially on hopes for big tax cuts soon and later on record corporate tax cuts becoming law. That ultimately propelled the SPX to 2872.9 in late January 2018 and 2930.8 in late September 2018, lofty new all-time record highs.

But paraphrasing an ancient Biblical passage from Job, the Fed gave then the Fed took away. Right after the SPX peaked, the Fed ramped its year-old quantitative-tightening campaign to full speed in Q4’18. QT was supposed to unwind a large fraction of that $3625b of QE-conjured money, shrinking the Fed’s crazy-bloated balance sheet. $50b per month of QT monetary destruction had to be this QE-fueled bull’s death knell!

Indeed the stock markets crumbled under that Fed-tightening onslaught, plunging 19.8% over the next 3.1 months into late December 2018. That severe correction was right on the verge of crossing the -20% threshold into new-bear territory. Over a third of those serious losses happened in just 4 trading days after the Fed chairman declared full-speed QT was “on automatic pilot”. By that time the SPX was very oversold.

Stock-market extremes never last long, with big and sharp mean-reversion bounces following major selloffs. The SPX reversed hard and soared into early 2019, already 12.3% higher by late January. Then the Fed’s first policy decision after that stock-crushing QT-autopilot one saw this central bank completely cave to the stock markets. It removed references to further rate hikes and declared it was ready to adjust QT.

That dovishness unleashed more waves of momentum buying. By the eve of the Fed’s next meeting in mid-March, the SPX had rocketed 20.5% above its severe-correction near-bear low. But that wasn’t good enough for the Fed, which slashed its future-rate-hike outlook while declaring it would essentially stop QT by September 2019. That is very premature, implying less than 23% of the Fed’s total QE will be unwound!

That goosed the stock markets again, helping push the SPX to an enormous 25.3% rebound-rally gain by this week. At 2945.8, it had edged 0.5% above late September’s then-record peak. With stock markets more than regaining their big losses, euphoria and complacency exploded again. These herd emotions have proven dangerous in market history, marking major toppings including terminal bulls rolling over to bears.

Euphoria is simply “a strong feeling of happiness, confidence, or well-being”. It is always accompanied by complacency, which is “a feeling of contentment or self-satisfaction, especially when coupled with an unawareness of danger or trouble”. This perfectly describes the stock markets’ sentiment-scape in recent months. Speculators and investors just love these lofty stock prices, with virtually no fear of material selloffs.

While euphoria and complacency are ethereal and unmeasurable, they can be inferred. The classic VIX fear gauge is the most-popular way. It quantifies the implied volatility options traders expect in the SPX over the next month, as expressed through their collective trades. While a high VIX reveals fear, a low one shows the direct opposite which is complacency. In mid-April the VIX revisited ominous bull-slaying levels.

This chart superimposes the SPX over its VIX sentiment indicator over the past several years or so. This monster Fed-QE-fueled stock bull sure looks to be carving a massive triple top in its terminal phase. At best in late April, the SPX had merely clawed back 2.5% over its initial peak of late January 2018. That’s terrible progress across 15.1 months where the biggest corporate tax cuts in US history greatly boosted profits.

While the first two-thirds of this monster bull were directly driven by the Fed’s extreme QE, the final third was corporate-tax-cut driven. Starting with that November 2016 Republican sweep, there was enormous anticipation of what eventually became the Tax Cuts and Jobs Act. Signed into law in December 2017, it went into effect as 2018 dawned. Its centerpiece was slashing the US corporate tax rate from 35% to 21%.

The SPX surged 19.4% in 2017 in the thrall of taxphoria hopes, driving 62 new record-high closes out of 251 trading days! The first 18 trading days of 2018 saw another 14 more, catapulting both euphoria and complacency off the charts. The VIX slumped into the 9s early that peaking month, proving that fear was nonexistent. Virtually no one expected a selloff when the SPX peaked at 2872.9, when the VIX closed at 11.1.

But just when traders were convinced stock markets could rally indefinitely with no material selloffs, the SPX suddenly nosed over into its first correction in 2.0 years. While sharp yet shallow and short at a 10.2% loss in just 0.4 months, it was a warning shot. Even with elite SPX companies’ corporate profits expected to soar 20%+ that year due to those big tax cuts, stock markets were already too high to rally much.

After that minor flash correction, the SPX started marching higher again throughout 2018. It wasn’t able to eclipse January’s maiden peak until late August, and ultimately crested merely 2.0% above it in late September. Such meager gains again suggested the corporate tax cuts were nearly fully priced in during 2017, leaving little room for additional gains. The day the SPX peaked at 2930.8, the VIX closed at 11.8.

Once again traders’ euphoria and complacency were extreme. The pressure on contrarians to capitulate was immense. But given the extreme stock-market technicals, sentiment, and valuations, I stuck to my guns warning how dangerous the stock markets were. Just a week after that all-time record high in the SPX, I published an essay warning “Fed QT is Bull’s Death Knell” one trading day before QT hit terminal velocity.

Indeed the stock markets fell hard, plunging 19.8% over 3.1 months into late December! That correction was much larger and more menacing than early 2018’s, on the edge of formal bear-market territory. And it happened despite SPX companies’ earnings actually blasting 20.5% higher year-over-year in 2018. Two corrections, including a serious one, in one of the best corporate-profits years on record should give pause.

The stock markets were due for a sharp mean-reversion rebound higher after such a steep drop. But the Fed waxing hyper-dovish and killing both its rate-hike cycle and QT really artificially extended it. Just over half the total rebound rally came after the Fed utterly surrendered to stock traders starting in late January. Many larger SPX-rally days clustered around dovish Fed announcements, they really amplified this rally.

It looked and felt exactly like a bear-market rally, the biggest and fastest ever witnessed in stock markets. The SPX soared in a symmetrical V-bounce out of late December’s deep lows. Those gains were front-loaded, fast initially but fading in recent months despite the Fed’s super-dovish jawboning. That severe near-bear correction that spawned this rally also fit the definition of a waterfall decline, an ominous omen.

They are 15%+ SPX selloffs without any interrupting countertrend rallies exceeding 5%. Since 1946 this had happened only 19 previous times. After every single past selloff, 100% of the time, the SPX retested its waterfall-decline lows! All 19 happened in bear markets. After these retests, fully 15 of the 19 were followed by new lower lows as those bears deepened. Only 4 of the 19 waterfall retests climaxed their bears.

So market history is crystal-clear in warning that the wild stock-market action of the past 7.3 months is exceedingly dangerous technically. Yet euphoria and complacency still exploded again in March and April as the SPX kept stretching skywards. By mid-April as the SPX clawed back up to 2907.4, the VIX fell back under 12.0 on close. Those were the lowest levels of fear seen since October 3rd, a bearish portent.

While that was a couple weeks after the SPX’s late-September then-record peak, this leading stock index was still just 0.2% lower. The selling that would grow into the severe near-bear correction began the very next day, and snowballed from there. Right when traders again delude themselves into believing stock markets can rally indefinitely, the hard reality of market cycles slams them like a sledgehammer to the skull.

Extreme levels of euphoria and complacency are always very dangerous, presaging major stock-market selloffs. Low VIX levels following record or near-record stock-market highs should not be trifled with, but considered a dire warning of serious downside risks. Very-high technicals breed very-lopsided sentiment, blinding traders to markets’ perpetual cyclicality. Today’s risks are compounded by near-bubble valuations.

For a century-and-a-quarter or so before the Fed’s insane QE experiment starting in late 2008, the US stock markets had averaged trailing-twelve-month price-to-earnings ratios around 14x earnings. That is considered fair-value, which makes sense. The reciprocal of 14x is 7.1%, which is a fair rate for both investors to earn to let companies use their saved capital and for companies to pay to use those same funds.

But valuations oscillate well above and below fair value in great waves that correspond with bull and bear markets. In bulls stocks are enthusiastically bid to high valuations not justified by their underlying profits. Valuation extremes start at twice fair value, 28x trailing earnings which is formally bubble territory. That necessitates bears to maul stock prices long enough for earnings to catch up, but stocks usually overshoot.

While major bull markets end above 28x, major bear markets often end between 7x to 10x. That’s the time investors should throw all their capital at the stock markets, when stocks are dirt-cheap and deeply out of favor. But instead they foolishly buy high near bull-market tops, which often leads to selling low later at catastrophic losses. The SPX valuations during this 15-month triple-top span have been scary-high.

This next chart shows the actual SPX in red, superimposed over the average trailing-twelve-month price-to-earnings ratios of its 500 elite companies. Their simple average at the end of every month is shown in light blue, and is what I’m using in this essay. The dark-blue line instead weights SPX-component P/Es by their companies’ market capitalizations. The white line shows where the SPX would be at 14x fair-value.

Remember the final third of this monster bull erupted on taxphoria after Trump won the presidency. But following trillions of dollars of QE before that, the SPX wasn’t cheap heading into November 2016. These elite stocks averaged TTM P/Es of 26.3x, just shy of 28x bubble territory. Interestingly that was about the same valuation as the 25.9x when QE ended in February 2015. Stocks had long been very expensive.

SPX corporate earnings did rise nicely in 2017, up about 16%. Republicans streamlining regulations was a factor, but more important was the widespread optimism from stock markets surging to endless new record highs. But the problem was stocks were already so overvalued that higher profits barely made a dent. At best that year the fair-value SPX at 14x hit 1296.0, a staggering 52% below the SPX’s 2017 high!

The SPX first crossed that 28x bubble threshold in late November 2016 after stocks surged higher on that Republican sweep. Valuations hung around 28x until July 2017 when they started climbing even higher. By late January 2018 just after the SPX’s initial peak, its elite companies were averaging TTM P/Es way up at 31.8x! While bubble valuations can persist while euphoria lasts, they are very dangerous for stocks.

SPX corporate-earnings growth in 2018 was amazing, exceeding 20% year-over-year thanks to those record corporate tax cuts. The four quarters of 2018 were the only ones comparing post-tax-cut and pre-tax-cut profits, an enormous one-off discontinuity. Yet damningly the valuations still didn’t retreat, in late September just after the SPX’s record peak its components were still averaging extreme 31.4x TTM P/Es.

That severe near-bear correction largely in Q4 last year certainly helped, dragging valuations back down out of bubble territory. But even at the end of December just after the lows, the SPX was still sporting a 26.1x valuation. That was near bubble territory, right around the levels just before Trump was elected. No bear market would end its predations and start hibernating while valuations remained so darned high!

In recent months many Wall Street apologists have claimed that severe correction was effectively a very-short-lived bear market since it was so close to 20% on a closing basis. They argue that means a new bull is underway that can run for years more. But bears don’t give up their ghosts after a single selloff with price-to-earnings ratios still near bubble levels. Bears ravage until valuations are mauled back under 14x.

Interestingly valuations haven’t soared back up with the massive rebound rally so far this year. By the end of April, the SPX components’ average P/E had only returned to 27.5x. That’s not greatly above the late-December levels. This was due to blowout Q4’18 earnings from SPX companies, the last quarter with profits compared across the Tax Cuts and Jobs Act. Q4’17 also rolled off, which the TCJA heavily distorted.

But 27.5x is still just under bubble territory, dangerously-expensive levels for stocks achieving record highs again. If the inevitable bear following the past decade’s enormous Fed-inflated monster bull just pushed stocks back down to 14x fair value, the SPX would have to plunge way back near 1400. That’s a heck of a long ways down from here, a 52% drop. Cutting stocks in half is right in line with bear-market precedent.

The SPX’s last bear market ran from October 2007 to March 2009, and pummeled this leading American stock index a gut-wrenching 56.8% lower in 1.4 years. That bear-market bottom birthed this current bull, when the SPX traded down to 12.6x earnings. Before that the SPX suffered another bear from March 2000 to October 2002, a 49.1% drop over 2.6 years. So 50%ish SPX losses are par for the course in bears!

Several factors could make this long-overdue next bear even worse. In 2016, 2017, and 2018, the elite SPX companies’ profits grew 9.3%, 16.2%, and 20.5% YoY. This year even Wall Street is forecasting earnings to be flat at best. There’s a real possibility they will even contract in 2019, the first year comparing post-tax-cut quarters. Stalling or shrinking corporate profits make near-bubble valuations even more extreme.

Lower profits actually push valuations even higher, increasing the valuation pressure for a major bear market. And with average month-end SPX TTM P/Es running 30.5x in 2018 at 20% profits growth, there’s no way similar high valuations will fly this year with zero profits growth. The more quarterly earnings fail to climb, the more worried traders will get over high stock prices and the more likely they will start selling.

And after the second-largest and first-longest bull market in US stock-market history, mostly driven by extreme Fed easing no less, the subsequent bear should be proportionally massive. There’s a fairly-high chance this bear won’t stop brutalizing stocks until the average SPX P/E falls near half fair-value around 7x earnings. That’s where the biggest bears in the past have ended, valuations overshot way under 14x.

Finally the Fed is going to have a hard time riding to the rescue again since it has expended all its easy dovish ammunition. It really only has three options left for another dovish surprise, and the latter two are very serious decisions. Top Fed officials’ outlook for rates in their collective dot-plot forecast can still be lowered to show cuts coming. But since these guys downplay the dot plot, that won’t mollify traders for long.

That leaves actually cutting rates or birthing QE4, which are huge course changes that the Fed can’t take lightly or revoke without panicking stock markets! With the Fed just about out of dovish rabbits to pull out of its hat, it doesn’t have many options to slow the selling when stock markets inevitably turn south again. Cutting rates or restarting QE may even exacerbate any selloff, worrying traders about what so scared the Fed.

The overdue bear market is still coming, make no mistake. Extreme technicals, sentiment, and valuations assure it. Investors really need to lighten up on their stock-heavy portfolios, and protect themselves with cash and gold. Holding cash through a 50% bear market allows investors to buy back their stocks at half-price, doubling their holdings. But unlike cash gold actually appreciates in value during bears, growing weath.

Absolutely essential in bear markets is cultivating excellent contrarian intelligence sources. That’s our specialty at Zeal. After decades studying the markets and trading, we really walk the contrarian walk. We buy low when few others will, so we can later sell high when few others can. While Wall Street will deny this coming stock-market bear all the way down, we will help you both understand it and prosper during it.

The bottom line is these stock markets are very dangerous. A monster bull has been topping over the past year-and-quarter, leading to extreme technicals, sentiment, and valuations. Traders’ euphoria and complacency have been running at bull-slaying levels, while valuations remain way up near perilous bubble territory. All this is happening as corporate profits flatline after surging dramatically on the corporate tax cuts.

Like after every past waterfall decline, the stock markets are due to roll over and retest their deep late-December lows. Odds are they will fail, confirming a major new bear market. And the Fed doesn’t have much dovish ammunition left to retard the heavy selling. Gold investment demand will surge as stocks finally face their reckoning after this artificially-amplified bull. That will push gold and its miners’ stocks far higher.

Adam Hamilton, CPA

May 6, 2019

Gold has failed to gain traction over the past couple months, normally a seasonally-strong time. That has really weighed on sentiment, leaving traders increasingly bearish. Gold investment demand has flagged dramatically with lofty stock markets spewing great euphoria. That’s given gold-futures speculators the run of the market, where they have sold aggressively including extreme shorting. But that’s actually very bullish.

Gold price action is driven by the collective trading of both investors and speculators. The former control vast amounts of capital, which dominates gold prices when it is migrating in or out. But investors’ interest in gold withers when stock markets are super-high. When stocks seemingly do nothing but rally, there’s no perceived need to prudently diversify stock-heavy portfolios with counter-moving gold. It falls out of favor.

Extreme stock-market euphoria is gold’s primary problem now, acting like kryptonite for gold investment. This week the flagship US S&P 500 broad-market stock index clawed back to a new all-time record high. That extended its monster rebound rally since late December’s near-bear lows to 24.8%! The farther the stock markets advance, the more gold is forgotten. Investors have relentlessly pulled capital back out of gold.

The best proxy for gold investment demand is the physical gold-bullion holdings of the world’s dominant gold exchange-traded fund, the American GLD SPDR Gold Shares. In early October soon after the S&P 500 peaked but before it started plunging in its severe 19.8% correction, GLD’s holdings slumped to a deep 2.6-year low of 730.2 metric tons. I explained these stock-market and GLD dynamics in depth last week.

Then the very day the stock markets first dropped hard, investors remembered gold. Over the next 3.8 months into late January, GLD’s holdings surged 12.8% to 823.9t on heavy capital inflows from American stock investors. That helped push gold 8.9% higher in that span. But as euphoria came roaring back as the S&P 500 rebounded sharply from its deep selloff, gold’s relative luster again faded in investors’ eyes.

Between late January and this week, they’ve dumped GLD shares much faster than gold itself was being sold. That has forced GLD’s holdings 9.2% lower in the last 2.8 months to 747.9t, helping push gold’s price down 2.7%. Over 4/5ths of gold’s stock-market-correction-driven investment surge has now been erased, leaving GLD’s holdings just 2.4% above their secular lows of early October before stocks plunged!

The gold-investment selling via GLD in recent months has been relentless, especially in February and now April. During February’s 19 trading days, 13 saw GLD draws averaging 0.4%. And as of the middle of this week, April’s 17 trading days so far have seen 12 GLD-draw days also averaging 0.4%. Gold has faced unyielding selling pressure from American stock investors as the S&P 500 levitated ever higher.

There’s an old proverb stating “when the cat’s away, the mice will play”. That concept perfectly applies to the gold market. When investors are away, the gold-futures speculators will play. Investors’ capital just dwarfs speculators’, so when gold investment demand is robust spec trading is drowned out and usually irrelevant. But when investors aren’t interested, the gold-price impact of gold-futures trading is magnified.

These traders already punch far above their weights, their capital being far more potent than investors’ on a dollar-for-dollar basis. Gold futures allow extreme leverage far beyond anything legal in the stock markets. Each gold-futures contract controls 100 troy ounces of gold, which is worth $127,500 at $1275. But gold-futures speculators are only required to keep $3,400 cash in their accounts for each gold-futures contract.

That gives them absurd maximum leverage up to 37.5x, compared to the decades-old 2.0x limit in stock markets! At 30x leverage, every dollar deployed in gold futures has literally 30x the price impact on gold as another dollar used to buy gold outright. Just $1 of gold-futures capital flows yield the same gold-price result as $30 of investment capital flows. Gold-futures trading’s impact on gold is wildly disproportionate.

Further amplifying gold-futures speculators’ outsized influence, the American gold-futures price is gold’s global reference one. So when heavy gold-futures selling blasts that headline price lower, the resulting negative psychology quickly infects the rest of the world gold markets. Gold-futures trading is effectively the tail that wags the gold-investment dog. This vexing problem shouldn’t be allowed to exist, but it does.

Over the past couple months as mounting stock-market euphoria seduced investment capital out of gold, speculators’ gold-futures selling has soared to extremes at times. That really exacerbated the counter-seasonal downside pressure on gold prices. This heavy selling is evident in the weekly Commitments of Traders reports from the CFTC, which detail speculators’ collective long and short positions in gold futures.

This chart superimposes several years of daily gold prices in blue over the weekly CoT data. Total spec long contracts are shown in greed, and total shorts in red. The falling longs and rising shorts since gold last peaked near $1341 in mid-February are a big reason for its recent weakness. But the lower specs push their longs and the higher they ramp their shorts, the more bullish gold’s near-term outlook grows.

A couple weeks ago I dug deeper into gold futures’ impact on gold prices in recent years, so I’m going to focus on recent months here. On February 19th when gold surged to $1341, total spec longs and shorts were running 305.0k and 138.5k contracts. While those longs remained way below recent years’ peaks, they were still near the highest levels seen in the past year. I developed a simple metric to quantify that.

This chart shows the general rule on gold-futures trading driving gold price action. When speculators are buying by either adding new longs or covering existing shorts, gold rallies. When they are selling existing longs or adding new shorts, gold retreats. So the lower spec longs, and the higher spec shorts, the more bullish gold’s near-term outlook. The opposite is also true, higher longs and lower shorts are bearish for gold.

Gold’s biggest uplegs in recent years emerged from relatively-low spec longs and/or relatively-high spec shorts. Figuring out how low or high both sides of this trade happen to be can be done by looking at current levels compared to their trading ranges over the past year. When gold peaked at $1341 9 weeks ago, total spec longs were running 96% up into their 52-week trading range. That was certainly relatively high.

That left speculators little room to buy more gold-futures long contracts unless they expanded their total capital allocation back to bigger prior-year levels. If they didn’t, they had a lot more room to sell than to buy. That same CoT week, total spec shorts were running 32% up into their own past-year trading range. Thus the short-side guys had probable remaining room to cover 1/3rd of their shorts, which was relatively low.

If investors had been buying gold, if the mounting stock euphoria hadn’t been sucking capital out of gold, speculators’ gold-futures positioning wouldn’t have mattered much. But with investors missing in action, the gold-futures traders were ruling the roost. And they started selling heavily in the CoT week ending on Tuesday March 5th. Be aware that CoT weeks always run from Tuesday closes to Tuesday closes.

Gold began that CoT week looking great, trading at $1328. But speculators started selling gold futures, pushing gold down towards $1300. That is a hugely-important psychological level for gold, which seems to attract gold-futures stop losses like gravity. So as $1300 neared and failed, gold-futures selling ramped up massively. That CoT week ended with specs dumping 34.0k long contracts while adding 11.9k short ones!

A 20k+ contract change in either spec longs or shorts in a single CoT week is the threshold where huge begins. 20k contracts control the equivalent of 62.2 metric tons of gold, way too much for normal markets to absorb in a single week. That big bout of spec gold-futures long selling that kicked off the last couple months’ gold slump was exceptional. At that point 1053 CoT weeks had passed since early 1999, a long span.

That CoT week’s spec long selling ranked as the 20th largest ever witnessed, a rare event. And in terms of speculators’ total gold-futures selling including both longs and shorts, it was the 11th largest on record! It’s important to realize that gold-futures selling of that magnitude is unusual, unsustainable, and self-limiting. The lower spec longs and the higher spec shorts, the less gold futures these traders have left to sell.

That extreme selling blitz puking out the equivalent of 142.6t of gold in a single CoT week would probably have been the end of it without the growing stock-market euphoria. Gold usually carves a major seasonal low in mid-March before powering higher in its spring rally. But with the S&P 500 levitating and investors still selling gold on balance, sentiment stayed fairly bearish so gold-futures specs had the run of the market.

Still gold defied the surging stock markets to rally like usual, climbing back to $1322 by March 25th. The gold-futures speculators were responsible, adding 20.4k new long contracts while covering 15.4k short ones in the CoT week ending a day later. That was the equivalent of 111.3t of gold buying. But over the next CoT week, that reversed into heavy selling. That again surrounded gold plunging back under $1300.

For decades now I’ve intensely studied and closely watched the markets in real-time. I get up at 5am and follow the data and news feeds until 4pm or later. Usually when gold or the stock markets make some big intraday move, it’s explainable by news or data. Neither gold’s 1.7% plunge on March 1st, nor its later 1.4% drop on March 28th, had any apparent catalysts! But both days saw gold break back below $1300.

Running extreme leverage up to 37.5x, gold-futures speculators can’t afford to be wrong for long. A mere 2.7% gold price move against their positions would wipe out 100% of their capital risked at such leverage! So these guys have to maintain an ultra-short-term price-dominated focus, and they have to run tight stop losses or risk quick ruin. Long-side gold-futures traders have long clustered stops near that key $1300 level.

So when gold falls back through $1300 from above, mechanical stop-loss orders start triggering resulting in forced long selling. That quickly pushes gold even lower, tripping more stops to fuel cascading selling. By the time the dust settled in that CoT week ending on April 2nd with gold battered back to $1291, total spec gold-futures longs had plummeted 35.3k contracts! They weren’t short selling then, as shorts fell 2.1k.

That massive long dump was again exceptional, ranking as the 18th largest ever witnessed out of 1057 CoT weeks since early 1999 at that point. Speculators can’t maintain such crazy selling rates for long, as just 7 weeks at that pace would drive their longs to zero which will never happen. For the second time in 4 CoT weeks, extreme spec gold-futures long selling hammered gold from well above $1300 to back below.

But gold soon started recovering even while investors mesmerized by stock euphoria exited. Gold again climbed up over $1300, hitting $1308 on April 10th. This metal really wants to power higher even with investment capital fleeing to chase the lofty stock markets. Yet once again extreme gold-futures selling erupted in the latest CoT week reported before this essay was published, which ended last Tuesday April 16th.

For the third time in 7 weeks, extreme gold-futures selling flared as gold passed back down below $1300. Once again there were no significant data or news catalysts around the world, gold-futures selling just snowballed to a stunning degree. That CoT week total spec longs dropped another 17.5k contracts, close to that 20k+ huge threshold. But total spec shorts exploded an utterly-astounding 36.9k contracts higher!

That single-CoT-week shorting was so crazy it ranked as the 2nd highest ever witnessed out of the 1059 CoT weeks since early 1999! The only bigger shorting week was back in mid-November 2015, soon after the Fed telegraphed its first rate hike of the recent cycle. Yet that record shorting would soon prove very bullish for gold, birthing a major bull market. Gold surged 29.9% higher in 6.7 months in the first half of 2016.

Considered together in that latest reported CoT week ending April 16th, speculators’ total long and short selling rocketed to 54.4k contracts! That is the 5th highest on record, incredibly extreme. The 1st and 4th weighed in at 70.4k and 56.7k, and both occurred in December 2017. That record gold-futures selling also proved very bullish, as gold soon surged sharply to challenge a major bull-market breakout above $1350.

Big gold-futures selling is always bullish for gold, because those bearish bets will soon be unwound with proportional buying. This current episode won’t prove an exception, especially with near-record shorting. While making bullish long-side gold-futures trades is voluntary, short covering is mandatory. Shorting is effectively borrowing gold futures that traders don’t own, those contracts have to be repurchased and paid back.

Between gold’s latest interim high in mid-February to this extreme latest-reported CoT week, total spec longs collapsed 68.5k contracts or 22.5%. That’s a lot in a short span, leaving longs running just 32% up into their past-year trading range. That means specs easily have room to do over 2/3rds of their likely near-term long buying, and much more if higher gold prices excite traders enough to bet at previous years’ scales.

And over the last 8 reported CoT weeks, total spec shorts rose 19.5k contracts. That left them 37% up into their own past-year trading range. That’s not high, but it still leaves a lot more shorts that have to be covered with offsetting buying as gold reverses higher again. Total spec selling since February 19th ran 88.0k contracts, the equivalent of 273.9t of gold. That’s helped force gold 4.8% lower from $1341 to $1276.

The bright side of all this gold-futures selling is it is inherently self-limiting and self-correcting. The more these traders sell, the less they have left to sell. And the higher the odds they will start buying in a big way to mean revert their recent bearish bets back to normal. One of these days some catalyst will arise that will spark major spec gold-futures buying. Gold will surge sharply for weeks as buying normalizes bets.

The biggest casualty of recent months’ extreme near-record gold-futures selling was the gold miners’ stocks, which amplify moves in gold. The major gold miners of the leading GDX VanEck Vectors Gold Miners ETF tend to leverage gold’s action by 2x to 3x. That has weighed on gold-stock prices and psychology since mid-February. GDX slumped while gold-futures speculators battered the gold price lower.

Despite that extreme gold-futures selling nearing records, and incredible stock-market euphoria stunting gold investment demand, the gold stocks have weathered this storm really well. GDX did knife back under its upleg’s support, nearing its 200-day moving average which is much-stronger support. But the major gold stocks have proven impressively resilient overall, largely consolidating high as gold swooned.

Again gold was pounded 4.8% lower over those 8 CoT weeks starting near $1341 and ending way down near $1276. At 2x to 3x normal leverage, the gold stocks would’ve plunged almost 10% to 15%. Yet over that exact span GDX merely slid 5.7%, just 1.2x gold’s loss! And GDX’s leverage was healthy before that as gold rallied, running 2.8x at best by mid-February. The gold stocks have really been holding their own.

Gold stocks are set to surge again once gold reverses decisively higher, which is increasingly likely any day now. These lofty euphoric stock markets are going to inevitably encounter some catalyst sparking significant selling, which will snowball after such a massive and long rally steeped in such epic complacency. Gold investment demand will turn on a dime as stock markets roll over, just like back in early October.

And when gold starts moving higher, the hyper-leveraged gold-futures speculators will rush to buy and pile on to its upside momentum. And after slashing their longs and ramping their shorts over the past couple months, they have major buying to do to reestablish bullish positioning relative to gold to ride its next rally. As leveraged gold-futures capital inflows force gold higher, gold stocks will really amplify its gains.

The last time major gold investment buying lined up with major gold-futures buying by the speculators was in roughly the first half of 2016. That catapulted gold 29.9% higher in 6.7 months kicking off this bull. The major gold stocks as measured by GDX soared 151.2% in essentially that same span, amplifying the big gold gains by 5.1x. Gold stocks are the place to be when traders are pouring capital back into gold!

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. We’ve added plenty of new trades since mid-February as older ones were stopped out, which are ready to surge much higher as gold recovers.

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The bottom line is gold has been bludgeoned by extreme gold-futures selling in the past couple months, culminating in near-record shorting. That’s what forced gold lower during its usual spring-rally timeframe. With investors seduced by the lofty euphoric stock markets, gold-futures speculators have been running roughshod over gold prices. But their heavy selling is self-limiting, and will reverse into proportional buying.

Speculators’ big bearish shift in gold-futures positioning will have to be normalized, resulting in big buying that will push gold higher. That upside momentum could really grow, especially when stock markets roll over and again rekindle gold investment demand. The biggest gains as gold mean reverts back higher will come in the stocks of its miners. They’ve proven resilient as gold swooned, and are poised to surge again.

Adam Hamilton, CPA

April 30, 2019

The great euphoria emanating from these near-record-high stock markets is breathtaking. Traders are again convinced stocks do nothing but rally indefinitely. That everything-is-awesome mindset has stunted gold’s latest upleg, since there’s no perceived need for prudently diversifying stock-heavy portfolios. But that psychology can change fast, as we saw a half-year ago. Gold investment roars back as stocks roll over.

The word “euphoria” is widely misunderstood, often confused with “mania.” The latter is when stocks rocket vertically in blowoff tops, and is defined as “an excessively intense enthusiasm, interest, or desire”. The US stock markets certainly aren’t in a mania. At its latest high last Friday, the flagship U.S. S&P 500 broad-market stock index (SPX) had only edged up 1.2% over the past 14.5 months. That’s not parabolic.

The closest thing to a mania seen in recent years was the SPX’s 18.4% surge over just 5.3 months that led into its initial January 2018 peak. Traders were ecstatic about Republicans’ coming major corporate tax cuts, and aggressively piled into stocks. While euphoria accompanies manias, it is entirely different. It is simply “a strong feeling of happiness, confidence, or well-being”. That psychology is universal today.

Traders have fully persuaded themselves that these stock markets have virtually no material downside risks. Like all sentiment, that’s the direct result of recent price action. These beliefs were last seen in late September and early October. The SPX had just hit a dazzling all-time record high, extending its monster bull market to 333.2% gains over 9.5 years. That was the second-biggest and first-longest in U.S. history!

Gold was deeply out of favor near that last SPX topping too. As a rare counter-moving asset that tends to rally when stock markets weaken, gold investment demand wanes when stock euphoria grows extreme. The whole discipline of portfolio diversification is based on acknowledging that stock markets rise and fall. Since investors can’t know when the next major stock-market selloff will erupt, they keep some non-stock holdings.

But euphoria blinds traders to long centuries of financial wisdom. They tend to extrapolate present conditions out into infinity, assuming they will last indefinitely. But betting any trend will run forever is just plain foolish, as markets are forever cyclical. “Complacency” always accompanies euphoria, “a feeling of contentment or self-satisfaction, especially when coupled with an unawareness of danger or trouble”.

Soon after traders overwhelmingly believe major selloffs are extinct, the next one pummels them. The endless stock-market cycles reassert themselves with a vengeance, punishing the scoffers. The severe correction after late-September’s peak is a textbook example. Over the next 3.1 months into Christmas Eve, the SPX plunged 19.8%! That was right on the verge of confirming a new bear at its -20% threshold.

Traders were confronted with the painful truth that stock markets don’t rally forever, that major selloffs are inevitable. So gold investment demand surged as investors rushed to start diversifying their bleeding stock-dominated portfolios. Major stock-market plunges are always followed by big and sharp rebound rallies. Just 5 weeks after those deep near-bear lows, the SPX had blasted 15.0% higher by the end of January.

That’s when euphoria and complacency started to return. These perilous herd emotions strengthened with every daily SPX rally over the past several months or so. The higher the stock markets bounced, the more selloff fears faded. That left portfolio diversification and gold investment increasingly out of favor again. The result is today’s extreme euphoria resembles late September’s, traders don’t have a care in the world.

The SPX’s massive rebound rally had extended to 23.7% over 3.6 months, recovering over 19/20ths of the preceding severe-correction losses. The SPX had soared back to within just 0.8% of its record peak of 6.7 months earlier! The stocks-to-the-moon zeitgeist had returned in an extreme way. The VIX hadn’t been lower since early October, when the SPX still lingered merely 0.2% under its unprecedented crest.

So per the leading approximation, traders’ current euphoria and fear have reverted right back to their very same high and low levels just before the last major SPX selloff! That’s why gold has slumped in recent weeks. Investors forget about it when they come to believe stock markets’ downside risks have vanished. When they buy into that peaking delusion that stocks can rally indefinitely, there’s no perceived need for gold.

This psychology creates an inverse relationship between stock-market levels and gold. It becomes most-pronounced when stock markets are near record highs generating great euphoria. This chart shows how the SPX and gold have traded over the past several years or so. Ever since that mania-like SPX surge into late January 2018 on corporate-tax-cut hopes, gold has generally meandered in opposition to stock markets.

The greater stock-market euphoria, for the most part the weaker gold investment demand and thus gold prices. And of course euphoria is a direct function of how high the stock markets are. The SPX has surged to record and near-record levels 3 times over the past 15 months or so. It peaked at 2872.9 in late January 2018, 2930.8 in late September 2018, and has shot as high as 2907.4 so far in mid-April 2019.

These two confirmed major toppings along with today’s likely third averaged 2903.7, so call it 2900. The SPX is now trading just slightly above January 2018 levels, despite last year being one of the greatest in history for corporate-profits growth. The underlying earnings of the 500 elite SPX companies soared well over 20% in 2018! The SPX should’ve surged proportionally on such strong underlying fundamentals.

But it didn’t, mostly grinding sideways to lower. The U.S. stock markets were already wildly overvalued, spending most of last year trading literally in bubble territory. That’s 28x+ in trailing-twelve-month price-to-earnings-ratio terms, twice historical fair value at 14x. Stocks were already far too expensive to bid to major new highs, a dangerous problem which persists in their latest quarterly results. And 2018 was one-off.

Its four quarters were the only ones comparing pre-tax-cut and post-tax-cut results. That unprecedented discontinuity is the only reason earnings growth was so enormous last year. Profits are expected to stall out this year at best, and likely shrink. All quarterly comparisons going forward already include those big corporate tax cuts. So if the SPX couldn’t materially rally even in 2018, it’s in a world of trouble this year.

In December 2017 just before the corporate tax cuts kicked in, the 500 SPX stocks traded at a simple-average TTM P/E ratio of 30.7x. At the end of March 2019, that had merely retreated modestly to 26.3x which is still just under perilous bubble territory. Without strong double-digit earnings growth, such rich stock valuation levels won’t be sustainable for long. That’s great news for gold’s investment demand and prices.

The first time the SPX topped in January 2018, gold’s powerful upleg stalled just shy of breaking out to new bull-market highs. Gold held those strong levels until the SPX started powering higher again, which quickly rekindled euphoria dousing portfolio diversification. Gold suffered a major correction as the SPX challenged and exceeded new records into September 2018. Gold languished near lows as the SPX peaked.

Gold investment demand didn’t flare again to force gold higher until the SPX decisively rolled over from those all-time record highs. Once the stock markets started falling long enough and far enough to scare traders into remembering stocks can fall too, gold investment demand surged pushing this metal’s prices much higher. Gold was nearing another breakout before stock-market euphoria grew extreme again.

That’s why gold’s latest upleg stalled in recent weeks, why its price has slumped after nearing another major bull-market breakout. Gold has actually shown remarkable resiliency considering stock euphoria soaring right back up to early-October extremes. Last Friday when the VIX fell under 12.0 on close, gold was trading near $1291. That was way better than early October’s $1198 the last time the VIX traded that low.

Stock-market psychology’s primary impact on gold is sentimental. The higher stocks and the greater the herd belief they will keep rallying, the more gold interest and investment demand fade. But there’s also a way to measure capital flows into and out of gold from American stock investors. That is through the gold-bullion holdings of the world’s leading and dominant gold exchange-traded fund, the GLD SPDR Gold Shares.

GLD is a behemoth, holding 752.9 metric tons of physical gold bullion in trust for its shareholders this week. According to the World Gold Council, GLD is the world’s biggest gold ETF by far. At the end of Q4’18 its gold holdings were 2.8x larger than its next-biggest competitor’s. GLD commanded nearly 3/7ths of the total gold bullion held by the world’s top-10-largest physical-gold-backed ETFs, a vast amount!

GLD’s mission is to track the gold price, to give stock traders easy access to gold exposure. This is only possible if GLD can vent excess supply and demand for its shares directly into the global gold market, as the supply and demand for GLD shares is independent of gold’s own. GLD prices can’t mirror gold prices unless this ETF is able to buy and sell physical gold bullion to equalize supply and demand, which it does daily.

It also reports its total gold holdings daily, allowing traders to see whether American stock-market capital is flowing into or out of gold. When GLD’s holdings are rising, investors are buying gold. When they are falling, investors are selling gold. The capital flows into and out of GLD are heavily influenced by stock-market fortunes, stunted when euphoria grows extreme. Gold investment has suffered with the SPX so high.

Understanding how these capital flows work is important. When traders buy GLD shares faster than gold itself is being bought, GLD’s price threatens to decouple from gold to the upside. GLD’s managers avert this by shunting that excess GLD-share demand directly into gold itself. They issue enough new GLD shares to offset that differential demand, and use the proceeds to buy more physical gold bullion to hold in trust.

Conversely when GLD shares are being sold faster than gold, GLD’s price will soon break away from gold on the downside. GLD’s managers stave that off by buying back its shares to sop up that excess supply. The capital necessary to finance those repurchases is obtained by selling some of GLD’s physical-gold-bullion holdings. So rising and falling GLD holdings show stock-market capital migrating into and out of gold.

This chart superimposes GLD’s daily gold holdings in metric tons over the closing gold price. They are well-correlated with gold, showing American stock traders’ GLD trading heavily influences how gold is faring. Each calendar quarter’s gold-price percentage change, and both the percentage and absolute changes in GLD’s holdings, are noted. Over the past year in extreme SPX euphoria, GLD has driven gold.

Incredibly GLD’s and thus American stock traders’ huge impact on the gold price is often not understood. Overlooking it is a grave error, greatly hobbling chances of multiplying wealth in gold. To show how dominant GLD is, consider some of the larger quarterly gold moves of this young bull born from deep 6.1-year secular lows in mid-December 2015. GLD’s holdings languished near 7.3-year lows at that same time.

In Q1’16 gold surged 16.1% after the first SPX corrections in 3.6 years made traders remember gold’s crucial role in portfolio diversification. They flooded into GLD shares at dizzying rates, catapulting its holdings 27.5% or 176.9t higher that quarter! Per the latest comprehensive fundamental data from the World Gold Council, GLD’s build accounted for 84% of the year-over-year growth in total global gold demand!

In Q2’16 that massive gold upleg continued, pushing gold another 7.4% higher. GLD’s holdings surged another 16.0% or 130.8t higher on heavy differential buying by American traders. That GLD build alone ran 106% of gold’s total YoY worldwide demand growth! Had U.S. stock-market capital not been flowing into gold via GLD, this gold bull never would’ve existed. Q4’16’s gold plunge drove home that critical point.

After Trump won the presidency that quarter, stock markets surged on hopes for big tax cuts soon with Republicans controlling the U.S. government. Euphoria soared with the SPX, leading investors to jettison gold and chase stocks. Gold plunged 12.7% that quarter, driven by a huge 13.3% or 125.8t draw in GLD’s holdings. That selling was a whopping 112% of the total YoY decline in global gold demand that quarter!

While American stock traders certainly aren’t the only gold investors, they command vast capital that has really moved gold in recent years. Gold’s price behavior in each quarter of this bull has generally been quite proportional with capital flows into and out of GLD. That’s certainly proven true in this past year as well, when SPX euphoria ran rampant other than deep in Q4’18’s severe near-bear correction in the SPX.

After that initial SPX peak in January 2018 and the subsequent sharp-yet-shallow-and-short correction, gold investment demand grew as euphoria wavered. Between mid-January to late April that year, GLD enjoyed a 5.1% holdings build. That wasn’t enough to push gold much higher, it only climbed 0.4%. Differential GLD-share trading isn’t gold’s only driver, gold-futures trading also plays a major role for different reasons.

But as the SPX powered higher out of that initial post-topping selloff, so did investors’ stock euphoria. So they again started to pull capital out of GLD faster than gold was falling, forcing a major holdings draw. Between late April to early October soon after the SPX’s second topping and new all-time record highs, GLD’s holdings plunged 16.2%. That gold-investment exodus pushed gold prices 9.0% lower in that span.

The relentless slump in GLD’s holdings reversed sharply on a very telling day. American stock traders finally started aggressively buying GLD again on October 10th, forcing a major 1.2% daily holdings build. What happened? That was the first day the SPX sold off hard after its recent record high, plunging 3.3% to shatter complacency. That budding sentiment shift was evident in the VIX, which soared 39.7% to 22.6.

The more that serious Q4’18 SPX selloff intensified, the greater gold investment demand grew. This was most evident in December, when the stock markets plunged a brutal 9.2% alone! That pain really helped investors remember the wisdom of having gold allocations in their stock-heavy portfolios. Gold surged 4.9% that month on a 3.4% GLD-holdings build. Gold investment was strong with stock euphoria gone.

Investors’ interest in gold continued well after the SPX started rebounding, as GLD’s holdings peaked in late January 2019 about 5 weeks after the SPX had bottomed. But with the SPX already soaring 15.0% off its lows, euphoria was mushrooming rapidly. Between early October to late January, GLD’s holdings surged 12.8% driving a parallel 9.7% gold rally with stock euphoria not stunting gold investment demand.

Though gold’s latest interim high of $1341 came a couple weeks later in mid-February, American stock traders’ capital outflows from gold were well underway. As the SPX powered ever higher that month, GLD suffered draws on fully 13 of its 19 trading days! That differential GLD-share selling on resurgent stock euphoria continued to this week. Since late January, GLD’s holdings have shrunk another 8.7%.

Though gold has been fairly resilient considering the lofty stock-market levels, it still slid 3.3% in that span. Gold’s upleg was stunted by stock markets’ powerful rebound rally. It rekindled the same levels of extreme euphoria and complacency seen near the SPX’s late-September record peak. With everyone once again convinced stocks can rally indefinitely with no material selloffs, gold investment demand withered.

While wearying for long-suffering contrarian investors, this is actually quite bullish for gold. Back in early October GLD’s holdings slumped to 730.2t in extreme stock-bull-peaking euphoria. Gold fell as low as $1188 as GLD’s holdings bottomed before the SPX started dropping again. Forced way back down to 752.3t this week, GLD’s holdings are only 3.0% above those deep early-October lows. Yet gold was way higher.

At $1276, gold was fully 7.4% above its own early-October low! This is a much-higher base from which to launch its next surge higher, with gold-investment buying potential via GLD shares almost fully reset! When these dangerously-overvalued stock markets inevitably roll over again, American stock traders will again remember prudently diversifying with gold. Their big capital inflows will again drive gold much higher.

That has real potential to fuel a major bull-market breakout for gold above its $1365 bull-to-date peak seen way back in July 2016. This is even more likely because gold-futures speculators aren’t very long as I discussed in last week’s essay. Just like American stock traders, they have lots of room to buy gold aggressively as it resumes marching higher. Gold investment demand only grows as gold prices climb.

Realize gold’s big problem right now is universal stock-market euphoria at extreme stock-bull-peaking levels. But that won’t last, it never does. Once the SPX inescapably starts sliding again in its next material selloff, gold demand will surge back. These lofty overvalued and overbought stock markets near record highs look exhausted. They are likely to turn back south any day, bleeding away euphoria and rekindling gold.

The biggest beneficiaries of gold uplegs are the gold miners’ stocks, which tend to leverage gold’s gains by 2x to 3x. Back in essentially the first half of 2016 when gold surged 29.9% higher in response to back-to-back SPX corrections, the leading GDX and GDXJ gold-stock ETFs soared 151.2% and 202.5% higher in roughly that same span! When gold starts powering higher again, the coming gold-stock gains will be big.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from deep lows, our unrealized gains are still running as high as 59% this week!

The bottom line is stock-market euphoria has stunted gold’s upleg. With U.S. stock markets once again back up challenging all-time-record highs, traders have forgotten the hard lessons from late September’s peak. They’ve deluded themselves into believing stocks can rally indefinitely, that near-bubble valuations don’t matter. Thus gold investment demand has withered, which is normal when stock markets are topping.

But once these lofty stock markets inevitably roll over decisively again, gold demand will come roaring back just like in Q4. Investors will remember the wisdom of prudently diversifying their stock-dominated portfolios with counter-moving gold, and start shifting capital back in. That will push gold prices much higher, with real potential for a major bull-market breakout. The gold stocks will amplify those gains like usual.

Adam Hamilton, CPA

April 24, 2019

Gold has faded from interest in the past couple months, overshadowed by the monster stock-market rally. But gold has been consolidating high, quietly basing before its next challenge to major $1350 bull-market resistance. A decisive breakout above will really catch investors’ attention, greatly improving sentiment and driving major capital inflows. With gold-futures speculators not very long yet, plenty of buying power exists.

Last August gold was pummeled to a 19.3-month low near $1174 by extreme all-time-record short selling in gold futures. The speculators trading these derivatives command a wildly-disproportional influence on short-term gold price action, especially when investors aren’t buying. Gold-futures trading bullies gold’s price around considerably to majorly, which can really distort psychology surrounding the gold market.

The main reason is the incredible leverage inherent in gold futures. This week the maintenance margin required to trade a single 100-troy-ounce gold-futures contract is just $3400. That’s the minimum cash traders have to keep in their accounts. Yet at the recent $1300 gold price, each contract controls gold worth $130,000. So gold-futures speculators are legally allowed to run extreme leverage up to 38.2x!

That’s extraordinarily risky of course. A mere 2.6% adverse move in gold against traders’ fully-leveraged positions would result in 100% total losses. It’s amazing these guys can sleep at night. For comparison, the stock markets’ legal limit has been 2x leverage since 1974. 10x, 20x, 30x+ is crazy, and has been very problematic for gold for decades. It greatly amplifies gold-futures speculators’ impact on gold prices.

Every dollar deployed in gold futures at 30x leverage literally has 30x the influence on gold prices as a dollar invested in gold outright! So even though gold-futures speculators have far less capital available than investors, it is way more potent amplified up to 38x! Thus when gold investment demand is weak like recently with stellar stock-market complacency, gold-futures speculators utterly dominate gold price action.

Their collective trading effectively controls gold psychology too, since the American gold-futures price has become the world’s leading gold reference one. Investors start feeling bullish on gold and buying usually only after gold-futures speculators push its price higher. And gold-futures selling leaves investors bearish and worried, impelling them to exit gold. Gold-futures trading is the tail that wags the gold-investment dog!

So everyone interested in gold has no choice but to follow what the gold-futures speculators as a herd are doing. The US Commodity Futures Trading Commission publishes weekly data showing their collective positioning, the famous Commitments of Traders reports. They are released late Friday afternoons, and show traders’ aggregate gold-futures long and short contracts held as of the preceding Tuesday closes.

Despite gold’s solid upleg since those deep mid-August lows, these traders still have lots of buying power left to push gold considerably higher. This first chart superimposes the daily gold price in blue over specs’ weekly total gold-futures long and short contracts in greed and red. The great majority of gold’s upleg-to-date gains have been driven by short-covering buying. Very bullishly the larger long buying is still yet to come.

In mid-August when today’s gold upleg was born, speculators’ total gold-futures shorts rocketed way up to 256.7k contracts! That was the highest witnessed in the 19.6 years since early 1999, almost certainly an all-time record. That unprecedented orgy of extreme shorting hammered gold from roughly $1300 down to $1175 in a couple months or so. That sharp futures-driven gold plunge naturally devastated psychology.

The gold-futures traders were effectively borrowing gold they didn’t own to dump in the markets, hoping to buy it back later at lower prices and profitably repay those debts. They were doing it at extreme 30x+ leverage, proportionally amplifying their capital’s price impact. That record shorting spree had nothing to do with fundamentals, it was a snowballing momentum thing. Yet investors were spooked into selling in sympathy.

In mid-June when gold traded just over $1300, total spec shorts were only 100.3k contracts. But over the next 10 CoT weeks they skyrocketed 156% higher to that record 256.7k. The resulting gold carnage led American stock investors to sell shares in the leading GLD SPDR Gold Shares gold ETF much faster than gold was being sold. That forced its gold-bullion holdings 60.1 metric tons or 7.2% lower in that short span!

Gold bottomed the very week gold-futures short sellers had exhausted themselves, reached the limits of their available capital. Since then gold has powered nicely higher on balance, enjoying a 14.2% upleg over the next 6.2 months into mid-February. Gold peaked near $1341 then and has been consolidating high ever since. This upleg has been almost fully driven by gold-futures buying, which is totally normal.

To close gold-futures short positions and repay those debts, speculators have to buy gold-futures long contracts to offset them. They bought to cover an enormous 112.3k short contracts in this upleg’s span, mostly unwinding last summer’s record shorting spree. They also added another 46.8k long contracts, leveraged upside bets on gold’s price. Despite all that gold-futures buying, there is still room for much more.

Major gold uplegs have three stages, each driven by distinctive buying from different groups of traders. Uplegs are always born and initially fueled by gold-futures short covering, as speculators are motivated to buy to cover and realize their shorting profits. Short covering quickly becomes self-feeding, as resulting fast gold-price gains force other short-side traders to rapidly buy to cover or face catastrophic leveraged losses.

Thus that stage-one short-covering buying quickly burns itself out after a couple months or so. But it first pushes gold high enough for long enough to convince long-side gold-futures speculators to return. They command way more capital than the short-side guys, as evidenced by the green long line in this chart usually being much higher than the red short line. Spec gold-futures long buying is uplegs’ second stage.

That unfolds more gradually than short covering, typically 6 months or longer. Long-side traders not only have lots more capital to deploy, but their buying is voluntary. They have to really believe gold is heading higher to make such risky hyper-leveraged upside bets. In contrast short covering is mandatory and often involuntary, as those effective debts must legally be repaid. Stage-one buying directly ignites stage two.

Gold has real bull-market breakout potential in the coming months because this current upleg hasn’t yet seen much gold-futures long buying. Stage two is underway, but the majority is likely still yet to come. The green total-spec-gold-futures-longs line above proves this. At best in mid-February near gold’s latest high, total spec longs peaked at 305.0k contracts. And they have since retreated sharply to 243.8k as of last Tuesday.

Both levels are really low by bull-to-date precedent. This young secular gold bull was born out of deep 6.1-year secular lows in mid-December 2015. Its maiden upleg was big and fast, gold rocketed 29.9% higher in just 6.7 months in essentially the first half of 2016. As that peaked in early July 2016, total spec longs hit an all-time record high of 440.4k contracts! Gold-futures traders piled on, helping fuel big upside momentum.

Total spec shorts that same CoT week ran 100.2k contracts. That upleg had been partially driven by the gold-futures speculators buying a monster 249.2k longs while covering 82.8k shorts. Gold crested at $1365 in early July, which remains this bull’s best level today. Over the subsequent years $1350 would repel gold multiple times, becoming major overhead resistance as gold kept failing to break out above it.

Speculators soon started to unwind their excessive long positions, helping hammer gold 17.3% lower by mid-December 2016. That heavy gold-futures selling was greatly exacerbated by stock markets surging after Trump’s surprise election victory. This gold bull’s second upleg emerged from the ashes, driven first by gold-futures short covering which soon ignited gold-futures long buying. That was also the first upleg’s order.

Gold powered another 20.4% higher to $1358 by late January 2018, and once again gave up its ghost right near that key $1350 resistance. Gold-futures speculators ultimately played a smaller role in that upleg as investors returned. Gold investment buying is the third stage of gold uplegs, which can grow far larger than gold-futures-driven stages. Futures buying is a two-stage ignition mechanism to attract investors.

Total gold-futures longs only climbed 80.6k contracts during that second upleg, while shorts only slipped 4.1k. That’s somewhat misleading though, as the precise upleg dates mask the green long line trending higher while the red short line trended lower. When that upleg peaked, total spec longs and shorts were running 356.4k and 121.9k contracts. The former was still much higher than today’s levels, a very-bullish omen.

This gold bull’s first two uplegs failed with total spec longs far higher than today’s 243.8k, averaging 398.4k contracts. Second-stage spec long buying has exhausted itself and killed uplegs between roughly 350k to 450k contracts in this gold bull. So the sub-250k levels seen last Tuesday remained way too low to likely signal a mature gold upleg. Speculators still have room to do the majority of their stage-two long buying!

This gold upleg is highly likely to see at least another 100k contracts of long buying, and potentially up to 200k if gold returns to favor! That is the gold-futures equivalent to another 311 to 622 metric tons of gold. That will almost certainly catapult gold much higher, just like during this bull’s prior uplegs. Given where gold is today, this creates major bull-market breakout potential. A concerted assault on $1350 is likely.

Throughout this entire gold bull, gold has never been higher with sub-250k spec longs than it is today near $1300! Usually the yellow metal was only around $1250 at this kind of positioning. So we are now witnessing gold’s highest basing in its bull market relative to spec longs. $1350 isn’t much higher than $1300, just another 3.8%. There’s a good chance the remaining stage-two buying will drive gold there.

While it’s certainly not exact, 50k contracts of gold-futures long buying in this bull’s other gold uplegs have often pushed gold $50 higher. Again we are almost certain to see another 100k and potentially a best case of 200k. So gold has never been better positioned in this bull market to surge up to and through its multi-year $1350 resistance! A decisive breakout above $1350 would change everything in the gold market.

Gold-futures speculators are necessarily trapped in the short term by their extreme leverage. They don’t care what gold does, they just want to ride its momentum. Investors are way different, with no leverage at all they have a long-term focus. There’s nothing that excites them more, and drives more capital inflows into gold, than new bull-market highs. Higher highs prove gold is still marching, portending more future gains.

Investors haven’t seen a new gold-bull high since way back in early July 2016, which feels like forever ago in these markets. As the months and years paraded by and gold kept failing to best $1350, most investors gradually lost interest in gold. While its bull-market lower-support zone has gradually risen, the horizontal upper resistance really tainted psychology. Gold has been viewed as consolidating, not in a bull.

But 100k to 200k contracts of spec gold-futures long buying starting near $1300 has real potential to blast gold back above $1350. A decisive breakout is 1%+ beyond that, or $1364. Once gold climbs back over $1365, it will start hitting new bull-to-date highs. That will bring gold back into the financial news in a big way, rekindling investor interest and capital inflows. The resulting bullish sentiment becomes self-feeding.

Major stage-three investment gold buying gets way more likely the higher gold forges above $1350. It’s ironic that although investment is all about buying low when assets are out of favor, the great majority of investors instead prefer to buy high. They love chasing winners, and increasingly crowd into positions the higher their prices climb. There’s no doubt new bull-market gold highs will fuel big excitement in this metal.

Gold’s bull-market breakout potential in the coming months is amplified by a couple other major factors. Gold is in a seasonally-strong time of the year, enjoying its seasonal spring rally. That provides a solid sentimental tailwind that should help motivate gold-futures speculators to continue rebuilding their low gold-futures long positions. Their buying also becomes self-feeding the higher and longer gold runs.

Far more importantly, gold-investment levels are really low thanks to the monster stock-market rally since late December. With the US stock markets skyrocketing from ugly near-bear severe-correction lows to nearly regaining September’s all-time highs, complacency and euphoria are epic. Stock investors have virtually no fear of a major stock-market selloff, which like usual has greatly retarded gold investment demand.

But these lofty stock markets are dangerously overvalued and overbought, heading into a Q1’19 earnings season which is looking to be the weakest in years. When the stock markets roll over again, investors will again remember the wisdom of prudently diversifying their stock-dominated portfolios with gold. It tends to rally when stock markets weaken, a rare and desirable quality. The next material stock selloff will goose gold.

Back in December when the flagship US S&P 500 stock index plunged 9.2%, gold surged 4.9% higher. Any material stock-market selloff, regardless of the reason, will quickly rekindle gold investment demand. And if investors start buying even before gold-futures speculators’ stage-two long buying is complete, a decisive breakout back above $1350 is all but certain. This gold bull’s upside breakout potential is very real.

The biggest beneficiaries of higher gold prices reviving interest in its bull market will be the gold miners’ stocks. The major gold miners of the GDX VanEck Vectors Gold Miners ETF usually amplify gold’s own moves by 2x to 3x. So a 10% gold rally will often translate into 20% to 30% GDX gains. But when gold really shifts back into favor among investors, the upside can be far greater. We’ve already seen that in this bull.

This GDX gold-stock-bull chart is updated from last week’s essay, where I explained the bullish gold-stock situation in depth. So check that out if you need to get up to speed. But for our purposes today, note the last time gold powered to new bull-market highs exciting investors was during this bull’s first upleg largely in the first half of 2016. GDX skyrocketed 151.2% higher in essentially the same span of that 29.9% gold upleg!

That made for outstanding 5.1x upside leverage to gold from the major gold miners. The smaller mid-tier and junior gold miners of the GDXJ VanEck Vectors Junior Gold Miners ETF did even better. With their superior fundamentals and lower market capitalizations, mid-tier upside is much better than the majors. Even if gold merely challenges $1350 again, the gold stocks will surge dramatically higher as traders flock back.

So while the lack of interest in gold and its miners’ stocks these days is understandable, it is unfortunate. The biggest gains are won by buying relatively low before everyone gets excited about an asset or stock sector. Once gold and the gold stocks start surging again as $1350 nears, speculators and investors alike will have to buy much higher. Deploying aggressively before new bull highs should yield impressive gains.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from deep lows, our unrealized gains are already running as high as 76% this week!

The bottom line is this gold bull now has the highest major-upside-breakout potential of its entire lifespan. This latest gold upleg fueled by gold-futures buying hasn’t matured yet, as speculators’ long positioning remains quite low. For the first time in this bull, gold is already consolidating high around $1300 before most of the likely gold-futures long buying has run its course. That makes an assault on $1350 very likely.

If gold can break decisively above that multi-year resistance and start forging new bull-market highs, its psychology will greatly improve. Investors will take notice and start buying again, driving gold higher and fueling mounting bullishness. The gold miners’ stocks will be the biggest beneficiaries of new bull-market gold highs. Their stocks soared the last time investors were excited about this gold bull, rapidly multiplying wealth.

Adam Hamilton, CPA

April 15, 2019

The gold miners’ stocks are still marching, grinding higher on balance in a solid upleg. While interest in this sector has faded since late February, it is nicely set up for a strong rally. After consolidating high and establishing a sturdy base, the gold miners are likely to soon report greatly-improved first-quarter results. Couple that with gold itself powering higher, and the slumbering gold stocks should surge substantially.

The gold stocks are mired in something of a psychological limbo these days. They aren’t exactly out of favor, but there’s little enthusiasm for this sector. Investors and speculators have largely lost interest for technical, sentimental, and fundamental reasons. It’s been 6 weeks since this gold-stock upleg surged to material new highs. The major gold miners have been mostly grinding sideways since, consolidating and basing.

Contributing heavily to traders’ apathy is gold’s own price action in that recent span. Gold overwhelmingly drives gold-mining profits, making these stocks leveraged plays on gold. Gold’s own latest upleg high of $1341 came back in mid-February right before gold stocks topped. Over the next 12 trading days gold fell 4.1% to $1285 during its usual pre-spring-rally-pullback period. Slumps invariably sap traders’ enthusiasm.

Gold’s seasonal spring rally launched right on schedule after that. By late March this metal had gained back 2/3rds of its pullback losses. The gold stocks surged right back up to challenge their late-February highs on that, but couldn’t break out decisively. Then gold rolled over again during these last couple weeks, revisiting those pre-spring-rally lows. That spooked gold-stock traders, so they sold in sympathy.

Gold’s problem is the great complacency and euphoria spewing forth from the massive rally in the general stock markets. Largely in Q4, the flagship S&P 500 broad-market stock index (SPX) plunged 19.8% from an all-time record peak to deep near-bear lows. But since then it has soared 22.2% higher in what looks like a monster bear-market rally. The SPX has regained an incredible 9/10ths of its severe-correction loss!

Gold is the ultimate portfolio diversifier, tending to rally when stock markets fall. Gold investment demand surges as traders rush to diversify stock-dominated portfolios. December was a key case in point, as gold powered 4.9% higher while the SPX plunged 9.2%. But complacency mushrooms after stock markets rally strongly, and prudent money management is quickly forgotten. So capital inflows into gold wither again.

While sideways-at-best technicals and deteriorating sentiment are the main reasons this gold-stock upleg has stalled, fundamentals played a role too. The major gold miners of the leading gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF, reported their Q4’18 operating and financial results between early February to mid-March. And they proved fairly lackluster due to lower prevailing gold prices.

Yet despite these considerable headwinds, the gold stocks are still marching higher on balance. This chart looks at GDX over the past several years or so. Despite the apathy traders feel, this young gold-stock upleg remains solid. The gold miners’ stocks are still gradually grinding higher in a well-defined uptrend channel. They are well-positioned to surge on any good news, which is likely right around the corner.

While indifference reigns in this small contrarian sector today, that’s actually a major improvement! Back in early September GDX plunged to a deep 2.6-year secular low. Gold stocks had just been crushed on cascading selling as stop losses were sequentially tripped. That brutal forced capitulation was the direct result of gold getting hammered by all-time-record gold-futures short selling. This sector was loathed then.

Those extreme gold-stock lows weren’t fundamentally righteous, so a big mean-reversion rebound higher was inevitable. That very week in my essay I argued “The technicals and sentiment spawned by capitulations are so extreme they usually birth massive uplegs and entire bull markets.” As contrarians we aggressively bought gold stocks and recommended our newsletter subscribers load up near those lows.

The gold stocks indeed bounced and started recovering, gradually fleshing out the solid uptrend channel in this chart. GDX rallied to cross multiple major technical milestones. A simultaneous triple breakout above three major resistance zones was soon followed by a major Golden Cross buy signal. Triggered by a 50-day moving average climbing back above a 200dma after a major low, these herald big runs higher.

GDX rallied 33.0% over 5.3 months, regaining recent years’ large consolidation trend between $21 support and $25 resistance. At its recent highs of $23.36 on February 20th and $23.35 on March 26th, GDX edged into the upper half of this range for the first time in 12.6 months! The best gold-stock levels in over a year were something to celebrate, technical proof things are changing in this long-neglected sector.

Even better, GDX leveraged gold’s own gains over this upleg-to-date span by 2.8x. That’s strong, on the high side of the usual historical 2x-to-3x range. Gold-stock gains hadn’t outpaced gold’s to such a degree in years, yet again showing this gold-stock upleg is impressive and robust. GDX’s recent high consolidation was just a normal and healthy mid-upleg drift entirely within its uptrend channel, nothing to fear.

Uplegs naturally flow and ebb, surging two steps higher before slumping one step back. This rhythm is essential to keep sentiment balanced, which helps maximize uplegs’ ultimate durations and gains. Once gold stocks blast higher fast enough to rekindle greed, that has to be bled away by subsequent selloffs or drifts. Without these retreats, too much buying too fast burns out uplegs prematurely truncating their potential.

So technically the major gold stocks are looking a lot better today than most traders give them credit for. The consolidating pullback since late February has done its work brilliantly, heavily dampening sentiment while gold-stock prices remain relatively close to upleg highs. Without this critical perspective, it’s not too surprising traders are so indifferent. But enthusiasm can return fast with the right catalyst, and some are coming.

Without any doubt gold stocks will catch a strong bid when gold’s spring rally resumes. In December as gold rallied 4.9% while the stock markets burned, GDX blasted 10.5% higher. In late January gold surged 3.1% higher in a week, fueling GDX soaring 10.7% in that short span! All gold-stock traders really care about is gold, and rightly so. Once gold gets moving again, the gold stocks are going to surge sharply higher.

There are two big catalysts that could start pushing gold considerably higher any day now. Gold-futures speculators drive much of gold’s short-term price action, and closely watch the US dollar’s fortunes for trading cues. The US Dollar Index (USDX) hit a major 20.5-month high in early March, and is likely to roll over soon. The Fed just kneecapped the US dollar by slashing its rate-hike outlook and prematurely killing QT!

Any meaningful dollar selling will drive big gold-futures buying, pushing the yellow metal higher. A good example of this just happened in mid-March. After hitting that major high, the USDX retreated 1.8% over the next couple weeks or so. Gold bottomed the very day the dollar topped, then rallied 2.2% in that span on gold-futures buying. GDX amplified that with a solid 3.9% advance. Gold stocks rally on a weaker dollar.

The US stock markets are way overextended and overvalued, also ready to roll over imminently. This week the monster likely-bear rally in the SPX had carried it back within just 2.0% of late September’s all-time record peak! But such lofty levels aren’t fundamentally-justified. The 500 elite SPX stocks left March trading at average trailing-twelve-month price-to earnings ratios way up at 26.4x, near bubble territory.

And even the Wall Street perma-bulls universally expect SPX earnings growth to be flat at best in 2019. This is a colossal slowdown from 2018’s 20%+ driven by Republicans’ massive corporate tax cuts. Very-expensive valuations aren’t sustainable without surging profits. As the general stock markets start selling off again, investors will resume returning to gold. Their capital inflows will drive its price higher, boosting the miners.

A great proxy for gold investment demand is the physical gold bullion held in trust for shareholders of the world’s largest and dominant gold ETF, the GLD SPDR Gold Shares. Back in early October with the SPX still just under record highs and complacency extreme, GLD’s holdings fell to a deep 2.6-year secular low. They started climbing again the very day the SPX first plunged, as American stock investors remembered gold.

Their big differential-buying pressure on GLD’s shares drove its holdings up 12.8% to 823.9 metric tons by late January. That helped push gold 8.9% higher over that span, which GDX leveraged with a nice 17.8% gain. Gold buying, whether from gold-futures speculators watching a flagging USDX or American stock investors worried about a rolling-over SPX, will push its price higher. That will bring traders back to gold stocks.

Gold’s upleg resuming is the key to reigniting gold stocks’ own upleg. But the major gold miners’ nearing Q1’19 earnings season should provide further fundamental justification for big gold-stock buying. Odds are their results will show big improvements over Q4’18, which should catch investors’ and speculators’ attention and entice them back. The main reason is higher prevailing gold prices really boosting earnings.

Every quarter I dive deeply into the major gold miners’ latest fundamentals. Several weeks ago I looked at the just-reported Q4’18 results from the top 34 GDX components. Those were lackluster, with lower production, higher costs, and lower prevailing gold prices. While gold averaged $1228 per ounce in Q4, the major gold miners’ average all-in sustaining costs rose to $889 per ounce. Profits were the difference at $339.

Q1 is going to look far better, which most gold-stock traders likely haven’t figured out yet given the apathy for this drifting sector. Thanks to the SPX’s severe near-bear correction largely in Q4, resurgent gold investment demand catapulted it a major 6.2% higher quarter-on-quarter to average over $1303 in Q1. The considerably-higher prevailing gold prices should combine with flat-to-lower AISCs to greatly boost earnings.

All-in sustaining costs generally don’t change much regardless of gold’s action. They are largely fixed as mines are being planned. Operating them generally requires similar levels of spending on infrastructure and employees quarter after quarter. Over the past 4 quarters, the GDX-top-34 gold miners’ AISCs have averaged $884, $856, $877, and $889 per ounce. That works out to a tight mean of $877, close to $875.

If the major gold miners produced gold last quarter at $877 per ounce, that implies $426 profits given the $1303 average prevailing gold prices in Q1. That would make for utterly-enormous 25.7% QoQ growth in gold-mining profits! Such massive earnings growth would really catch investors’ attention, especially with general stocks’ profits expected to be flat at best. Gold-stock fundamentals radically improve with higher gold.

And all this is happening during one of gold stocks’ strongest times of the year seasonally, their powerful spring rally. I explained this next chart in depth about a month ago in my latest spring-rally essay, and it’s important to remember. Gold stocks have powered sharply higher on average between mid-March to early June in modern bull-market years. We’re talking 12.2% average gains in the benchmark HUI gold-stock index!

Not only is gold stocks’ spring rally underway, but it’s this sector’s second-strongest seasonal advance of the year. Even if much-stronger fundamentals weren’t likely, even if gold wasn’t due to continue powering higher on a weakening U.S. dollar and rolling-over stock markets, gold stocks tend to rally considerably in the spring. Greatly-improving earnings and stronger gold prices will really amplify this seasonal strength.

Strong seasonals act like tailwinds, boosting gold-stock uplegs fueled by improving technicals, sentiment, and fundamentals. When all these forces align, the gold-stock gains can be enormous. The last major spring rally happened in 2016, part of a monster gold-stock upleg where GDX skyrocketed 151.2% higher in just 6.4 months driven by a parallel strong gold upleg. GDX blasted 37.7% higher in that spring-rally span!

Although traders’ apathetic view on gold stocks in recent weeks is understandable, it isn’t justified at all. This sector has big potential to run much higher in the next couple months, which most traders aren’t yet ready for. The time to get deployed is of course before gold stocks surge higher again, when they can still be bought at relatively-low prices. This consolidation-drift window won’t last long, as gold is due to rally.

While investors and speculators can ride gold stocks’ next move higher in GDX, that is suboptimal. The largest gold miners dominating its weightings are really struggling with depleting production, retarding this entire ETF’s upside potential. Far-better gains will be won in the smaller mid-tier and junior gold miners. Plenty of them have superior fundamentals to the large majors, growing their outputs and driving down costs.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from deep lows, our unrealized gains are already running as high as 66% this week!

To multiply your capital in the markets, you have to stay informed. Our newsletters are a great way, easy to read and affordable. 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. As of Q4 we’ve recommended and realized 1076 newsletter stock trades since 2001, averaging annualized realized gains of +16.1%! That’s nearly double the long-term stock-market average. Subscribe today for just $12 per issue!

The bottom line is gold stocks are still marching higher despite the pall of apathy hanging over them. This upleg that excited traders back in February remains intact, with this sector simply pulling back within its uptrend. That has rebalanced sentiment, bleeding away greed. This basing has left gold stocks ready to rally to new upleg highs again, fueled by better gold prices greatly improving gold-mining fundamentals.

Gold-mining earnings are set to surge quarter-on-quarter due to gold’s own upleg powering higher. It too is on the verge of accelerating again as buyers return. A weaker U.S. dollar and rolling-over stock markets will motivate speculators and investors to buy gold again. And naturally the gold miners’ stocks will really leverage those gains like usual. Especially this time of year in the midst of their strong spring-rally season.

Adam Hamilton, CPA

April 9, 2019

The major silver miners have rallied higher on balance in recent months, enjoying a young upleg. That’s a welcome change after they suffered a miserable 2018. Times are tough for silver miners, since silver’s prices have languished near extreme lows relative to gold. That has forced many traditional silver miners to increasingly diversify into gold. The major silver miners’ recently-released Q4’18 results illuminate their struggles.

While 10-Qs with filing deadlines of 40 days after quarter-ends are required for normal quarters, 10-K annual reports are instead mandated after quarters ending fiscal years. Most silver miners logically run their accounting on calendar years, so they issue 10-Ks after Q4s. Since these annual reports are larger and must be audited by independent CPAs, their filing deadlines are extended to 60 days after quarter-ends.

The definitive list of major silver-mining stocks to analyze comes from the world’s most-popular silver-stock investment vehicle, the SIL Global X Silver Miners ETF. Launched way back in April 2010, it has maintained a big first-mover advantage. SIL’s net assets were running $362m in mid-March near the end of Q4’s earnings season, 6.1x greater than its next-biggest competitor’s. SIL is the leading silver-stock benchmark.

In mid-March SIL included 21 component stocks, which are weighted somewhat proportionally to their market capitalizations. This list includes the world’s largest silver miners, including the biggest primary ones. Every quarter I dive into the latest operating and financial results from SIL’s top 17 companies. That’s simply an arbitrary number that fits neatly into the table below, but still a commanding sample.

As of mid-March these major silver miners accounted for fully 97.7% of SIL’s total weighting. In Q4’18 they collectively mined 75.5m ounces of silver. The latest comprehensive data available for global silver supply and demand came from the Silver Institute in April 2018. That covered 2017, when world silver mine production totaled 852.1m ounces. That equates to a run rate around 213.0m ounces per quarter.

Assuming that mining pace persisted to Q4’18, SIL’s top 17 silver miners were responsible for about 35% of world production. That’s relatively high considering just 28% of 2017’s global silver output came from primary silver mines! 36% came from lead/zinc mines, 23% from copper, and 12% from gold. 7/10ths of all silver produced is merely an other-metals-mining byproduct. Primary silver mines and miners are fairly rare.

Silver price levels are best measured relative to prevailing gold prices, which overwhelmingly drive silver price action. Q4’18 saw the worst Silver/Gold Ratio witnessed in nearly a quarter century! The SGR collapsed to 86.3x in late November, an extreme 23.8-year secular low. The raw silver price fell under $14 in mid-November, a major 2.8-year low. With such a rotten silver environment, silver miners had to struggle.

The largest primary silver miners dominating SIL’s ranks are scattered around the world. 11 of the top 17 mainly trade in US stock markets, 3 in the United Kingdom, and 1 each in South Korea, Mexico, and Peru. SIL’s geopolitical diversity is good for investors, but makes it difficult to analyze and compare the biggest silver miners’ results. Financial-reporting requirements vary considerably from country to country.

In the U.K., companies report in half-year increments instead of quarterly. Some silver miners still publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q4 approximation. Canada has quarterly reporting, but the deadlines are looser than in the States. Some Canadian miners trading in the U.S. really drag their feet in getting quarterly results out.

The big silver companies in South Korea, Mexico, and Peru present other problems. Their reporting is naturally done in their own languages, which I can’t read. Some release limited information in English, but even those translations can be difficult to interpret due to differing accounting standards and focuses. It’s definitely challenging bringing all the quarterly data together for the diverse SIL-top-17 silver miners.

But analyzing them in the aggregate is essential to understand how they are faring. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. Some highlights make it into this table. Blank fields mean a company hadn’t reported that data by mid-March, as Q4’s earnings season wound down. Some of SIL’s components report in gold-centric terms.

The first couple columns of this table show each SIL component’s symbol and weighting within this ETF as of mid-March. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each miner’s Q4’18 silver production in ounces, along with its absolute year-over-year change. Next comes this same quarter’s gold production.

Nearly all the major silver miners in SIL also produce significant-to-large amounts of gold! That’s truly a double-edged sword. While gold really stabilizes and boosts silver miners’ cash flows, it also retards their stocks’ sensitivity to silver itself. So the next column reveals how pure these elite silver miners are, approximating their percentages of Q4’18 revenues actually derived from silver. This is calculated one of two ways.

The large majority of these top SIL silver miners reported total Q4 revenues. Quarterly silver production multiplied by silver’s average price in Q4 can be divided by these sales to yield an accurate relative-purity gauge. When Q4 sales weren’t reported, I estimated them by adding silver sales to gold sales based on their production and average quarterly prices. But that’s less optimal, as it ignores any base-metals byproducts.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. This whole dataset together offers a fantastic high-level read on how the major silver miners are faring fundamentally as an industry. They definitely struggled in Q4.

SIL’s performance certainly reflects the challenges of profitably mining silver when its price languishes so darned cheap. In 2018 SIL plunged 23.3%, amplifying silver’s own 8.6% loss by 2.7x. Silver’s weakest prices relative to gold in almost a quarter century wreaked havoc on silver-mining sentiment. Investors didn’t want anything to do with silver miners, and their own managements seemed almost as bearish.

In Q4’18 silver’s average price dropped 12.9% YoY to just $14.53. That was disproportionally worse than gold, which saw its average price decline 3.8% YoY. Such deep lows exacerbated the pall of despair that is plaguing the silver-mining industry. While production decisions aren’t made quarter by quarter, it sure felt like the seriously-weak silver prices were choking off output. Production is the lifeblood of silver miners.

The SIL top 17’s collective silver production fell 3.9% YoY in Q4’18 to 75.5m ounces. Interestingly that’s right in line with what the major gold miners of GDX experienced that quarter, a 4%ish YoY slide when adjusted for mega-mergers. The major silver miners could be experiencing a peak-gold-like decline in their silver production. Peak silver isn’t discussed as much, but world silver mine output has been shrinking.

According to the Silver Institute’s latest annual World Silver Survey current to 2017, world silver mined supply peaked at 895.1m ounces in 2015. It nosed over a slight 0.7% in 2016, but accelerated sharply to another 4.1% drop in 2017. So the SIL top 17’s output contraction in Q4’18 is just continuing this trend. Silver mining has been starved of capital since 2013, when silver plummeted 35.6% on a 27.9% gold collapse!

Silver-mining stocks have been something of a pariah to even contrarian investors for much of the time since then. That’s left their prices largely drifting at relatively-low levels, making it more difficult to obtain financing to expand operations. Investors haven’t been interested in silver-stock shares, leaving miners wary of issuing more to raise capital with stock prices so low. That can really dilute existing shareholders.

With the major silver miners unable or unwilling to invest in developing new silver mines and expansions to offset their depleting output, it has to decline. 11 of the 15 top SIL components reporting Q4’18 silver production mined fewer ounces than in Q4’17. All 15 together averaged silver output shrinkage of 3.4% YoY. That’s a sharp contrast to these same miners’ gold production, which grew an average of 7.9% YoY.

In overall total terms, the SIL top 17’s 1.4m ounces of gold mined in Q4’18 still slipped 1.5% YoY. But with total silver production sliding more than gold, the major silver miners’ long ongoing diversification into the yellow metal continued. At the bombed-out silver prices of recent years, the economics of gold mining are way superior to silver mining. The traditional major silver miners are painfully aware of this and acting on it.

Silver mining is as capital-intensive as gold mining, requiring similar large expenses to plan, permit, and construct new mines, mills, and expansions. It needs similar fleets of heavy excavators and haul trucks to dig and move the silver-bearing ore. Similar levels of employees are necessary to run silver mines. But silver generates much-lower cash flows than gold due its lower price. Silver miners have been forced to adapt.

The major silver miners continued their trend of diversifying into gold at silver’s expense in Q4’18. SIL’s largest component Wheaton Precious Metals was a great example of this. It used to be known as Silver Wheaton, a pure silver-streaming play. Back in May 2017 it changed its name and symbol to reflect the fact it would increasingly diversify into gold. In Q2’17 WPM streamed 7,192k and 80k ounces of silver and gold.

Back then fully 61.9% of WPM’s sales still came from silver, qualifying it as a primary “miner”. Fast-forward to Q4’18 and WPM’s silver output plunged 27.1% YoY to 5,254k ounces! But its gold mined rose 10.5% YoY to 107k ounces. That pushed the implied percentage of WPM’s revenues down to just 36.8% silver, way below the 50% primary threshold. Like it or not, the silver-mining industry is increasingly turning yellow.

This strategic shift is good and bad. The major silver miners’ growing proportion of gold output is helping these companies weather this long dark winter in silver prices. But lower percentages of sales generated from silver leaves their stock prices and SIL less responsive to silver price moves. Silver stocks’ leverage to silver is the main reason investors buy them and their ETFs. Their shift into gold is really degrading that.

In Q4’18 the top 17 SIL silver miners averaged just 39.6% of their sales from silver. Only Pan American Silver, First Majestic Silver, Silvercorp Metals, and Endeavour Silver qualified as primary silver miners with over half their revenues from the white metal. While still low, that 39.6% average of SIL was actually considerably better than Q4’17’s 36.0% despite the ongoing transition into gold. But that’s not a trend shift.

In Q4’17 SIL’s components included Tahoe Resources, which was bought out by Pan American Silver in mid-November. Tahoe owned what was once the world’s largest silver mine, Escobal in Guatemala. It produced 5,700k ounces in Q1’17! But Guatemala’s government shut it down after a frivolous lawsuit by anti-mining activists. I last discussed the whole Tahoe saga in depth in my Q3’18 essay on silver miners’ results.

By Q4’17 Escobal’s production had dropped to zero, leaving Tahoe’s silver purity at 0.0%. That dragged down the SIL top 17’s average, leaving it artificially low. But Pan American buying Tahoe for both its gold production and hopes of convincing Guatemala to allow Escobal to reopen killed Tahoe’s stock and purged it from SIL’s ranks. Endeavour Silver edged into the top 17 to take its place, with 59.6% of sales from silver.

If Tahoe’s silver purity is excluded from Q4’17’s overall calculation while Endeavour is added, SIL would have averaged 39.9%. So in comparable terms Q4’18’s 39.6% remains a declining trend. Primary silver miners continue to get rarer, they may even be a dying breed. That has forced SIL’s managers to really scrape the bottom of the barrel to find components to fill their ETF. That’s what happened with Korea Zinc.

This is no silver miner, but a base-metals smelter! In mid-March it commanded a hefty 13.2% weighting in SIL, over 1/8th the total. I’ve searched and searched, but can’t find English financial reports for this company. But in 2017 it reported smelting 66.2m ounces of silver, a 16.6m quarterly pace. I bet there’s not a single SIL investor looking for base-metals-smelting exposure! Global X really ought to remove it entirely.

The capital allocated to Korea Zinc could be spread across the remaining SIL components proportionally, reallocating and modestly upping their weightings. But the fact Korea Zinc even ever made it into SIL is a testament to how rarified the ranks of major silver miners have become. That won’t reverse unless silver mean reverts dramatically higher relative to gold and remains at much-better price levels for years on end.

With SIL-top-17 silver production sliding 3.9% YoY in Q4’18, the per-ounce mining costs should’ve risen proportionally. Silver-mining costs are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. So the lower production, the fewer ounces to spread mining’s big fixed costs across. SIL’s major silver miners indeed reported far-higher costs last quarter.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of silver, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q4’18 these SIL-top-17 silver miners reported cash costs averaging $6.46 per ounce. While that surged 37.0% YoY, it still remains far below prevailing prices. Silver miners face no existential threat.

The major silver miners’ average cash costs vary considerably quarter-to-quarter, partially depending on whether or not Silvercorp Metals happens to be in the top 17 or not. This Canadian company mining in China has negative cash costs due to massive byproduct credits from lead and zinc. So over the past couple years, SIL-top-17 average cash costs have swung wildly ranging all the way from $3.95 to $6.75.

The SIL-top-17 silver miners reported average AISCs of $13.28 in Q4’18, surging 31.0% higher YoY! That is troubling, climbing vexingly close to silver’s latest major secular low of $13.99 in mid-November. While Q1’19’s average silver price of $15.55 so far is much better, these profit margins are still tight for a long-struggling industry. Thankfully the major silver miners’ cost structure is better than that number implies.

The highest AISCs by far in Q4 came from SSR Mining, which was formerly known as Silver Standard Resources. They climbed another 11.7% YoY to nosebleed levels of $20.45 per ounce! But that’s not a normal situation. SSRM too is shifting into gold, gradually winding down its old Pirquitas silver mine. As it depletes, there are fewer ounces to spread its fixed costs of mining across which drives up per-ounce costs.

Excluding SSRM, the rest of the SIL top 17 reporting AISCs in Q4’18 averaged a more-reasonable $12.48 per ounce. And these major silver miners providing AISC outlooks for 2019 projected similar levels near $12.70. This is still on the high side, as the SIL top 17’s AISCs ran $10.14, $10.92, $10.93, and $13.53 in the preceding four quarters. But $12.48 is still profitable even with silver seriously languishing relative to gold.

Silver-mining profits really leverage higher silver prices, and big earnings growth attracts in investors to bid up stock prices. In Q4’18 silver averaged $14.53 per ounce. At the SIL top 17’s average AISCs ex-SSRM of $12.48, that implies the major silver miners as an industry were earning profits of $2.05 per ounce. Those are going to grow majorly this quarter. The almost-over Q1’19 has seen silver average $15.55.

With Q4’s AISCs among the highest silver miners have reported in years, they could very well decline in Q1. But assume they remain stable near $12.48. That implies the major silver miners earned about $3.07 per ounce in Q1. A mere 7.0% quarter-on-quarter silver rally could catapult silver-mining profits a massive 49.8% higher QoQ! This awesome profits leverage to silver is why silver stocks amplify silver’s upside.

Of course the greater a silver miner’s exposure to silver, the more its stock will surge as silver advances. First Majestic Silver had the highest silver purity in Q4 at 63.7% of its revenues derived from silver. Thus AG’s stock should thrive with higher silver prices. But SSR Mining’s mere 12.5% silver purity pretty much leaves silver irrelevant. As SSRM is overwhelmingly a primary gold miner, higher silver won’t move the needle.

So investors who want classic silver-stock exposure to leverage silver uplegs need to be smart about how they deploy capital. While buying SIL is easy, it is dominated by primary gold miners. And who on earth wants over 1/8th of their investment wasted in a giant base-metals smelter? The greatest gains in future silver uplegs will come in the stocks with the most silver exposure. They are what investors need to own.

Despite slowing silver production and their ongoing diversification into gold, the major silver miners still remain well-positioned to see huge profits growth as silver marches higher. Especially the primary ones. But with silver hammered to major secular lows in Q4’18, the accounting results of the SIL-top-17 silver miners were quite weak. 3.9%-lower production combined with 12.9%-lower average silver prices wasn’t pretty.

The following accounting comparisons exclude SIL’s largest component WPM. For some reason it waits until the end of March to report Q4 results, which is incredibly disrespectful to its shareholders. Q4 data is getting stale with Q1 ending. There’s no excuse to delay reporting with modern automated accounting systems gathering all data in real-time. For workflow reasons I had to write this essay before WPM reported.

Ex-WPM, the SIL top 17 sold $3.4b worth of metals in Q4’18, which was down 10.9% YoY. Given lower silver production and much-lower silver prices that was relatively good. But cash flows generated from operations collapsed 52.5% YoY to $444m in Q4. That means less capital available to finance mine expansions and new mine builds. Overall corporate treasuries at these companies fell 33.0% YoY to $2.6b.

Surprisingly the hard-GAAP-earnings picture actually improved over Q4’17, though still remained weak. Excluding WPM, the SIL-top-17 silver miners lost $202m in Q4’18. That cut in half Q4’17’s total losses of $412m. But both quarters’ accounting profits were skewed by big non-cash impairment charges. When lower-silver-price forecasts reduce economic reserves at mines, those perceived losses must be recognized.

AG wrote off $168m of its mines’ carrying value on its books in Q4’18 due to lower reserves driven by lower metals prices. The grades within individual ore bodies vary widely. Silver that is economic to mine at $20 might not be worth extracting at $15, so companies have to cut their reserves and flush those non-cash losses through their income statements. PAAS reported a smaller $28m impairment charge as well.

Together these two $196m writedowns alone accounted for 97% of the major silver miners’ Q4 losses. But even without them most of the other SIL top 17 still reported mild-to-moderate GAAP losses with the silver prices so darned low. The comparable Q4’17 results had big writedowns too, primarily $547m by Volcan to meet new accounting standards demanded by another company that bought 55% of its stock.

While the major gold miners had no excuse for their huge impairment charges in Q4’18 since gold was stable last year, silver miners did since silver was hammered. As silver mean reverts higher with gold and outpaces its rallying, the major silver miners’ GAAP profits will improve radically. That will attract in a lot more investors, especially to the primary silver miners. Those capital inflows ought to drive massive gains.

The key takeaway here is avoid SIL. The world’s leading silver-stock ETF is increasingly burdened with primary gold miners with insufficient silver exposure. And having over 1/8th of your capital allocated to silver miners squandered in Korea Zinc is sheer madness! If you want to leverage silver’s coming huge mean reversion higher relative to gold, it’s far better to deploy in smaller purer primary silver miners alone.

One of my core missions at Zeal is relentlessly studying the silver-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as these stocks recovered from deep lows, our unrealized gains are already running as high as 87% this week!

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The bottom line is the major silver miners are struggling. With silver falling to nearly a quarter-century low relative to gold in Q4, the miners’ results were naturally weak. Mining costs surged as production kept waning, reflecting the ongoing trend of major silver miners increasingly diversifying into gold. But silver-mining profits are still primed to explode higher as silver continues climbing in its young upleg with gold.

Adam Hamilton, CPA

April 1, 2019

The mid-tier gold miners’ stocks have been rallying on balance in recent months, carving a solid young upleg. They’ve mostly finished reporting their latest fourth-quarter results, revealing how they are faring fundamentally. Their operating and financial performance is very important for investors, as the mid-tier realm is where most of the gold-stock sector’s gains accrue. They fared really well in a challenging quarter.

While 10-Qs with filing deadlines of 40 days after quarter-ends are required for normal quarters, 10-K annual reports are instead mandated after quarters ending fiscal years. Most gold miners logically run their accounting on calendar years, so they issue 10-Ks after Q4s. Since these annual reports are larger and must be audited by independent CPAs, their filing deadlines are extended to 60 days after quarter-ends.

The global nature of the gold-mining industry complicates efforts to gather this all-important fundamental data. Many mid-tier gold miners trade in Australia, South Africa, Canada, the United Kingdom, and other countries with quite-different reporting requirements. These include half-year reporting rather than quarterly, long 90-day filing deadlines after year-ends, and dissimilar presentations of operating and financial results.

The definitive list of mid-tier gold miners to analyze comes from the GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its misleading name, GDXJ is largely dominated by mid-tier gold miners and not juniors. GDXJ is the world’s second-largest gold-stock ETF, with $4.1b of net assets this week. That is only behind its big-brother GDX VanEck Vectors Gold Miners ETF that includes the major gold miners.

Gold stocks soared in price and popularity in the first half of 2016, ignited by a new bull market in gold. The metal itself awoke from deep secular lows and surged 29.9% higher in just 6.7 months. GDXJ and GDX skyrocketed 202.5% and 151.2% higher in roughly that same span, greatly leveraging gold’s gains. As capital flooded into GDXJ to own junior gold stocks, this ETF risked running afoul of Canadian securities laws.

Major gold miners are increasingly struggling with declining production, they can’t find or buy enough new gold to offset their depletion. And the stock-price inertia from their large market capitalizations is hard to overcome. The mid-tiers can and are boosting their gold output, fueling big growth in operating cash flows and profitability. With much-lower market caps, capital inflows drive their stock prices higher much faster.

Every quarter I dive into the latest results from the top 34 GDXJ components. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample. These companies represented 82.1% of GDXJ’s total weighting this week, even though it contained a whopping 71 stocks! 6 of the top 34 were majors mining 250k+ ounces, 17 mid-tiers at 75k to 250k, 8 “juniors” under 75k, and 3 explorers with zero.

These majors accounted for 19.8% of GDXJ’s total weighting, and really have no place in a “Junior Gold Miners ETF” when they could instead be exclusively in GDX. These mid-tiers weighed in at 44.3% of GDXJ. The “juniors” among the top 34 represented just 14.8% of GDXJ’s total. But only 4 of them at a mere 6.1% of GDXJ are true junior golds, meaning they derive over half their revenues from actually mining gold.

The rest are primary silver miners, gold-royalty companies, and gold streamers. GDXJ is overwhelmingly a mid-tier gold miners ETF, with sizable small-major exposure. Investors and speculators need to realize it is not a junior-gold investment vehicle as advertised. GDXJ also has major overlap with GDX. Fully 28 of these top 34 GDXJ gold miners are included in GDX too, with 23 of them also among GDX’s top 34 stocks.

The GDXJ top 34 accounting for 82.1% of its total weighting also represent 36.6% of GDX’s own total weighting! The GDXJ top 34 clustered between the 11th- to 40th-highest weightings in GDX. Thus over 4/5ths of GDXJ is made up by almost 3/8ths of GDX. But GDXJ is far superior, excluding the large gold majors struggling with production growth. GDXJ gives much-higher weightings to better mid-tier miners.

The average Q4’18 gold production among GDXJ’s top 34 was 164k ounces, just over half as big as the GDX top 34’s 302k average. Despite these two ETFs’ extensive common holdings, GDXJ is increasingly outperforming GDX. GDXJ holds many of the world’s best mid-tier gold miners with big upside potential as gold’s own bull gradually powers higher. Thus it is important to analyze GDXJ miners’ latest results.

19 of the GDXJ top 34 primarily trade in the US, 5 in Australia, 8 in Canada, and 2 in the U.K. So some symbols are listings from companies’ main foreign stock exchanges. That’s followed by each gold miner’s Q4’18 production in ounces, which is mostly in pure-gold terms excluding byproducts often found in gold ore like silver and base metals. Then production’s absolute year-over-year change from Q4’17 is shown.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. In cases where foreign GDXJ components only released half-year data, I used that and split it in half where appropriate. That offers a decent approximation of Q4’18 results.

Symbols highlighted in light blue newly climbed into the ranks of GDXJ’s top 34 over this past year. And symbols highlighted in yellow show the rare GDXJ-top-34 components that aren’t also in GDX. If both conditions are true blue-yellow checkerboarding is used. Finally production bold-faced in blue shows the handful of junior gold miners in GDXJ’s higher ranks, under 75k ounces quarterly with over half of sales from gold.

This whole dataset together compared with past quarters offers a fantastic high-level read on how mid-tier gold miners as an industry are faring fundamentally. While Q4’18 proved challenging with lower average gold prices, the GDXJ miners generally weathered it well. These elite mid-tier miners did much better last quarter than the major-dominated GDX elites. Their profits and stock prices are ready to soar with higher gold.

GDXJ’s managers have continued to fine-tune its ranks over this past year, making some good changes. For some inexplicable reason, one of the world’s largest gold miners AngloGold Ashanti was one of this ETF’s top holdings as discussed last quarter. AU was finally kicked out and replaced with a smaller major gold miner Kinross Gold and a mid-tier Buenaventura. Together they now account for 11.7% of GDXJ’s weighting.

Reshuffling at the top makes year-over-year changes less comparable, particularly given KGC’s larger size relative to most of the rest of the GDXJ top 34. Neither it nor BVN were included in GDXJ a year ago, and are new additions since Q3’18 results. Both are sizable GDX components, probably added to GDXJ to keep the weightings down in its smaller Canadian components. 4 other stocks climbed into the top 34.

Torex, Alacer, Hochschild, and Seabridge were already in GDXJ a year ago but weighted below the top 34. GDXJ is largely-but-not-entirely market-cap weighted, so it’s normal for components to rise into or fall out of the top 34 as their stock prices move higher or lower. All the following comparisons between Q4’18 and Q4’17 are across the two slightly-different GDXJ-top-34 sets, not the exact companies shown above.

Production has always been the lifeblood of the gold-mining industry. Gold miners have no control over prevailing gold prices, their product sells for whatever the markets offer. Thus growing production is the only manageable way to boost revenues, leading to amplified gains in operating cash flows and profits. Higher production generates more capital to invest in expanding existing mines and building or buying new ones.

Gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential. The top 34 GDXJ gold miners excelled in that department, growing their aggregate output by a big 12.8% YoY to 5.1m ounces! That’s really impressive, trouncing both the major gold miners dominating GDX as well as the entire world’s gold-mining industry.

Last week I analyzed the GDX majors’ Q4’18 results, which revealed they are still struggling with serious challenges. The GDX top 34’s total production fell 3.9% YoY when adjusted for a mega-merger. That was worse than total global output slumping 0.9% YoY according to the World Gold Council. So GDXJ’s mostly-mid-tier gold miners really stand out. They are bucking the industry trend with strong production growth.

Again GDXJ’s top 34 components start at the 11th-highest weighting within GDX. Most of the production problems occurred above that threshold, in GDX’s top 10 components which include the world’s largest major gold miners. Their immense average production of 630k ounces in Q4’18 was nearly 4x the 164k average among GDXJ’s top 34! Those GDX top 10 also accounted for a dominant 59.1% of its total weighting.

GDXJ excluding these depleting giants and reallocating their heavy weightings across smaller majors and mid-tier gold miners makes all the difference. The big majors’ waning production and large market caps act as an anchor retarding GDX’s upside. GDXJ doesn’t share that burden, which helped its top 34 show such strong production growth. There’s no reason to own the large majors with their serious challenges.

Also interesting on the GDXJ production front last quarter was silver. This “Junior Gold Miners ETF” also includes major silver miners, both primary and byproduct ones. The GDXJ top 34’s silver mined rocketed 53.8% higher YoY to 31.2m ounces! For comparison the GDX top 34’s total reported output of 28.8m ounces actually slumped 1.5% YoY. The smaller GDXJ mid-tiers are way better than majors at growing their outputs.

The mid-tier gold miners continue to prove all-important production growth is doable off smaller bases. With a handful of mines or less to operate, mid-tiers can focus on expanding them or building a new mine to boost their output beyond depletion. But the majors are increasingly failing to do this with the super-high production bases they operate at. As long as the majors are struggling, it’s prudent to avoid them.

GDXJ investors would be better served if this ETF contained no major gold miners producing over 250k ounces a quarter on average. They still command nearly 1/5th of its weighting, which could be far better reallocated in mid-tiers and juniors. If VanEck kept the major gold miners in GDX where they should be, it could give GDXJ much-better upside potential. That would make this ETF more popular and successful.

In gold mining, production and costs are generally inversely related. Gold-mining costs are largely fixed quarter after quarter, with actual mining requiring about the same levels of infrastructure, equipment, and employees. So the higher production, the more ounces to spread mining’s big fixed costs across. Thus with sharply-higher YoY production in Q4’18, the GDXJ top 34 should’ve seen proportionally-lower costs.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q4’18 these top-34-GDXJ-component gold miners that reported cash costs averaged $698 per ounce. That was up a sharp 10.8% YoY, and considerably worse than the GDX top 34’s $655 average.

Those were the highest GDXJ cash costs seen since at least Q2’16, when I started this research thread. But even $698 is far lower than prevailing gold prices, showing the mid-tier gold miners face no existential threat. And GDXJ’s high cash costs last quarter aren’t righteous anyway, as they were skewed higher by an extreme outlier. One of the new GDXJ companies Buenaventura reported crazy cash costs of $1627 per ounce!

Excluding that wild anomaly, the rest of the GDXJ top 34 averaged cash costs of $662 which was right in line with Q3’18’s $663. They’d be even lower without Sibanye-Stillwater, a troubled South-African major gold miner that saw cash costs soar 30.1% YoY to an ugly $1167. If that too is excluded the overall average falls to $642. So for the most part the mid-tier gold miners’ cash costs remain really low relative to gold.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

The GDXJ top 34 reporting AISCs averaged $932 per ounce in Q4’18, which was also up a sizable 7.1% YoY. That was also barely the highest seen since at least Q2’16, contradicting the big production growth these miners achieved. But once again this was heavily skewed by extreme outliers, including both BVN and SBGL. Hecla also reported a stunning 52.3% YoY surge in its gold AISCs to a nosebleed $1582 per ounce!

Both BVN and SBGL reported sharply-lower YoY production, helping explain their huge cost surges. HL’s is more temporary, as it expects 2019 gold AISCs to average a still-high-but-much-lower $1250. Without these abnormal situations, the rest of the GDXJ top 34 averaged excellent AISCs of just $863 per ounce. That would be down 0.8% YoY, and is close to the GDX majors’ $837 average also excluding BVN and HL.

Yet even at that skewed artificially-high $932 per ounce, the elite GDXJ gold miners have great potential to enjoy surging profits and hence stock prices. Gold was relatively weak last quarter, averaging $1228 which was 3.8% lower YoY. That implied the mid-tier gold miners as an industry were earning $296 per ounce. That’s still a 24% profit margin, proving Q4’18’s major GDXJ lows weren’t fundamentally righteous.

Gold is faring much better in this almost-over Q1’19, averaging $1303 which is up a big 6.1% quarter-on-quarter. Assuming GDXJ-top-34 AISCs are flat, these elite mid-tier gold miners are earning around $371 per ounce this quarter. That implies enormous 25.3% QoQ profits growth! We won’t know for sure until after Q1’s earnings season, near mid-May. But the mid-tiers’ fundamentals should’ve greatly improved.

Bigger profits driven by higher gold prices are sure to attract investors back to the still-beaten-down gold-stock sector in a big way. The gold miners will stand out even more with earnings growth expected to be scarce in the general stock markets this year. If gold continues marching higher on balance as it ought to, and GDXJ average AISCs retreat as BVN and HL get anomalous costs under control, GDXJ profits will soar.

The GDXJ top 34’s hard accounting results in Q4’18 were mixed, but way better than GDX on all fronts. These elite mid-tier gold miners reported total sales of $7.4b last quarter, up a strong 12.1% YoY. That is right in line with their 12.8% YoY total gold production growth. That huge 53.8% YoY surge in their silver output helped offset the 3.8% YoY decline in average gold prices. The mid-tier gold miners’ revenues are strong.

Compare that to the GDX top 34, which saw sales plunge 10.3% YoY in Q4 due to 3.9%-lower merger-adjusted gold output. Those strong GDXJ-top-34 revenues kept operating-cash-flow generation solid, totaling $2.2b which was down 9.2% YoY. That again crushed the majors in the GDX top 34, which saw OCFs plummet 30.4% YoY. The divergence between how mid-tiers and majors are faring these days is gaping.

The elite GDXJ mid-tier gold miners also invested in growing their production, so their collective total cash on hand slid 14.3% YoY to $5.9b. The GDX majors saw a similar 14.6% YoY decline in their cash, yet they certainly didn’t spend enough to offset their depleting mines. The only real blemish on the GDXJ top 34’s Q4 results came in hard GAAP profits. Their aggregate bottom line collapsed to a $732m loss last quarter!

That was far worse than Q4’17’s $26m loss. Much of this was due to big non-cash impairment charges, writedowns of the carrying value of gold mines and deposits due to lower gold prices and forecasts. If gold miners expect lower gold prices going forward, they have to flush the resulting expected economic losses through current-quarter results when those impairments are perceived. That hammered overall results.

Honestly the Q4’18 impairments seemed pretty unnecessary, with average gold prices merely down 3.8% YoY. 2018’s full-year average gold price actually rose 0.8% YoY. Major impairments usually happen in years gold plunges sharply, like 2013’s brutal 27.9% plummeting. Something like that really changes the economic assumptions underlying gold mines. But gold only slumped 1.6% last year, which is utterly trivial.

Some of the bigger impairment charges came from First Majestic Silver and Osisko Gold, which wrote off $168m and $166m. This primary silver miner and gold-royalty company aren’t even mid-tier gold miners. And the perpetually-troubled South African majors Gold Fields and Sibanye-Stillwater which have long tainted GDXJ reported big half-year losses implying $169m and $98m in Q4. These alone total $601m of losses.

That accounted for nearly 5/6ths of the GDXJ top 34’s total GAAP losses last quarter. While many of the elite mid-tier gold miners reported small losses, the great majority of the surge in losses came from a handful of stocks. Overall the GDXJ GAAP profits looked relatively decent compared to the majors. GDX’s top 34 reported a staggering $6.0b in accounting losses in Q4’18! The mid-tiers are thrashing the majors.

Despite being the world’s leading gold-stock ETF, GDX needs to be avoided. The major gold miners that dominate its weightings are struggling too much fundamentally, unable to grow their production. Capital will instead flow into the mid-tiers, juniors, and maybe a few smaller majors still able to boost their output and thus earnings going forward. None of this is new, but the major and mid-tier disconnect continues to worsen.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from deep lows, our unrealized gains are already running as high as 74% this week!

If you want to multiply your capital in the markets, you have to stay informed. Our newsletters are a great way, easy to read and affordable. 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. As of Q4 we’ve recommended and realized 1076 newsletter stock trades since 2001, averaging annualized realized gains of +16.1%! That’s nearly double the long-term stock-market average. Subscribe today for just $12 per issue!

The bottom line is the mid-tier gold miners are thriving fundamentally. They are still rapidly growing their production while majors suffer sharp output declines. The mid-tiers are holding the line on costs, which portends strong leveraged profits growth as gold continues grinding higher on balance. The performance gap between the smaller mid-tier and junior gold miners and larger major ones is big and still mounting.

Adam Hamilton, CPA

March 25, 2019

The major gold miners are grinding higher in a solid upleg, fueling growing interest in this small contrarian sector. They’ve mostly finished reporting their fourth-quarter results, revealing how they are really faring fundamentally. Collectively the world’s biggest gold miners continue to face serious challenges, which often stem from declining production. That makes stock picking more important than ever for investment success.

While 10-Qs with filing deadlines of 40 days after quarter-ends are required for normal quarters, 10-K annual reports are instead mandated after quarters ending fiscal years. Most gold miners logically run their accounting on calendar years, so they issue 10-Ks after Q4s. Since these annual reports are larger and must be audited by independent CPAs, their filing deadlines are extended to 60 days after quarter-ends.

The definitive list of major gold-mining stocks to analyze comes from the world’s most-popular gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF. Launched way back in May 2006, it has an insurmountable first-mover lead. GDX’s net assets running $10.6b this week were a staggering 47.1x larger than the next-biggest 1x-long major-gold-miners ETF! GDX is effectively this sector’s blue-chip index.

It currently includes 45 component stocks, which are weighted in proportion to their market capitalizations. This list is dominated by the world’s largest gold miners, and their collective importance to this industry cannot be overstated. Every quarter I dive into the latest operating and financial results from GDX’s top 34 companies. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample.

As of this week these elite gold miners accounted for fully 94.1% of GDX’s total weighting. Last quarter they combined to mine 300.8 metric tons of gold. That was 35.2% of the aggregate world total in Q4’18 according to the World Gold Council, which publishes comprehensive global gold supply-and-demand data quarterly. So for anyone deploying capital in gold or its miners’ stocks, watching GDX miners is imperative.

The largest primary gold miners dominating GDX’s ranks are scattered around the world. 21 of the top 34 mainly trade in US stock markets, 6 in Australia, 5 in Canada, and 1 each in China and the United Kingdom. GDX’s geopolitical diversity is good for investors, but makes it more difficult to analyze and compare the biggest gold miners’ results. Financial-reporting requirements really vary from country to country.

In Australia, South Africa, and the UK, companies report in half-year increments instead of quarterly. The big gold miners often publish quarterly updates, but their data is limited. In cases where half-year data is all that is made available, I split it in half for a Q4 approximation. While Canada has quarterly reporting, the deadlines are looser than in the States. Some Canadian gold miners drag their feet in getting results out.

While it is challenging bringing all the quarterly data together for the diverse GDX-top-34 gold miners, analyzing it in the aggregate to see how they are doing is essential. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. The highlights make it into these tables. Blank fields mean a company hadn’t reported that data as of this Wednesday.

The first couple columns of these tables show each GDX component’s symbol and weighting within this ETF as of this week. While most of these stocks trade on U.S. exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each gold miner’s Q4’18 production in ounces, which is mostly in pure-gold terms. That excludes byproduct metals often present in gold ore.

Those are usually silver and base metals like copper, which are valuable. They are sold to offset some of the considerable expenses of gold mining, lowering per-ounce costs and thus raising overall profitability. In cases where companies didn’t separate out gold and lumped all production into gold-equivalent ounces, those GEOs are included instead. Then production’s absolute year-over-year change from Q4’17 is shown.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. Companies with symbols highlighted in light-blue have newly climbed into the elite ranks of GDX’s top 34 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-level read on how the major gold miners are faring fundamentally as an industry. Unfortunately they were generally struggling on multiple fronts in Q4’18. The more quarterly reports I read and data I gathered, the more apparent it became that many if not most of the world’s biggest gold miners continue to face serious challenges. That makes GDX itself way less attractive to gold-stock investors.

GDX’s holdings grew much more concentrated over this past year, with the top 34’s total weighting rising from 90.5% in Q4’17 to 94.1% in Q4’18. That is partially due to increased merger-and-acquisition activity driven by big gold miners trying to replace depleting production. For years many have proven unable to replenish mined gold organically, leaving buying other companies the only option to maintain mining tempos.

Production has always been the lifeblood of the gold-mining industry. Gold miners have no control over prevailing gold prices, their product sells for whatever the markets offer. Thus growing production is the only manageable way to boost revenues, leading to amplified gains in operating cash flows and profits. Higher production generates more capital to invest in expanding existing mines and building or buying new ones.

Gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential. But for some years now the major gold miners have been struggling to grow production. Large economically-viable gold deposits are getting increasingly harder to find and more expensive to exploit, with the low-hanging fruit long since picked.

More and more gold-industry experts believe peak gold is nearing, after which global mine production will start declining. For many years now new deposit discoveries and mine builds have failed to keep pace with depletion at existing mines. So production growth is slowing. According to the World Gold Council’s latest fundamental data, global mine production only edged 0.8% higher in 2018 compared to 5.3% in 2013!

GDX’s major gold miners are the biggest in the world, with access to many billions of dollars of capital to expand their operations. Yet even with those vast resources by his sector’s standards, the top 34 have still failed to grow their production. In Q4’18 they collectively produced 9.7m ounces of gold, plunging a colossal 7.5% YoY from Q4’17’s 10.5m! That is shockingly bad, and the root of the major gold miners’ problems.

Total world gold production per the WGC merely slipped 0.9% YoY last quarter. Incidentally that was just the second YoY quarterly decline in the past 32 quarters, adding more fuel to peak-gold theories. Across all of them growth averaged 2.5% YoY. Seeing the top 34 GDX gold miners’ production plunge at 8.3x the world rate in Q4’18 is very concerning. Many major gold miners are stagnating, retarding GDX’s potential.

Just over half of GDX’s top 34 gold miners, fully 18 of them, suffered average production declines of 8.9% YoY! The worst in terms of impact came from GDX’s largest component Barrick Gold. GOLD’s gold mined fell 5.8% YoY in Q4’18, representing 1/10th of the total drop among the GDX top 34. Barrick is so desperate to buy production to offset its serious depletion that it recently purchased major gold miner Randgold.

That deal completed on January 1st, 2019, so GOLD’s Q4’18 results don’t yet reflect it. Randgold mined 374.6k ounces last quarter, which was actually up an impressive 9.9% YoY. That helps explain some of the big production drop among the GDX top 34. Randgold’s production was included in the GDX top 34 in Q4’17, but of course its stock no longer exists this week when I downloaded GDX’s current component list.

Adding Randgold’s Q4’18 production in cuts the GDX top 34’s production decline to 3.9% YoY. Going the other way and instead removing it from Q4’17’s total leaves the top 34’s mined gold down 4.4% YoY. But that’s still much worse than that overall 0.9% YoY decline in global gold mine production last quarter. As I explained in depth in a mid-February essay, gold-stock mega-mergers won’t solve this depletion problem.

Before Q4’18, Randgold suffered 4 quarters in a row of falling production averaging declines of 7.4% YoY. Barrick’s quarterly production has fallen for 6 quarters in a row, averaging hefty 13.4% YoY drops! Merging depleting major gold miners together doesn’t magically boost their collective production. It just masks production declines for a single year, the first 4 quarters comparing post-merger results with pre-merger ones.

Once those great cross-merger YoY comparisons pass, the relentless depletion in both companies’ gold mines will quickly become apparent again. The larger any gold miner, the harder it is to grow and even just maintain production levels. Because exploration budgets largely collapsed since 2013 when gold plunged and crushed gold stocks, the global pipeline of bigger economic gold deposits to mine has mostly dried up.

GDX’s top-two components have always been Barrick Gold and Newmont Gold. This week together they accounted for 19.5% of its total weighting and a whopping 28.0% of the top 34’s total Q4’18 gold mined! Had Barrick’s and Randgold’s merger been consummated in Q4, GOLD’s production would’ve soared over 1.8m ounces. Newmont didn’t want Barrick to surpass it, so in January it announced it was buying Goldcorp.

GG produced 630k ounces of gold in Q4, which will be added onto Newmont’s production going forward once this deal is done. Had Newmont and Goldcorp been together in Q4’18, this gold-mining behemoth would’ve produced nearly 2.1m ounces! Those levels are staggering, and will really increase these two mega-miners’ dominance over this sector and GDX. These mergers’ pro-forma impact on GDX is massive.

Using Q4’s numbers, Newmont and Barrick would’ve accounted for a colossal 38.8% of the GDX top 34’s entire gold mined including Randgold. Their collective weighting in this leading gold-stock ETF would shoot over a quarter. So the overall GDX future performance will be more dominated by Newmont and Barrick than ever before. If they can’t grow production from such stratospheric levels, they’ll retard GDX’s upside.

With gold deposits increasingly harder to discover, and taking even longer to get permitted and brought into production at ever-higher costs, the biggest gold miners are going to find it impossible to even maintain their outputs. Any production growth is going to come from smaller gold miners, and their stocks will soar to reflect it. Unfortunately the impact on GDX will be muted, since its weightings are tyrannized by the giants.

Kirkland Lake Gold has been one of the best-performing gold stocks over this past year. In 2018 its stock rocketed 69.9% higher as GDX fell 9.3%! The reason investors flocked to KL is it has rapidly grown its gold output, which soared 38.8% YoY in Q4’18. That greatly boosted its sales, operating cash flows, and profits. More gold produced spreads out the big fixed costs of mining across more ounces, amplifying earnings.

No matter how awesome KL’s management has proved, such production growth was only possible from a relatively-low base. KL produced 167k ounces of gold in Q4’17, compared with around 8x that from each Newmont and Barrick. The biggest gains in gold-stock prices won’t come from super-major-dominated GDX, but from smaller mid-tier gold miners. Investors will continue to prize and richly reward production growth.

Peak gold is likely bearish for the largest gold miners that drive GDX. Capital inflows from investors will wane along with their shrinking production. But lower gold mined supply on balance going forward is wildly bullish for the mid-tier and junior gold miners growing their production! The resulting higher gold prices will catapult their profits and thus stock prices far higher, attracting investors fleeing the struggling majors.

The only way to reap these massive gains is directly investing in the best individual gold miners. Their fundamentals are far superior to their sector’s as a whole. While buying GDX is easy, the lion’s share of that capital is funneled into the major gold miners with slowing production. Their underperformance will dilute away any outperformance among mid-tier miners in this ETF, leading to way-inferior overall gains.

Given the sharply-lower gold production by the GDX top 34 in Q4’18, per-ounce mining costs should’ve risen proportionally. Gold-mining costs are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. So the lower production, the fewer ounces to spread mining’s big fixed costs across. These elite gold miners indeed reported higher costs last quarter.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q4’18 these top 34 GDX-component gold miners that reported cash costs averaged $655 per ounce. That was up a sharp 9.1% YoY, among the highest quarterly cash costs seen in years.

That still shows the major gold miners face no existential threat as long as gold stays over $650, which is about half current levels. And Q4’s cash costs are artificially high due to two anomalies. Buenaventura and Hecla both reported cash costs rocketing to extremes of $1627 and $1048! Excluding these outliers, the rest of the GDX top 34 averaged cash costs of $598, which was right in line with Q4’17’s overall $600 read.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

The GDX top 34 gold miners reported average AISCs of $889 in Q4’18, up 3.6% YoY. That is inversely proportional to the 4%ish YoY drop in their gold production when Randgold is accounted for. While $889 is the highest seen since at least Q2’16 when I started doing this quarterly research, it is still roughly in line with the past four quarters’ averages of $858, $884, $856, and $877. And like cash costs this is skewed high.

Buenaventura and Hecla also reported anomalous super-high AISCs of $1485 and $1582. Excluding them, the rest of the GDX top 34 averaged much-lower all-in sustaining costs of $837 per ounce in Q4’18. So much to their credit, the major gold miners are ruthlessly managing their costs as their production slumps. That’s bullish for their coming earnings growth as gold continues grinding higher in this bull market.

Gold-mining profits really leverage higher gold prices, and big earnings growth attracts in investors to bid up stock prices. In Q4’18 gold averaged about $1228 per ounce. At the GDX top 34’s average AISC of $889, that implies the major gold miners as an industry were earning profits of $339 per ounce. Those are going to grow considerably this quarter. The almost-over Q1’19 has seen average gold prices near $1303.

AISCs are likely to decline from Q4’s high levels in this current Q1, but let’s assume they remain stable at $889. That implies the major gold miners are earning about $414 per ounce this quarter. In other words a mere 6.1% quarter-on-quarter rally in average gold prices could drive a major 22.1% QoQ jump in the major gold miners’ profits! That’s why major gold stocks tend to amplify gold uplegs by 2x to 3x or so.

It is encouraging the gold miners’ costs remain well-positioned to fuel big profits growth in a higher-gold-price environment despite their intractable production slumps. Investors love chasing earnings growth, which is looking to be scarce in the general stock markets this year. The good gold miners’ stocks are likely to see big capital inflows as gold continues climbing, driving them and to a lesser extent GDX higher.

Unfortunately the hard accounting results in Q4’18 were far worse than AISCs. Q4’18’s average gold price was 3.8% lower year-over-year, which combined with the 4%ish-lower gold production including Randgold among the GDX top 34 to really weaken financial performance. Overall quarterly revenues among these elite major gold miners fell 10.3% YoY to $12.8b. Operating cash flows amplified that drop.

Total OCFs among these GDX stocks collapsed 30.4% YoY to $3.7b in Q4’18. That means less capital available to finance mine expansions and new mine builds, exacerbating the production struggles. Yet overall corporate treasuries fared relatively better with a 14.6% YoY decline to total cash balances near $12.1b for all these miners. All this was understandable, but hard GAAP accounting profits were a total disaster.

Warren Buffett once famously joked about airline stocks, saying he would’ve done investors a huge favor if he could’ve shot down the Wright brothers’ maiden flight in 1903 killing that whole industry before it was born. His point was the airlines never earned profits over the long-term, so they weren’t worth investors’ time. The major gold stocks’ Q4 losses made it look like they could never earn any money either, terrible.

Last quarter the top 34 GDX gold miners, the biggest and supposedly best in the world, lost a staggering $6.0b collectively! That compared to relatively-minor total losses under $0.1b in Q4’17. At $1228 gold the major gold miners should’ve been earning solid profits. Yet they were hemorrhaging money in an accounting sense fast enough to make drunken sailors blush. So what the heck happened in this sector?

The problem was colossal non-cash impairment charges, gold miners writing down the value of mines on their books for a variety of reasons. These were mainly lower forecast gold prices reducing the economic reserves at those mines. While an accounting fiction, these perceived losses must still be flushed through income statements when they are believed to happen. The list of impairments disclosed in quarterlies was long.

GOLD reported about $1.1b in impairment charges in Q4’18, AEM $390m, AUY $151m, AG $168m, and the list goes on. But the writeoff king last quarter was Goldcorp, reporting an inconceivable $4.7b in impairment charges across multiple mines! Newmont’s offer for Goldcorp valued its mines much lower than their carried book value, forcing GG to write off the enormous differences in what may be its last solo quarter.

Together Barrick and Goldcorp wrote off $5.8b in assets in Q4’18, 97% of the GDX top 34’s total GAAP losses last quarter! This is yet another reason gold-stock mega-mergers are bad news for this entire sector. They give the managements of these giant gold miners cover for flushing away what were likely poor past decisions in allocating capital. Smaller miners focused on fewer mines seem to suffer fewer impairments.

I’ve extensively studied and actively traded gold-mining stocks for decades now, and these latest writeoffs seem really fishy. Major impairments are understandable in years gold plunges sharply, like 2013 when it plummeted 27.9%. That really changes the economic assumptions underlying the value of gold mines on balance sheets. But 2018 saw nothing like that, with gold slumping a trivial 1.6%. Big impairments made no sense.

While the average gold price slumped 3.8% YoY in Q4’18, that isn’t even material. And in full-year terms, 2018’s average gold price was actually 0.8% higher YoY. Huge writedowns on a flat gold year don’t look righteous at all. Gold-mining-company managements have a serious credibility problem with gold-stock investors, and pulling stunts like this worsen it. These guys need to start managing for their shareholders.

The major gold miners’ Q4’18 results were disappointing overall. Huge sky-is-falling impairments along with sharply-lower production driving much-weaker sales and operating-cash-flow generation sure made GDX look like an iffy investment at best. Offsetting that negativity somewhat was good control over their all-in sustaining costs, which only moved modestly higher and would’ve fallen without a couple anomalous reads.

The key takeaway here is avoid GDX. The world’s leading gold-stock ETF is increasingly burdened with giant gold miners struggling too much fundamentally. Their high weightings within this ETF are certain to retard its future performance. It’s far better to deploy capital in great smaller individual gold miners with superior fundamentals. Plenty of these companies are included in GDX, but have relatively-low weightings.

GDX’s little-brother ETF GDXJ is another option. While advertised as a “Junior Gold Miners ETF”, it is really a mid-tier gold miners ETF. It includes most of the better GDX components, with higher weightings since the largest gold miners are excluded. I wrote an entire essay in mid-January explaining why GDXJ is superior to GDX, and my next essay a week from now will delve into the GDXJ gold miners’ Q4’18 results.

Back in essentially the first half of 2016, GDXJ rocketed 202.5% higher on a 29.9% gold upleg in roughly the same span! While GDX somewhat kept pace then at +151.2%, it is lagging GDXJ more and more as its weightings are more concentrated in stagnant gold mega-miners. The recent big mergers are going to worsen that investor-hostile trend. Investors should buy better individual gold stocks, or GDXJ, instead of GDX.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from deep lows, our unrealized gains are already running as high as 75%+ this week!

If you want to multiply your capital in the markets, you have to stay informed. Our newsletters are a great way, easy to read and affordable. 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. As of Q4 we’ve recommended and realized 1076 newsletter stock trades since 2001, averaging annualized realized gains of +16.1%! That’s nearly double the long-term stock-market average. Subscribe today for just $12 per issue!

The bottom line is the major gold miners are still struggling fundamentally. Their production shrinkage is accelerating, pushing costs proportionally higher. That led to weaker sales and operating cash flows in Q4. And accounting profits cratered into a dark abyss on enormous and suspicious impairment charges by big gold miners involved in mega-mergers. These poor results are retarding GDX’s upside potential.

But smaller mid-tier and junior gold miners with superior fundamentals are bucking this trend to enjoy big stock-price gains. They are still able to grow production off way-smaller bases, boosting their earnings and attracting investment capital. They will continue amplifying gold’s uplegs, multiplying wealth for their contrarian investors. Gold-stock upside potential remains huge outside of the increasingly-problematic majors.

Adam Hamilton, CPA

March 18, 2019

The widely-held mega-cap stocks that dominate the U.S. markets recently finished reporting their Q4 2018 financial results. Because the tenor of stock markets changed radically last quarter, this latest earnings season is more important than usual. An extreme monster bull market suddenly rolled over into a severe near-bear correction in Q4. How major corporations fared offers insights into whether a young bear is upon us.

While 10-Qs with filing deadlines of 40 days after quarter-ends are required for normal quarters, 10-K annual reports are instead mandated after quarters ending fiscal years. Most big companies logically run their accounting on calendar years, so they issue 10-Ks after Q4s. Since these annual reports are larger and must be audited by independent CPAs, their filing deadlines are extended to 60 days after quarter-ends.

So the 10-K filing season just wrapped up last Friday, revealing how the biggest and best U.S. companies were doing in Q4 2018. They are the stocks of the flagship S&P 500 stock index (SPX). At the end of Q4 they commanded a gigantic collective market capitalization of $22.2t! The vast majority of investors own the big U.S. stocks of the SPX, as some combination of them are usually the top holdings of nearly every fund.

The major ETFs that track the S&P 500 dominate the increasingly-popular passive-investment strategies as well. The SPY SPDR S&P 500 ETF, IVV iShares Core S&P 500 ETF, and VOO Vanguard S&P 500 ETF are among the largest in the world. This past week they reported colossal net assets running $262.4b, $160.5b, and $103.2b respectively! Overall stock-market fortunes are totally dependent on big U.S. stocks.

Q4 2018 proved extraordinary. Leading into it, the SPX hit a dazzling all-time record high in late September about a week before Q4 arrived. That extended an extreme monster stock bull to 333.2% gains over 9.5 years, the 2nd-largest and 1st-longest in all of U.S. stock-market history! But as I warned days after that euphoric peaking, the Fed’s unprecedented quantitative-tightening campaign would finally ramp to full speed in Q4.

Stock markets artificially inflated by $3625b of Fed QE over 6.7 years couldn’t react well to Fed QT finally starting to unwind that epic monetary inflation. With QT hitting $50b per month starting in Q4, the stock markets indeed wilted. Over the next 3.1 months into Christmas Eve, the SPX plummeted 19.8%! That was right on the verge of a new bear market at -20%. The SPX suffered its worst December since 1931, -9.2%.

That sure looked like a young bear market, really freaking out traders. But since those deep and ominous lows, the SPX has soared 19.3% at best in a massive rally! That has reversed nearly 4/5ths of the total correction losses largely suffered in Q4. This looked and acted like a classic bear-market rally, rocketing higher to eradicate fear and restore universal complacency. New-bear worries have shriveled to nothing.

Given Q4 2018’s colossal stock-market inflection and subsequent huge rebound, whether the SPX narrowly evaded the overdue-bear bullet or not is supremely important. Bear markets exist for one reason, to maul overvalued stocks back down below historic fair-value levels. So how the major U.S. corporations actually fared last quarter, how large their earnings were compared to their stock prices, offers essential bull-bear clues.

Every quarter I analyze the top 34 SPX/SPY component stocks ranked by market cap. This is just an arbitrary number that fits neatly into the tables below, but is a dominant sample of the SPX. At the end of Q4, these American giants alone commanded fully 43.7% of the SPX’s total weight! Their $9.7t collective market cap exceeded that of the bottom 437 SPX companies. Big U.S. stocks’ importance cannot be overstated.

I wade through the 10-K or 10-Q SEC filings of these top SPX companies for a ton of fundamental data I dump into a spreadsheet for analysis. The highlights make it into these tables below. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q4 2018. That’s followed by the year-over-year change in each company’s market capitalization, a key metric.

Major U.S. corporations have been engaged in a wildly-unprecedented stock-buyback binge ever since the Fed forced interest rates to deep artificial lows during 2008’s stock panic. Thus the appreciation in their share prices also reflects shrinking shares outstanding. Looking at market-cap changes instead of just underlying share-price changes effectively normalizes out stock buybacks, offering purer views of value.

That’s followed by quarterly sales along with their y/y changes. Top-line revenues are one of the best indicators of businesses’ health. While profits can be easily manipulated quarter to quarter by playing with all kinds of accounting estimates, sales are tougher to artificially inflate. Ultimately sales growth is necessary for companies to expand, as bottom-line profits growth driven by cost-cutting is inherently limited.

Operating cash flows are also important, showing how much capital companies’ businesses are actually generating. Using cash to make more cash is a core tenet of capitalism. Unfortunately many companies are now obscuring quarterly OCFs by reporting them in year-to-date terms, lumping in multiple quarters together. So the Q4 2018 OCFs shown are mostly calculated by subtracting Q3’18 YTD OCFs from full-year ones.

While we’re also collecting the earnings-per-share data Wall Street loves, it’s more important to consider total profits. Stock buybacks are executed to manipulate EPS higher, because the shares-outstanding denominator of its calculation shrinks as shares are repurchased. Raw profits are a cleaner measure, again effectively neutralizing the impacts of stock buybacks. They better reflect underlying business performance.

Finally the trailing-twelve-month price-to-earnings ratios as of the end of Q4 2018 are noted. TTM P/Es look at the last four reported quarters of actual GAAP profits compared to prevailing stock prices. They are the gold-standard metric for valuations. Wall Street often intentionally conceals these hard P/Es by using the fictional forward P/Es instead, which are literally mere guesses about future profits that often prove far too optimistic.

These are mostly calendar-Q4 results, but some big U.S. stocks use fiscal quarters offset from normal ones. Walmart, Home Depot, and Cisco have quarters ending one month after calendar ones, so their results here are current to the end of January instead of December. Oracle uses quarters that end one month before calendar ones, so its results are as of the end of November. Offset reporting ought to be banned.

Stocks with symbols highlighted in blue have newly climbed into the ranks of the SPX’s top 34 companies over the past year, as investors bid up their stock prices and thus market caps relative to their peers. Overall the big U.S. stocks’ Q4 2018 results looked impressive, with good sales and profits growth. But that masks a sharp slowdown from prior quarters that will be exacerbated as the corporate-tax-cut transition year ends.

2018 was a banner year for corporate earnings because of Republicans’ massive corporate tax cuts. The Tax Cuts and Jobs Act was signed into law on December 22nd, 2017 to go into effect on January 1st, 2018. Its centerpiece was slashing the U.S. corporate tax rate from 35% to 21%, which naturally boosted reported profits. But 2018’s four quarters were the only ones that would experience anomalous TCJA growth.

Q4 2018 was the last quarter comparing year-over-year growth between a pre-TCJA quarter and post-TCJA quarter. That major discontinuity distorted corporate-earnings growth. Profits soared last year not just because companies were doing better, but because they were paying taxes at much-lower rates. But starting in Q1 2019, that TCJA-transition boost is gone forever. Normal same-tax-regime y/y comparisons will return.

But before we get to all-important corporate earnings and resulting valuations, let’s work our way through these tables. Thanks to the SPX’s brutal 14.0% plunge in Q4, this leading broad-market stock index lost 6.2% last year. The biggest and best US companies fared a little better, with the collective market cap of the top 34 sliding 5.2% y/y. These elite corporations had average market-cap losses running 3.6% y/y.

That certainly isn’t calamitous, but the deceleration is neck-snapping! In the prior four quarters starting in Q4 2017, the SPX’s top 34 components saw enormous average YoY market-cap gains of 29.2%, 14.6%, 23.5%, and 24.2%. Make no mistake, Q4’18 saw a massive and ominous stock-market inflection. The severe near-bear correction’s selling pressure was even heavier in smaller SPX stocks below the top 34.

That pushed the top 34’s share of the SPX’s total weighting to 43.7%, a big increase from Q4 2017’s 41.8%. The more capital concentrated in fewer stocks, the riskier the entire stock markets become. Big down days driven by company-specific news in highly-weighted individual stocks can drag down the entire stock markets. A great example occurred in mighty Apple just after Q4 ended, when it warned on weak Q4 sales.

For years Apple had been the largest U.S. stock by market cap, commanding the highest ranking in the SPX and SPY. Just after 2019’s first trading day closed, Apple cut its Q4 revenue guidance by 7.7% from its own midpoint given 2 months earlier. The next day AAPL stock collapsed by 10.0%, which pummeled the entire SPX 2.5% lower in its worst loss so far this year. When a top U.S. stock sneezes, markets catch a cold.

Falling stock markets exert a strong negative wealth effect. Both consumers and corporations get scared as stocks suffer big and fast drops, so they pull in their horns on spending. That left all kinds of economic data covering parts of Q4 weaker than expected, sometimes shockingly so. Lower spending weighs on corporate revenues, as fewer people buy less goods and services. Would the top 34’s Q4 2018 sales reflect this?

On the surface these biggest-and-best U.S. companies looked immune. Their total Q4 sales of $1051.6b still climbed an impressive 4.2% YoY in the stock markets’ worst quarter since Q3 2011. These companies averaged big sales growth of 7.4% y/y, which was surprisingly robust given the stock-market carnage. Yet even that good top-line growth still reflects a major slowdown for the top 34 from the past year’s pace.

In the preceding four quarters, the SPX’s top 34 component stocks averaged y/y revenues growth way up at 10.8%, 14.0%, 14.0%, and 11.5%. So Q4’s was a serious deceleration, which may be an ominous portent for 2019. Q4’s revenues growth may be overstated too. Nearly 2/3rds of the SPX’s spending-sapping Q4 plunge came in December alone, after much of the surge in holiday shopping was already over.

If big U.S. companies’ sales growth continues slowing or even starts shrinking in 2019, corporate-profits growth will collapse. While Q1 2019’s earnings season doesn’t start for another 5 weeks or so, plenty of companies have warned that they see revenues slowing much more than Wall Street expected. If Q4 2018 was indeed a major stock-market trend change from bull to bear, corporate results will continue deteriorating.

The mega-cap companies dominating the SPX and American investors’ portfolios also enjoyed strong operating-cash-flow-generation growth in Q4. Their collective OCFs surged 11.5% y/y to $195.8b. Individual companies enjoyed average OCF gains of 10.8% y/y. That looks great on the surface, but just like sales it represents a sharp slowdown from huge y/y OCF growth seen in the prior four quarters.

Starting in Q4 2017 the SPX top 34’s operating cash flows averaged growth of 17.0%, 52.5%, 30.3%, and 20.6% YoY. So Q4’18’s still-strong OCF growth actually decelerated by almost 2/3rds from the precedent of the prior year. That was the prevailing theme of Q4’18 results, good numbers but already slowing fast from the rest of 2018’s even though last quarter had easy annual comparisons across those corporate tax cuts.

Actual corporate profits among these elite U.S. companies are critical to prevailing valuations. The price-to-earnings ratio is the classic measure of how expensive stock prices are. It simply divides companies’ current stock prices by their total earnings per share over the last four reported quarters. So profits are really the only corporate results that matter for valuations, making their growth trends the most important of all.

Interestingly the top 34 SPX components’ total GAAP profits actually shrunk 1.4% y/y to $110.6b in Q4! That doesn’t make sense given their total revenues growth of 4.2%, which earnings should’ve amplified. But a couple big factors played into that surprising decline. After the Tax Cuts and Jobs Act was passed near the end of 2017, companies had to make huge adjustments to overpaid or underpaid taxes on their books.

These are called deferred tax assets and liabilities, which would suddenly be valued very differently under the new corporate-tax rules. So as I analyzed last year, the top 34 SPX companies ran a staggering $209.2b of TCJA adjustments through their earnings in Q4’17! Thus that earlier comparable quarter to Q4 2018 was a mess in GAAP-earnings terms. Q4 2017 was probably the most-distorted quarter in SPX history.

But with about half those one-time TCJA adjustments resulting in profits gains and half in losses, the net impact to overall SPX-top-34 earnings in Q4 2017 was essentially a wash at +$2.7b. That merely boosted overall Q4 2017 profits by 2.5%. A far-more-important factor in Q4’18’s YoY earnings decline came from a single company, Warren Buffett’s Berkshire Hathaway. It was the 5th-largest SPX component as 2018 ended.

BRK suffered a catastrophic $25.4b GAAP loss last quarter! That was almost entirely due to the sharp stock-market decline, which hammered Berkshire’s gigantic investment portfolio lower. It suffered $27.6b of non-cash losses that now have to be run through quarterly earnings. A new accounting rule now requires that unrealized capital gains and losses must be flushed through the bottom line, really irritating Buffett.

In BRK’s 2018 annual report he wrote “As I emphasized in the 2017 annual report, neither Berkshire’s Vice Chairman, Charlie Munger, nor I believe that rule to be sensible. Rather, both of us have consistently thought that at Berkshire this mark-to-market change would produce what I described as “wild and capricious swings in our bottom line.” … Wide swings in our quarterly GAAP earnings will inevitably continue.”

“That’s because our huge equity portfolio – valued at nearly $173 billion at the end of 2018 – will often experience one-day price fluctuations of $2 billion or more, all of which the new rule says must be dropped immediately to our bottom line. … Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety.” Berkshire’s operating earnings were $5.7b in Q4’18, soaring 71.4% y/y!

If BRK’s epic unrealized capital loss is ignored, total SPX-top-34 earnings would’ve surged 23.2% y/y in Q4 2018. On average these top 34 SPX companies reporting profits in both Q4 2017 and Q4 2018 averaged similar 27.8% y/y gains. But the same sharp-deceleration story seen in revenues and OCFs also applies here. The previous four quarters saw far-stronger average growth of 137.0%, 45.9%, 44.5%, and 53.8% y/y!

The massive swings in Berkshire’s enormous investment portfolio are going to distort overall corporate profits in all future quarters with significant SPX gains or losses. We’ll have to watch that going forward, and adjust for it if necessary. But overall corporate profits will be much cleaner in coming years with the TCJA transition year of 2018 behind us. Apples-to-apples comparisons will once again become the norm.

The major slowdown in big U.S. companies’ revenues, operating cash flows, and earnings growth in Q4 2018 is certainly ominous. Especially since the majority of the SPX’s plunge last quarter came relatively late in December. But the most-important thing for attempting to divine whether that monster bull remains alive and well having merely suffered a severe correction, or a young bear is underway, is how valuations look.

These top 34 SPX companies that earned GAAP profits over the past four quarters averaged trailing-twelve-month price-to-earnings ratios way up at 39.7x as Q4 ended! That’s 29.4% above Q4 2017’s average a year earlier, and well into dangerous bubble territory. Over the past century-and-a-quarter or so, U.S. stock markets have averaged 14x earnings which is fair value. Twice that at 28x is where bubble territory begins.

Despite remaining scary-high, big U.S. companies’ average valuations did moderate considerably in Q4. The prior four quarters saw the SPX top 34’s average TTM P/Es run 30.6x, 46.0x, 53.4x, and 49.0x. So the severe near-bear correction definitely did some real work in mauling valuations down. And the P/Es in these tables are as of the end of Q4, which of course didn’t yet reflect the solid y/y growth in Q4 earnings.

By the end of February the top 34 SPX companies’ average TTM P/Es had further dropped to 26.4x, still very expensive but no longer bubble levels. That includes these Q4 results and is even despite the SPX’s powerful rebound rally out of late December’s near-bear lows. So the situation today is nowhere near as dire as at the end of Q4’18 on the valuation front. But that doesn’t mean stock markets are out of the woods.

Bear markets exist because stocks get too expensive leading into the ends of preceding bulls. At 14x fair value it takes 14 years for a company to earn back the price investors are paying for it. The reciprocal of that is a 7.1% return, which is mutually beneficial for both investors with surplus capital and companies that need it. Once extreme bubble valuations birth bear markets, they don’t hibernate until stocks are cheap.

Throughout all of 2018 the U.S. stock markets were trading at extreme bubble valuations. Then in Q4 that severe 19.8% correction hammered the SPX to the verge of formal bear territory. The rebound since has all the hallmarks of a massive bear-market rally. Wall Street’s oft-cited belief that Q4’s plunge was more than enough to restore balance to these stock markets isn’t credible. Bears don’t stop with stocks still expensive!

Historical bear markets after major bulls nearly always maul prevailing US-stock-market valuations back down to cheap levels at 7x to 10x earnings in TTM P/E terms. With the top U.S. stocks averaging 39.7x as Q4 waned and 26.4x at the end of February, the valuation-mean-reversion work still has a long way to go. It is certainly not safe to assume no bear is coming until the SPX trades under 14x, which is far lower.

The SPX soared 11.1% YTD by the end of February, hitting 2784.5. Merely to get to fair value at 14x earnings, not even overshoot to the downside, the SPX has to fall to 1476.6! That’s another 46.7% under this week’s levels! And if corporate earnings actually start retreating this year, the SPX downside targets will fall proportionally. Big bears are normal and inevitable after big bulls, as I explained in depth in late December.

Nearly a decade of Fed-QE-goosed bull market has left traders forgetting how dangerous bears are. The SPX’s last two bears were a 49.1% decline over 2.6 years ending in October 2002, and a 56.8% plunge in 1.4 years climaxing in a stock panic to a March 2009 low! With the big U.S. stocks sporting extreme bubble valuations all of last year, and still near bubble valuations now, it’s hard to believe we aren’t in a young bear.

If that proves true, investors need to lighten up on their stock-heavy portfolios, or at least put stop losses in place. Cash is king in bear markets, since its buying power grows. Investors who hold cash during a 50% bear market can double their holdings at the bottom by buying back their stocks at half-price. But cash doesn’t appreciate in value like gold, which actually grows wealth during major stock-market bears.

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The bottom line is big U.S. stocks’ Q4 2018 results looked impressive on the surface. Good annual growth in sales, operating cash flows, and even earnings excluding Berkshire’s huge mark-to-market losses appeared to buck Q4’s major stock-market selloff. But these growth rates all suffered sharp decelerations from those seen in preceding quarters, suggesting a slowdown is underway. That’s a real problem for stock markets.

Valuations remain dangerously high, deep into bubble territory at the end of Q4. And even after the Q4 earnings were included by late February, near-bubble valuations persisted. That means the likely bear has barely started its stock-price-mauling work to mean revert expensive valuations. On top of that, 2018’s anomalous corporate-tax-cut-transition growth rates are history. All this will continue to pressure stock prices.

Adam Hamilton, CPA

March 11, 2019

The gold miners’ stocks have been climbing higher on balance, enjoying a solid upleg that is gathering steam. That’s fueling improving sentiment, driving more interest in this small contrarian sector. This gold-stock upleg is likely to grow in coming months, partially because of very-favorable spring seasonals. The gold stocks’ second-strongest seasonal rally of the year typically unfolds between mid-March to early June.

Gold stocks exhibit strong seasonality because their price action mirrors that of their dominant primary driver, gold. Gold’s seasonality generally isn’t driven by supply fluctuations like grown commodities experience, as its mined supply remains fairly steady year-round. Instead gold’s major seasonality is demand-driven, with global investment demand varying dramatically depending on the time in the calendar year.

This gold seasonality is fueled by well-known income-cycle and cultural drivers of outsized gold demand from around the world. The seasonal gold year starts in late July as Asian farmers begin reaping their harvests. They plow some of their surplus income into gold. That’s soon followed by the famous Indian wedding season in autumn, with its heavy gold buying for brides’ dowries during marriage-auspicious festivals.

After that comes the Western holiday season, where gold jewelry demand surges for Christmas gifts for wives, girlfriends, daughters, and mothers. Following year-end, Western investment demand balloons after bonuses and tax calculations as investors figure out how much surplus income the prior year generated for investment. Then after that Chinese New Year gold buying flares up heading into February.

These understandable cultural factors drive surges of outsized gold demand between late summer and late winter. But interestingly there is one more gold-demand spike in spring. Over the years I’ve seen a variety of theses explaining this mid-March-to-late-May gold rally, but nothing definitive like for the rest of the year’s seasonality. As silly as it sounds, I suspect spring itself is the reason for this demand surge.

Sentiment exceedingly influences investing, which requires optimism for the future. Investors won’t risk deploying their scarce capital unless they believe it will grow. And the glorious expanding sunshine and warming temperatures of spring naturally breed optimism. The vast majority of the world’s investors are far enough into the northern hemisphere that spring has a major psychological impact, buoying their spirits.

Since it is gold’s own demand-driven seasonality that fuels the gold stocks’ seasonality, that’s logically the best place to start to understand what’s likely coming. Price action is very different between bull and bear years, and gold remains in a young bull market. After being crushed to a 6.1-year secular low in mid-December 2015 on the Fed’s first rate hike of this cycle, gold blasted 29.9% higher over the next 6.7 months.

Crossing the +20% threshold in March 2016 confirmed a new bull market was underway. Gold corrected after that sharp initial upleg, but normal healthy selling was greatly exacerbated after Trump’s surprise election win. Investors fled gold to chase the taxphoria stock-market surge. Gold’s correction cascaded to mammoth proportions, hitting -17.3% in mid-December 2016. But that remained shy of a new bear’s -20%.

Gold’s last mighty bull market ran from April 2001 to August 2011, where it soared 638.2% higher! And while gold consolidated high in 2012, that was technically a bull year too since gold just slid 18.8% at worst from its bull-market peak. Gold didn’t enter formal bear-market territory at -20% until April 2013, thanks to the crazy stock-market levitation driven by extreme distortions from the Fed’s QE3 bond monetizations.

So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, and resumed in 2016 to 2019. Thus these are the years most relevant to understanding gold’s typical seasonal performance throughout the calendar year. We’re interested in bull-market seasonality, because gold remains in its latest bull today and bear-market action is quite dissimilar.

Prevailing gold prices varied radically throughout these modern bull-market years, running between $257 when gold’s last secular bull was born to $1894 when it peaked a decade later. All these years along with gold’s current bull since 2016 have to first be rendered in like-percentage terms in order to make them perfectly comparable. Only then can they be averaged together to distill out gold’s bull-market seasonality.

This chart averages the individually-indexed full-year gold performances in those bull-market years from 2001 to 2012 and 2016 to 2018. 2019 isn’t included yet since it remains a work in progress. This bull-market-seasonality methodology reveals that gold’s spring rally is its last push higher before the summer doldrums arrive. While this is gold’s smallest seasonal rally of the year, the gold stocks greatly leverage it.

During these modern bull-market years from 2001 to 2012 and 2016 to 2018, gold’s spring rally tended to start in mid-March on average. From that major seasonal low following the winter rally, gold often starts grinding higher before its gains accelerate through April and much of May. This spring rally has generally run its course by late May. Across the 15 bull years in this study, gold averaged modest spring rallies of 3.3%.

This spring rally unfolds rapidly, with an average duration of just 2.2 months. That makes it the smallest and shortest of gold’s three major seasonal rallies, falling way behind the champion 9.3% winter rally that precedes it and the strong 5.7% autumn rally that follows the summer doldrums. Nevertheless, it is still well worth trading. 3.3% gains do really make a difference, and naturally about half of years exceed this mean.

On average gold’s spring-rally bottoming occurred on March’s 10th trading day, which will be the 14th this year. If today’s seasonals stay true to form, gold will slump in the first couple weeks of March. But that seasonal pullback between the winter and spring rallies is pretty modest, averaging just 1.3% over a few weeks at most. The resulting mid-March lull in gold prices spawns an excellent gold-stock buying opportunity.

Gold’s average seasonal performances in March, April, and May during these modern bull-market years ran -0.3%, +1.6%, and +0.6%. While even April is just gold’s 6th-best month of the year, it still has an outsized impact on gold-stock prices. This has to be sentiment-driven. Optimism runs high in the spring anyway, and plenty of bullish psychology lingers following gold stocks’ strong winter rally in preceding months.

This year’s spring gold rally has excellent potential to come in on the large side. Gold investment demand surged in Q4’18 as global stock markets crumbled. They are likely rolling over into a long-overdue major bear. When investors start worrying its next major downleg is brewing, they will again flood into gold to continue diversifying their stock-heavy portfolios. Surging gold investment demand propels gold strongly higher.

That may push gold to the verge of a major decisive breakout to new bull highs! At best in February, gold hit $1341 on close. Assuming a 1.3% early-March seasonal pullback before a typical 3.3% spring rally, gold would hit $1367. That’s just above its bull-to-date peak of $1365 seen way back in early July 2016. Investor and speculator interest in gold, and capital inflows into it, will explode as new bull highs are achieved.

And as goes gold, so go gold stocks. Gold stocks also exhibit strong seasonality, which is of course the direct result of gold’s own seasonality. Since gold-mining costs are largely fixed when mines are being planned, fluctuations in gold’s price flow directly into amplified moves in gold-mining profits. Higher gold prices drive much-higher earnings for the gold miners, which attract in more investors to bid up stock prices.

The ironclad historical relationship between the price of gold, gold-mining profitability, and therefore gold-stock price levels is exceedingly important to understand. If you need to get up to speed, I wrote an essay looking at gold-stock price levels relative to gold early last month. Fundamentally gold stocks are leveraged plays on gold, and greatly outperform in the spring on gold’s seasonals and general optimism.

This next chart applies this same bull-market-seasonality methodology used on gold directly to the gold stocks. It looks at the average annual indexed performance in the flagship HUI NYSE Arca Gold BUGS Index in these same bull-market years of 2001 to 2012 and 2016 to 2018. Using the HUI is necessary because the popular GDX VanEck Vectors Gold Miners ETF was only born in May 2006, missing bull years.

That was halfway into the last secular gold-stock bull, which ran from November 2000 to September 2011. Over that long 10.8-year span, the HUI skyrocketed a life-changing 1664.4% higher on gold’s parallel 638.2% bull! Gold-stock prices naturally mirror and amplify gold action since it dominates gold-mining earnings. That’s true across entire secular bulls, within individual uplegs, and even in calendar-year seasons.

Gold stocks’ seasonal spring rally is much stronger than gold’s, buttressing that spring-optimism-drives-stock-buying thesis. Between mid-March and early June, the gold stocks have averaged hefty 12.2% rallies in these 15 modern bull-market years. That makes for exceptional 3.7x upside leverage to gold’s 3.3% seasonal spring rally! Interestingly this is gold stocks’ best seasonal leverage to gold’s gains by far.

While the HUI averaged 14.9% surges during gold’s winter rally, that only made for 1.6x upside leverage to gold’s big 9.3% gain. And the HUI’s 9.3% average gain during gold’s autumn rally also only amplified gold’s 5.7% gain by 1.6x. So while the gold-stock spring rally’s 12.2% average gains rank second out of these three seasonal rallies, it offers the most bang for the buck in gold-stock upside compared to gold!

Like gold, the gold miners’ stocks suffer a seasonal slump from late February to mid-March. That has averaged 2.7% in these modern bull-market years. So don’t be worried into selling if we see a typical early-March slump in this sector. That’s usually just a mild pullback before gold stocks’ strong spring rally gets underway. Any seasonal weakness is a great opportunity to add new gold-stock trades relatively low.

The gold stocks’ post-winter-rally pre-spring-rally lull tends to bottom on March’s 11th trading day, which will be the 15th this year. From there the HUI surges 12.2% higher on average over the next 2.7 months into early June. Interestingly the gold stocks tend to top a couple weeks after gold peaks in late May. That’s likely the result of momentum fueled by spring optimism and strong gains since the prior summer.

Assuming this year’s gold-stock seasonals conform to their bull-year precedent in coming months, some impressive levels are coming before summer. If the HUI first retreats 2.7% from its February peak into mid-March before powering 12.2% higher into early June, we are looking at 193.0 heading into this year’s summer doldrums. Those would be the best gold-stock levels since February 2018 on merely normal seasonals.

But this year’s spring seasonal rally has real potential to grow much larger than usual. Of course if gold’s own spring rally becomes outsized due to stock-market-selloff-driven surging gold investment demand, the gold miners’ stocks will leverage those gains. And the higher gold stocks climb, the more bullish their psychology. Speculators and investors alike love chasing momentum and piling into winning trades en masse.

More importantly this sector’s strengthening fundamentals should support bigger seasonal gains. Gold’s price averaged $1228 in Q4’18. While the gold miners are still finishing reporting their results for last quarter and full-year 2018, odds are their collective all-in sustaining costs will remain flat. Every quarter I wade through the latest results of the major gold miners of GDX, and usually publish the Q4 ones in mid-March.

Over the last four fully-reported quarters ending in Q3’18, the GDX gold miners averaged AISCs of $858, $884, $856, and $877. That makes for an $869 mean, but let’s round that to $875 for easier calculations. At Q4’s average gold price of $1228 and $875 AISCs, the major gold miners of GDX and the HUI likely earned profits near $353 per ounce last quarter. But so far in Q1, the average gold price has surged to $1305!

With AISCs this quarter likely to be stable too around that usual $875, the gold miners are likely earning profits of $430 per ounce so far in Q1. That is a massive 21.8% higher quarter-on-quarter! If investors expect Q1’19 earnings to come in this strong, there’s no way gold stocks will merely see a seasonally-average spring rally. Strong operational results in both Q4 and Q1 reporting should fuel a major gold-stock bid.

Seasonal spring rallies can balloon very large in rising-gold-price environments, which drive excellent fundamentals for the gold miners. The last example happened in spring 2016, when the HUI powered 32.3% higher within its normal spring-rally span! That was just a fraction of a monster 182.2% upleg that skyrocketed over just 6.5 months. Gold-stock buying is fast and furious when momentum fuels enthusiasm.

This last chart breaks down gold-stock seasonality into even-more-granular monthly form. Each calendar month between 2001 to 2012 and 2016 to 2018 is individually indexed to 100 as of the previous month’s final close, then all like calendar months’ indexes are averaged together. Slicing up seasonal tendencies this way shows May has actually averaged gold stocks’ strongest month of the year in modern bull-market years!

During the 15 Aprils in these modern gold bull-market years, the gold stocks as measured by the HUI saw average gains of 1.6%. But the lion’s share of the spring-rally gains came in May, where average gains nearly tripled to 4.7%! For decades if not longer, May has been one of the best and most-important months to be heavily long gold miners’ stocks. Only February and November have managed to rival it.

The key to gold stocks’ spring rally is to get your capital deployed by mid-March, when gold stocks swoon to their spring-rally bottoming. In intra-month terms the initial gains are often fast in late March as gold stocks rebound out of their seasonal lull. But then the spring rally tends to slow down in mid-April, which invariably discourages impatient and short-sighted traders. The real gains come in May, when gold stocks surge.

Of course the standard seasonality caveat applies that these are mere tendencies, not primary drivers of gold or gold stocks. Seasonal tailwinds can be easily drowned out by bearish sentiment, technicals, and fundamentals. Seasonality doesn’t always work, especially when it doesn’t align with the primary drivers of sentiment, technicals, and fundamentals in that order. Thankfully that certainly isn’t the case this year.

Gold-stock sentiment is growing increasingly bullish as this sector’s solid upleg gathers steam. Seeing higher lows and higher highs on balance further feeds into positive psychology, and traders love to chase momentum in rallying sectors. Mounting stock-market fears of a young bear getting underway should continue to push gold investment demand higher. The resulting higher gold prices really boost mining profits.

Outsized gold-stock gains during this spring-rally timeframe are fully justified fundamentally when gold itself is rallying. When sentiment, technicals, fundamentals, and seasonals all align behind gold stocks, they often surge dramatically higher. Unfortunately most speculators and investors won’t realize this until most of the spring-rally gains have already been won. Buy low in mid-March instead of buying high in early June!

While you can ride gold stocks’ spring rally higher in GDX, the major miners dominating it are struggling to grow their production. Far-better gains will be won in smaller mid-tier and junior gold miners with superior fundamentals. The best are increasing their output through new mine builds and expansions, which also lowers their costs further boosting their profits. Their upside potential utterly trounces that of the GDX majors.

The earlier you get deployed, the greater your gains will be. That’s why the trading books in our popular weekly and monthly newsletters are currently full of better gold and silver miners mostly added in recent months. The gains we won in 2016 were amazing the last time American stock investors returned to gold. Our newsletter stock trades that year averaged +111.0% and +89.7% annualized realized gains respectively!

The gold-stock gains should get really big as today’s young gold and gold-stock uplegs grow. The gold miners are the last undervalued sector in these still-expensive stock markets, and rally with gold during stock-market bears unlike anything else. To multiply your wealth in the stock markets you have to do your homework and stay abreast, which our newsletters really help. They explain what’s going on in the markets, why, and how to trade them with specific stocks. You can subscribe today for just $12 per issue!

The bottom line is gold stocks often experience a strong spring rally seasonally. This is driven by gold’s own seasonality, where outsized investment demand arises at certain times during the calendar year. Gold usually enjoys a solid spring rally likely driven by the universal optimism this season brings. And since gold drives gold miners’ profitability, their stock prices naturally follow it higher while amplifying its gains.

This year’s coming spring rally is due to start in mid-March, with great potential to grow much larger than normal. Gold-stock sentiment is slowly improving as this sector’s current upleg continues grinding higher on balance. And higher gold prices driven by renewed investment demand on stock-market-selloff fears is really boosting gold-mining earnings. All this with strong seasonal tailwinds should fuel an outsized spring rally.

Adam Hamilton, CPA

March 4, 2019

The gold miners’ stocks surged strongly last week, blasting to new upleg highs. The mounting gains are naturally driving more interest in this small contrarian sector, shifting sentiment towards bullish. Despite their accelerating rally, gold stocks still remain fairly low technically and deeply undervalued relative to gold. So their strengthening upleg likely has plenty of room to run considerably higher in coming months.

The gold miners’ stocks are ultimately leveraged plays on gold, which overwhelmingly drives their profits. The much-maligned yellow metal has enjoyed a strong upleg since mid-August, when record gold-futures short selling pounded it to a deep 19.3-month low of $1174. Gold has been gradually powering higher on balance ever since, surging near $1341. That makes for 14.2% gains over 6.1 months, an excellent run.

Gold miners’ earnings are amplifying these higher gold prices, driving this parallel gold-stock upleg. This is readily evident in the most-popular gold-stock benchmark, the GDX VanEck Vectors Gold Miners ETF. Launched back in May 2006, GDX has an insurmountable first-mover lead. This week its net assets of $11.1b were a whopping 50.6x larger than the next-biggest 1x-long major-gold-miners-ETF competitor!

The gold stocks as measured by GDX have certainly capitalized on gold’s advance. Between its own brutal 2.6-year low in early September and this week, GDX has surged 33.0% higher in 5.3 months. That works out to gold stocks leveraging gold’s gains by 2.3x in recent months. That is right in line with the 2x to 3x usually seen historically in the major gold miners. Many smaller gold miners are doing even better.

As this upleg was being born and growing, I wrote multiple essays explaining what was happening and why it was important to get heavily long gold stocks. We filled the trading books in our newsletters with great smaller gold and silver miners with superior fundamentals to the majors. Our unrealized gains this week were already running 60%+ on multiple trades! This young gold-stock upleg is even now quite lucrative.

While it is always better to buy in earlier than later, GDX’s 33.0% upleg to date remains relatively small. In essentially the first half of 2016, GDX soared 151.2% higher in just 6.4 months in its last major upleg! Really-big uplegs are par for the course in the volatile gold-stock sector. Gold stocks’ last secular bull ran from November 2000 to September 2011. Half of that was in the pre-gold-stock-ETF era before GDX’s launch.

During that long 10.8-year span, the classic HUI NYSE Arca Gold BUGS Index skyrocketed an incredible 1664.4% higher! That life-changing secular bull consisted of 12 separate uplegs. One was an anomaly, the mean reversion out of 2008’s first stock panic in a century. Excluding that behemoth, the 11 normal ones averaged hefty gains of 80.7% over 7.9 months. So GDX’s recent run is nothing by this sector’s standards.

At this stage all gold stocks have really done is regain their sharp late-summer losses. This GDX chart over the past few years or so illuminates the gold-stock technicals. The major gold miners’ stocks have merely climbed back up into their multi-year consolidation basing trading range. The lion’s share of this upleg’s gains are most probable as GDX breaks out above longstanding resistance, likely in coming months.

For fully 21.5 months leading into August 2018, GDX consolidated in a well-defined trading range from $21 lower support to $25 upper resistance. That sideways grind bled away bullish psychology, leading many traders to abandon this drifting sector. By late last summer not many were left, and most of them were soon driven out too. August’s extreme record gold-futures short selling spawned a washout in gold stocks.

Because this sector is so volatile, running loose trailing stops is essential for managing risk. The lower gold was hammered, the more selling pressure mounted in its miners. That forced them to stop losses, unleashing more mechanical selling and fueling a vicious circle. Gold stocks cascaded lower in a brutal forced capitulation into mid-August, and a secondary echo capitulation bashed them lower still in early September.

GDX’s $21 support was shattered as this benchmark ETF plunged to $17.57 by mid-September. Several days later I published an essay Gold-Stock Forced Capitulation explaining all this right in those depths of bearish despair. I concluded “…the aftermath of capitulations is exceedingly bullish. … The technicals and sentiment spawned by capitulations are so extreme they usually birth massive uplegs and entire bull markets.”

With GDX just plunging to an extreme and unsustainable 2.6-year low, we were aggressively buying great gold stocks and recommending them to our newsletter subscribers. Being bullish when everyone else was bearish was the right call of course. The gold stocks started powering higher in their upleg persisting to today. I did my best to let speculators and investors know about the great upside opportunities in this sector.

Since that forced-capitulation essay, I’ve published 23 more weekly essays on subsequent Fridays. Fully 14 of those were about gold stocks, exploring their deep undervaluation relative to gold, their excellent technicals, and strong fundamentals. If you want to multiply your wealth in the stock markets, you have to pay attention all the time. Most traders make the costly mistake of ignoring sectors until they get exciting.

I’ve been trading stocks for over three decades now, and doing it full-time professionally to earn a living for two-thirds of that long span. One of the most-important lessons I’ve learned is it’s critical to always keep plugged in. If you are not following the markets, you are missing great opportunities. The only way to buy low before later selling high is staying abreast of beaten-down sectors, especially when they are despised.

The gold stocks kept marching higher on balance after that anomalous forced capitulation, carving higher lows and higher highs. In mid-October with GDX under $19 I explained why gold stocks were Stocks’ Last Cheap Sector. I concluded, “These gold miners’ stock prices are wildly undervalued relative to the metal which drives their profits. So they are overdue for a massive mean reversion and eventually overshoot.”

This new gold-stock upleg mostly drifted sideways in November, discouraging even early contrarians. I did my usual quarterly analyses of the newest Q3’18 results of the major gold miners of GDX and mid-tier gold miners of the GDXJ Van Eck Vectors Junior Gold Miners ETF. This critical fundamental homework proved “…the major gold miners’ fundamentals remain far stronger than implied by their left-for-dead stock prices.”

While few traders cared about gold stocks in this upleg’s initial few months, December’s action started to change that. Gold surged 4.9% higher to $1282 that month as the US stock markets rolled over into a severe near-bear correction. Down 19.8% at worst since its late-September peak, the flagship S&P 500 broad-market stock index plunged 9.2% in its worst December since 1931 in the midst of the Great Depression!

The gold miners’ stocks ignored the burning stock markets to follow gold higher and leverage its gains like usual. GDX blasted up 10.5% that month, amplifying gold’s strong advance by a solid 2.1x! Finally this young gold-stock upleg was getting big enough to attract traders’ attention. I continued to do my best to spread awareness, writing about an imminent Gold-Stock Triple Breakout in mid-December with GDX near $20.

This leading gold-stock benchmark was on the verge of breaking out above three major upper-resistance zones simultaneously. These included the old $21 support of its consolidation basing trend, a downward-sloping resistance line from a bearish descending-triangle technical pattern, and most importantly GDX’s key 200-day moving average. Gold stocks’ improving technicals were on the verge of getting far more bullish.

I concluded, “Three major GDX resistance zones have converged just above current levels. Once the gold stocks surge decisively over, the technically-oriented traders will take notice. They will likely start chasing the momentum accelerating the gains, with buying begetting buying.” That indeed came to pass. By early January that super-bullish upside triple breakout in GDX had already become a fait accompli.

I wrote another essay Gold-Stock Upleg Breaking Out to explain the huge upside potential the gold stocks had after clearing those essential technical hurdles. I concluded this gold-stock upleg “is now surging in a major upside breakout that should unleash a flood of new buying. With gold climbing on balance too, everything is in place to fuel a major gold-stock upleg.” There were many opportunities to buy gold stocks low.

January was a roller-coaster month for gold stocks, with GDX rallying then swooning then surging to big new upleg highs at month-end. But on balance this leading gold-stock benchmark continued carving both higher lows and higher highs. In late January I explained why Gold-Stock Upleg Pauses were nothing to worry about. All major uplegs flow and ebb, surging two steps forward before slumping one step back.

Speculators and investors needed to remember that “Uplegs don’t shoot higher in straight lines, pullbacks within them are normal and expected. They serve to rebalance sentiment keeping uplegs healthy.” Then in early February GDX flashed one of the most-powerful buy signals of all, the fabled Golden Cross. That is when its 50dma crosses back above its 200dma soon after a major secular low in GDX, a wildly-bullish omen.

But gold stocks again retreated in early February after surging in late January, again worrying traders who lacked perspective. So a couple weeks ago with GDX just over $22, I published another essay showing Gold Stocks Gather Steam. It explained that rare Golden Cross buy signal and concluded, “All this has really started to shift sentiment back to bullish, which will attract in lots more capital to chase the momentum.”

That indeed proved correct again. The more you study markets, the deeper you understand them and the more sense their seemingly-capricious rhythms make. The more your market experience and knowledge grow, the higher the odds you can figure out what’s most likely next. If you aren’t in a position to watch markets full-time for decades, it’s essential to spend a little time and money to learn from someone who is and has.

I started investing in stocks when I was 12 years old, using money earned from summer jobs. I had very little market knowledge in those early years. So I subscribed to a few financial newsletters written by market experts with vastly more experience and wisdom than me. Their hard-earned insights from long decades of study kept me on the right track to gradually grow my meager capital at the time. I loved those guys!

Universally in life, the more time anyone spends doing anything the better they get at it. Success is often directly proportional to time on task. So if you can’t or don’t want to devote your life to trading, you need to diligently and consistently learn from those who have. Being right on this gold-stock upleg is no big deal, as it’s been garden-variety and in line with precedent so far. It has been both predictable and gameable.

After drifting lower in the first half of February, GDX started surging again late last week. Heading into last weekend the major gold stocks enjoyed solid 1.0% and 1.3% daily rallies per this ETF. Those were directly driven by gold climbing 0.5% and 0.7% after slumping to its own mid-month lows. While US stock markets were closed Monday, that gold-stocks-rallying-and-amplifying-gold trend really accelerated on Tuesday.

After edging up to a new upleg high last Friday, gold continued climbing modestly in foreign trading over the long weekend in the U.S. By Tuesday morning gold-futures speculators were seeing gold at its best levels in 10.1 months. So they apparently rushed to buy, catapulting gold 1.5% higher to $1341! GDX surged 3.2% that day, leveraging gold’s advance by 2.1x. That momentum drove another 1.0% rally Wednesday.

But despite the major gold stocks climbing 33.0% in 5.3 months as of the middle of this week, they remain fairly low technically. At $23.36, GDX was merely back up to the middle of its old multi-year consolidation basing trend between $21 to $25. Traders aren’t going to get really excited until GDX powers decisively above $25 for the first time since mid-2016. While improving, gold-stock psychology is still relatively bearish.

I suspect GDX will challenge $25 in the next few months. Though this sector often experiences a seasonal lull into mid-March, gold stocks then enjoy a strong spring rally. As long as gold continues slowly climbing on balance, the gold stocks have excellent upside potential. Remember GDX’s last major upleg soared 151.2% in essentially the first half of 2016, and the prior secular gold-stock bull’s uplegs averaged +80.7%!

While the major gold miners’ technicals and sentiment both support bigger gains to come, perhaps the most-bullish argument of all comes from the fundamental side. The gold stocks remain relatively low compared to prevailing gold prices, the metal which directly drives their profits. They need to mean revert much higher to regain normal levels compared to gold. A simple ratio of gold stocks to gold illustrates this.

The GLD SPDR Gold Shares is the world’s dominant gold ETF. Dividing GDX’s daily close by GLD’s daily close yields the GDX/GLD Ratio, a great fundamental proxy for gold-stock valuations. Hammered to the low side by gold stocks’ late-summer forced capitulation, the GGR is just now regaining average levels for recent years’ gold bull. But mean reversions rarely stop at the averages, instead overshooting proportionally.

I explained this chart in depth a couple weeks ago in another essay, so just a brief update today. This Wednesday the GGR clawed back up to 0.185x, which is exactly at the 3.2-year average since today’s gold bull was born in mid-December 2015. At worst in mid-September, the GGR plunged to a deep 2.6-year secular low of 0.155x. That was 0.030x under this bull’s mean, portending a proportional overshoot higher.

Before this gold-stock upleg gives up its ghost, the odds really favor the GGR surging back to 0.215x. At this week’s gold-upleg-to-date high of $126.70 in GLD, that implies GDX near $27.25. That would be a powerful breakout above that old $25 consolidation-trend resistance line, and would catalyze a lot more trader interest in this small sector! It would extend this current gold-stock upleg’s gains to a more-normal 55.1%.

But if gold keeps rallying like it ought to as these overvalued and overbought US stock markets roll over again, the potential gold-stock upside is far greater. $1400 gold is just 4.4% above this week’s levels, not a stretch at all. That would be a new bull-market high exceeding July 2016’s $1365, generating serious excitement to attract in new traders. At a proportional-overshoot 0.215x GGR, that leaves GDX near $28.50.

That’s still not particularly high, as GDX traded over $31.25 in early August 2016 in its own gold-bull-to-date peak. With speculators and investors actually excited about gold stocks then, the GGR hit 0.244x. Apply that to $1400 gold, and the GDX target climbs above $32.25. That would grow this upleg to +84%, right in line with the prior secular bull’s average. Make no mistake, the gold-stock upside from here is still big!

And that’s just this upleg, not the entire gold-stock bull. In the 2 years before 2008’s stock panic radically changed the markets, the GGR averaged 0.591x. In the 2 years after of 2009 and 2010, the GGR was still far higher than recent levels averaging 0.422x. Plug in the much-higher historical GGRs seen when gold stocks were far more popular, and higher gold prices, and GDX’s potential upside in this bull gets huge.

The best gains in today’s mounting gold-stock upleg are likely still yet to come. While you can play it in GDX, the major gold miners dominating this ETF are really struggling to grow their production. And that problem is even worse in the newly-merged super-majors, further retarding GDX’s performance. So the best gains will be won in smaller gold miners with superior fundamentals that are still expanding their outputs.

Coming gold-stock gains should be similarly huge as today’s strengthening gold and gold-stock uplegs grow. To multiply your wealth in the stock markets you have to do your homework and stay abreast, which our newsletters really help. They explain what’s going on in the markets, why, and how to trade them with specific stocks. You can subscribe today for just $12 per issue! That’s a trivial pittance for decades of hard-won market experience, knowledge, wisdom, and ongoing research.

The bottom line is gold stocks just surged higher again, their upleg getting stronger on balance. GDX continues to carve higher lows and higher highs, fueling improving sentiment. More traders are getting interested in this sector and bringing in more capital, driving gold stocks higher to strengthen a virtuous circle of buying. Gold-stock technicals, sentiment, and fundamentals all argue for bigger gains to come.

This current upleg remains relatively small by sector precedent. And gold stocks are just regaining their bull-average levels relative to gold, with lots of room to rally on a proportional mean overshoot. While a seasonal lull nears, mid-upleg pullbacks or consolidating drifts are normal and healthy. This gold-stock upleg is likely to grow a heck of a lot bigger in coming months’ major spring rally. Get deployed if you aren’t yet!

Adam Hamilton, CPA

February 25, 2019

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