Bloodbath of a summer for gold miner stocks July 22. 2022
(Adam Hamilton)
The gold miners’ stocks have just been slaughtered in recent months, spiraling relentlessly lower. This bloodbath of a summer has deteriorated into their worst in modern-gold-bull years! The resulting bearish sentiment has proven overwhelming, leaving this sector universally-despised. But this brutal gold-stock selloff is an unsustainable anomaly fueled by extreme gold-futures selling, which will soon reverse hard.
Merely paying attention to battered gold stocks these days is depressing, and analyzing them is grueling. Yet contrarian speculators and investors who have forged the mental toughness necessary to buy low know deeply-out-of-favor sectors offer the greatest upside potential. So we have to hold our noses and keep trudging forward through this gold-stock-sentiment hellscape. The recent carnage has been dreadful.
The leading gold-stock benchmark and trading vehicle remains the GDX VanEck Gold Miners ETF. While it feels like an eternity ago, in mid-April the major gold stocks dominating GDX were faring quite well. At $40.87, this ETF had blasted 39.5% higher in just 2.6 months in a strong young upleg. This small sector was regaining favor, starting to win the attention of more-mainstream traders. Then it all went pear-shaped.
In less than a month into mid-May, GDX plummeted 26.2%. It started to recover into early June, but only rallied 10.5% before another crushing wave of selling hit. That slammed the major gold stocks another 24.3% lower by this week. GDX’s total losses over the 3.1 months between mid-April to this Wednesday were a soul-crushing 38.2%! As price action drives sentiment, it is no wonder this sector has grown loathed.
The gold stocks are now suffering their worst summer performance in all modern gold-bull-market years, running from 2001 to 2012 and 2016 to 2022!
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As of this week, the major gold stocks have plunged a stunning 21.1% summer-to-date! Between 2001 to 2012 and 2016 to 2021, they averaged far-better 2.8% gains in this same span. So there’s no doubt recent months’ gold-stock death march lower is an exceptional anomaly. This severe drawdown is also unusual in its profile, proving gradual and remarkably-linear. Gold-stock selloffs are typically sharp and short-lived.
This relentless selling has felt like Chinese water torture, obliterating any residual bullish sentiment. The tiny fraction of traders still watching this left-for-dead sector are extrapolating this miserable downtrend into the indefinite future. They assume gold stocks are doomed to keep spiraling lower. Few contrarians are willing to try and catch these falling knives, so battered gold miners are seeing little bidding in this massacre.
But market extremes are never sustainable, neither technically nor sentimentally. Anomalous selloffs are almost always soon followed by symmetrical mean-reversion rallies higher. Bombed-out stock prices and suffocatingly-bearish psychology are inherently self-limiting. Once all traders susceptible to being scared into selling low have panicked and fled, that leaves only buyers. Their capital inflows fuel major reversals.
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From its earlier overbought topping in early March soon after Russia invaded Ukraine, gold has plunged 17.4% over 4.4 months as of this week. Speculators’ and investors’ confidence in this leading alternative investment was crushed as it collapsed from $2,051 to $1,695, a serious fall from grace. At best within that span from late March to mid-July, the USDX skyrocketed 11.1% to an incredible 20.1-year secular high!
Trading near 108.7 last week, the USDX had soared to extraordinarily-overbought levels 10.3% above its 200-day moving average! Normal overboughtness in recent years started at just 4% over that baseline. This long-dollar trade has become exceedingly-overcrowded in recent months. Just like with gold and its miners’ stocks, traders now assume the US dollar’s blistering strength will persist forever. They’re dead-wrong.
The USDX soared on an amazing confluence of unrepeatable one-off events. They started with the Fed’s most-extreme hawkish pivot in its entire century-plus history in recent months! That included ending QE4 bond monetizations, launching an aggressive new rate-hike cycle, and starting to unwind the extreme money printing of recent years through QT2 bond selling. All this coming so fast was wildly-unprecedented.
Starting in mid-March, the Fed’s FOMC accelerated its rate hikes from 25 basis points to 50bp then 75bp at three consecutive meetings! The latter two big hikes were the first the Fed dared at those levels since way back in May 2000 and November 1994. The Fed is universally expected to hike another 75bp at next week’s coming FOMC meeting. These soaring US interest rates attracted currency traders into the US dollar.
In just 25.5 months into mid-April 2022, the Fed had mushroomed its balance sheet a truly-astonishing 115.6% or $4,807b! Functioning as the monetary base, that more than doubled the US-dollar supply in just a couple years. So QT2 to start unwinding these crazy monetary excesses was started at $47.5b per month in June, before doubling to $95b monthly in September. That dwarfs QT1 in both size and intensity.
It took an entire year to slowly ramp up to QT1’s own terminal velocity of $50b a month of bond selling. The Fed will probably never be able to execute another similar hawkish shock in our lifetimes. Reversing from a zero-interest-rate policy to big-and-fast rate hikes while simultaneously birthing the largest QT monetary destruction ever attempted is totally-unique! That extreme hawkish shift is pricing into the markets.
Adding to that Fed-fueled dollar surge’s uniqueness, the euro plummeted in that same span. Between late March to mid-July where the USDX soared 11.1%, Europe’s common currency dropped near parity with a huge 10.2% loss. The euro dominates the US Dollar Index at 57.6% of its weighting, leaving the Japanese yen a distant-second at just 13.6%. This monster euro drop was as unique as the dollar’s surge.
The European Central Bank dragging its feet on tightening compared to the Fed was a big factor. That gap is closing though, as the ECB finally surprised this Thursday with a big 50bp hike! Like the Fed, the ECB is fighting raging Eurozone inflation fueled by its own extreme money printing in recent years. The euro’s anomalous weakness was also exacerbated by Europe’s dependence on Russian natural gas.
Traders dumped the euro as worries mounted that Russia would severely curtail or even halt shipments to punish European governments for supporting Ukraine. But this one-off event risk has been priced-in. Another factor is Italy’s troubled government forcing its bond yields higher. The ECB is trying to address that inter-country yield-fragmentation risk with new Italy-specific QE bond buying announced this week.
All this happening together in just a few months is extraordinary, and unrepeatable! The problem for gold and thus its miners’ stocks is gold-futures speculators watch the US dollar’s fortunes for their primary trading cues. So that monstrous USDX surge ignited extreme gold-futures selling, slamming gold sharply-lower which the major gold stocks of GDX dutifully amplified like usual. But those big moves are exhausted.
After the US Dollar Index rocketed parabolic to some of its most-extreme overbought levels ever, this wildly-overcrowded trade has run its course. The resulting euphoria and greed have already sucked in the vast majority of capital willing to chase that unsustainable momentum. The euro selling fueling its recent plunging is also way-overdone. The euro isn’t going to zero backed by the Eurozone’s huge economy.
The overdue big symmetrical mean-reversion reversals in both the US dollar and euro will ignite big gold-futures buying. That will catapult gold sharply-higher due to the same extreme leverage that pummeled it lower in recent months. With gold near $1,700 mid-week, each 100-ounce gold-futures contract controls $170,000 of it. Yet margin requirements only make traders keep $6,500 cash per contract in their accounts.
That enables extreme maximum leverage of 26.2x! Every dollar traded in gold futures at these levels has 26x the gold-price impact as a dollar invested outright! So when the enormous gold-futures selling of recent months gives way to proportional buying, gold is going to soar. Both speculators’ long and short bets on gold via futures are at unsustainable extremes with selling exhausted, which is super-bullish for gold.
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The gold-futures speculators punching way above their weights bullying around gold prices with outsized leverage is bad enough. 26x+ is criminal and should be outlawed, brought in line with stock markets’ 2x legal limit since 1974! There’s no reason one small group of traders should unfairly dominate any global market. Unfortunately the technical price action their reckless trading drives unduly influences investor psychology.
Gold’s fundamental backdrop today is phenomenal, wildly-bullish! Thanks to the Fed’s crazy QE4 money printing, US inflation is raging in its biggest super-spike since the 1970s. During the pair of those plaguing that decade, monthly-average gold prices from trough to peak headline CPI nearly tripled during the first before more than quadrupling in the second ! Gold investment demand should be soaring with red-hot inflation.
Stock bear markets also fuel major gold investment demand, to prudently diversify stock-heavy portfolios. Between early January to mid-June, the flagship US S&P 500 stock index fell 23.6% formally entering a new bear! And given US stock markets’ festering near-bubble valuations, this beast has a long ways to rampage. Investors should be flocking back to the leading alternative investment to protect their scarce capital.
Yet thanks to the serious technical damage inflicted on gold by indiscriminate myopic gold-futures selling recently, investors are exiting. The World Gold Council publishes comprehensive gold-investment-demand data quarterly, but the best high-resolution daily proxy for that is the combined holdings of the dominant GLD and IAU gold ETFs. Between late April to this week, those suffered a big 7.1% or 115.7t draw!
Investors love chasing upside momentum, so technical breakdowns spook them into fleeing. It doesn’t matter if they are righteous or not, fundamentally-driven or fueled by unsustainable gold-futures selling. This recent gold carnage driven by the gold-futures equivalent of 526.1t of selling shook loose at least another 115.7t of investment selling. That adds up to nearly two-thirds of 2021’s total investment demand!
While it’s been infuriating seeing gold artificially plunge in this most-bullish-environment-imaginable for it, the responsible gold-futures selling has exhausted. Weekly CoT reports are current to Tuesdays, but not released until late Friday afternoons. So the latest-reported CoT data before this essay was published is only as of Tuesday July 12th when gold was near $1,725. Even more gold-futures selling has happened since!
So all the following wildly-bullish gold analysis is understated. Total spec longs had fallen to just 303.7k contracts then, a 3.1-year secular low near levels not seen since mid-June 2019! Major secular support runs higher than that near 312k contracts. Spec longs aren’t likely to fall much lower, so their selling is spent. As longs outnumber shorts by 1.8x, the are proportionally-more-important for gold’s near-term direction.
Most of the gold-futures selling initially crushing gold between mid-April to mid-May was a huge long liquidation. But with most speculators abandoning their upside gold bets then, there wasn’t much left to sell from mid-June to mid-July. So the great majority of gold-futures selling crushing gold to its recent technical breakdown was shorting. Total spec shorts rocketed way up to 165.9k contracts last week!
Those extremes were the highest levels witnessed since 3.2 years earlier in late April 2019. While gold-futures speculators’ ludicrous leverage gives them tyranny over short-term gold prices, their capital firepower is very-limited. There’s only a small group of traders playing the gold-futures game, as the risks are crazy-high. So there’s only so much long and short selling these guys can do before they reach limits.
And those have almost-certainly been hit with spec longs at extreme 3.1-year lows while spec shorts are at extreme 3.2-year highs! Once their collective bets get that lopsidedly-bearish on gold, they soon have to reverse them with massive proportional buying. That initially starts with a short-covering squeeze on some inevitable gold-bullish news catalyst, with traders legally required to close out those positions by buying.
The resulting gold upside momentum from short-covering soon attracts in new long buyers, which propel gold higher accelerating its gains. That soon entices back investors which command vastly-larger pools of capital. This three-stage buying dynamic fuels major gold bull-market uplegs.
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Market history has proven many times that there is nothing more bullish for gold’s and gold stocks’ near-term fortunes than excessively-bearish gold-futures speculators. Once their capital firepower available for selling is exhausted as seen in very-low longs and very-high shorts, gold decisively bottoms. Then as these hyper-leveraged traders normalize their gold-futures bets, gold soars on big mean-reversion buying.
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The bottom line is this recent brutal gold-stock selloff is an extreme unsustainable anomaly. Gold stocks only collapsed because their metal was slammed lower by extreme gold-futures selling. That in turn was fueled by an extreme parabolic US-dollar rally on an unprecedented confluence of one-off events. But all that exhausted specs’ gold-futures-selling firepower, leaving their positioning at unsustainable bearish extremes.
That only leaves room for big mean-reversion buying to normalize these severely-lopsided gold-futures bets. That will catapult both gold and its miners’ stocks sharply-higher in massive symmetrical rallies. In just four months after the last time speculators’ positioning was similar in spring 2019, gold blasted 22% higher which GDX amplified to a 53% gain! Exceedingly-bearish gold futures are super-bullish for gold stocks.
[Full article recommended]
Gold-Stock Selloff Anomaly
https://www.zealllc.com/2022/gdsksoan.htm