Gold-Stock Upside Targets
Adam Hamilton
Archives
Apr 04, 2024
The gold miners' stocks are building steam, enjoying mounting upside momentum with gold powering to nominal record highs. Speculators and investors alike are taking notice of this high-potential sector that has long been overlooked. Despite their recent surge, gold stocks remain very undervalued relative to the metal that drives their profits. Their technicals and fundamentals argue for much-higher stock prices ahead.
Over the past five weeks or so, gold has blasted higher in a magnificent breakout rally! It was born as March dawned when a top Fed official hinted at more quantitative-easing Treasury monetizations. Gold shot up 2.0% that day to its first nominal record close since late December, and has achieved a dozen more since. Midweek gold was challenging $2,300, and its total upleg since early October had grown to 26.3%!
Who could've seen this coming? Me. The very day after gold bottomed under $1,820, I wrote an essay on gold's violent breakdown. My contrarian conclusion fighting universal bearishness was, "...gold's latest plunge was driven by massive gold-futures selling, leaving speculators' positioning exceedingly-bearish. These super-leveraged traders have probably about exhausted their capital firepower available for selling."
"That guarantees huge mean-reversion short-covering buying is imminent, which will catapult gold sharply higher." How high? While most other analysts were forecasting gold to keep grinding lower, I wrote "Yet gold can easily surge 20% to 25% out of excessively-bearish spec gold-futures positioning like today on stage-one and stage-two buying alone!" Those are respectively short-covering buying and long buying.
That's exactly what happened, as I detailed in a late-February essay on gold futures being reloaded. But while gold has been the belle of the ball, gold stocks have acted like ugly stepsisters. At best since early October, the leading GDX gold-stock ETF has merely rallied 27.9%. That's appalling, not even 1.1x upside leverage to gold! Normally GDX's major gold miners tend to amplify material gold moves by 2x to 3x.
The gold stocks have languished and lagged their metal for a variety of reasons, which I explored in an early-March essay. The day before I wrote that one, GDX had plunged to $25.79 which was actually a little under its early-October low of $25.91! Major gold stocks had slumped 0.5% during a 4.8-month span where gold had surged 11.7% higher. While bearish market anomalies feel bad, they offer great opportunities.
Extreme disconnects never last long, soon mean reverting to restore normal relationships. Over the last five weeks or so, GDX has rallied a sizable 28.5% leveraging gold's parallel surge by 2.2x. Naturally that is working wonders for sentiment, rekindling bullishness and attracting in more traders. As they chase these mounting gold-stock gains, this sector's outperformance relative to its underlying metal will grow.
This chart looks at GDX technicals over the past few years or so. The last time I ran it in early March, this dominant sector benchmark was right at that anomalous pre-gold-upleg low. But gold stocks have started to surge with gold since, achieving some nice gains. Yet GDX is still only about halfway up into its secular uptrend, still having massive room to mean revert higher. Much bigger gold-stock gains are still coming.
Gold stocks remind me of a great Easter sermon my pastor just gave at church focusing on Thomas the Apostle. After Jesus was crucified, Thomas's world came crashing down. He heard the impossible news of Jesus's resurrection, but remained skeptical. John's gospel records Thomas saying "Unless I see the nail marks in his hands and put my finger where the nails were, and put my hand into his side, I will not believe."
Forever branded Doubting Thomas for that, he was more of a realist. He wanted some real evidencethat Jesus had risen, and soon got it as Jesus visited and spoke with him. Right then Thomas believed, and went on to do many great works including spreading the gospel to India. Gold stocks have been out of favor so long they may as well be rising from the dead! So traders want hard evidence before believing this is real.
GDX surging nearly 30% in just over a month is starting to convince skeptics. The hardline bearishness on this sector that has festered for years is softening, with bullish green shoots sprouting up. In markets, buying begets buying. Traders lover chasing winners to ride their upside momentum. The higher and longer anything rallies, the more capital it attracts accelerating its gains. Doubt quickly transforms into belief.
Gold stocks' violent upside potential has largely been forgotten in recent years. GDX has enjoyed some modest-to-decent uplegs since 2021, clocking in at +28.4%, +41.4%, +52.1%, and +34.4%. Those are alright, but nothing to write home about. Averaging 39.1% gains, they really weren't compelling enough to overcome the challenges of contrarian trading. But go back just one more year, and everything changes.
In 2020 two separate GDX uplegs peaked at massive 76.7% and 134.1% gains! The first would've grown larger, but was prematurely truncated by March's pandemic-lockdown stock panic. Yet that pair of uplegs still averaged huge 105.4% gains. That's not unusual either. Between 2000 to 2011 in a mighty secular gold bull, the earlier HUI gold-stock index enjoyed twelve uplegs averaging 87.5% gains over 7.8 months!
Its total secular-bull gains skyrocketed to 1,664.4% in that span, amplifying gold's own underlying 638.2% secular bull by 2.6x! Gold's current secular bull was technically born in late September 2022, after the brunt of the Fed's most-extreme tightening cycle ever launched the US Dollar Index parabolic. Since then gold has merely rallied 41.6% at best, and GDX is only up 51.5%. These bull markets remain very young.
Again major gold stocks normally amplify material gold moves by 2x to 3x, with leverage growing later in uplegsas bullish sentiment flares. That simple metric implies GDX should be up 83% to 125% now, between $40 to $49. Reaching there from midweek levels would require GDX to surge another 21% to 48% from here. But that projection is conservative, as gold stocks' upside potential is much larger.
In the last few years, GDX peaked at $40.87 in mid-April 2022 before the Fed went ham on crazy rate hikes. The day that happened, gold closed at $1,977. It is 16.2% higher now, which implies GDX $47.50 if it rallied proportionally. But the major gold miners' fundamentals are much better today, because their earnings leverage higher prevailing gold prices. I have a unique research thread with the data to prove that.
Right after every quarterly earnings season, I painstakingly analyze the latest results reported by GDX's 25 largest gold miners. My recent mid-March essay examining their Q4'23 results was the 31st quarter in a row I've done that hard work. One of the key takeaways is quarterly average gold prices less these elite gold miners' quarterly average all-in sustaining costs is a great proxy for sector profitability, which is exploding.
GDX's Q2'22 peak came before extreme Fed tightening launched the dollar stratospheric, slamming gold and its miners' stocks. That quarter gold averaged $1,872 while the GDX top 25's AISCs averaged $1,281 per ounce. That implied fat unit profits of $591 per ounce, which were great. Yet in this just-finished Q1'24, gold averaged a record $2,072! While Q1 hasn't been reported yet, 2024 AISCs have been projected.
They've been guided to midpoints averaging $1,334 per ounce, implying last quarter's unit profits running way up near $738! Those are 24.9% higher than during GDX's April 2022 recent high-water mark. That pushes a comparable GDX price target up to $51, another 54% higher than midweek levels! And that remains way under GDX's record closing high of $66.63 in early September 2011, when gold ran just $1,866.
While bullish upside targets for gold stocks abound, the most-probable in my mind come from 2020. The aforementioned mighty 76.7% and 134.1% GDX uplegs both cresting that year responded to underlying monster 42.7% and 40.0% gold uplegs. And those enjoyed a critical attribute that hadn't been seen again until gold's current upleg got underway. Those 2020 gold uplegs were the last achieving new record highs.
In early December 2023, today's upleg surged to gold's first nominal record close in the 3.3 yearssince then! So I wrote an essay on the powerful gold-record-momentum dynamic. Record-achieving uplegs grow much larger than their normal peers. And gold's current upleg has already hit 15 new record closes, including a big 7-trading-day streak in early March and another 5-trading-day one as of the middle of this week.
New records are powerful because they greatly boost trader awareness of the surging market. Cocoa is a great example. Though everyone loves chocolate, few follow cocoa. But this year its price has blasted parabolic on bad weather and crop disease crushing harvests in western Africa, where most of the world's cocoa is produced. 2024's global cocoa supply shortfall is catastrophic, looking like the worst in 65+ years!
In Q1'24 cocoa prices skyrocketed 134.6%, even beating AI-stock market-darling NVIDIA's 82.5% surge. I've never followed cocoa before, but now I'm reading every article I can find about it. New records drive greatly-expanding financial-media coverage, which grows increasingly bullish as gains mount. That really builds traders' awareness of surging prices, way outside of the normal groups specializing in particular sectors.
That's already happening in gold! In my line of work as a financial-newsletter writer and professional speculator, I'm deeply immersed in the markets all day every day. CNBC or Bloomberg are always on in my office, and I see plenty of articles each day from major financial news sources like the Wall Street Journal. Thanks to gold's March breakout surge, financial-media gold coverage is soaring and has been quite bullish.
Speculators and investors who don't usually follow gold and its miners' stocks are seeing this and getting interested. So some are starting to deploy capital to chase these big gains. That accelerates the upside, attracting more bullish financial-media coverage which entices in even more traders. This fuels powerful virtuous circles of rallying, where buying begets buying. This is well underway in gold, and starting in gold stocks.
Again today's gold upleg is the first record-achieving one since mid-2020's pair averaging monster 41.4% gains. Similar gains this time around would propel gold way up to $2,572. That would further supercharge the gold miners' already-rich profits. Also again GDX's parallel 2020 uplegs averaged massive 105.4% gains on that, beautiful doubling-pluses! Reaching that would catapult GDX over $53, up another 61% from here.
Today's gold upleg also has real potential to grow considerably larger than 40%. The economic situation is far worse today than it was in 2020, thanks to central banks radically inflating their fiat-money supplies. In just 25.5 months after March 2020's pandemic-lockdown stock panic, the Fed expanded its balance sheet an absurd 115.6% or $4,807b! That monetary base underlying the dollar still remains fully 80.0% higher.
The resulting festering proportional inflation makes gold way more attractive to investors. And many have virtually no allocations to gold today, especially American stock investors. A great proxy for that is the ratio of the total value of the gold bullion the dominant GLD and IAU gold ETFs hold for shareholders to the market capitalization of all S&P 500 stocks. Exiting March, that still ran virtually zero at just 0.2%!
Not only are investors holding practically no gold, government spending is out of control. US deficits and debt are soaring, and interest expenses are nearly the federal government's biggest single outlay. No matter what the Fed does with rates, interest expenses are surging higher as maturing lower-yielding US Treasuries are replaced with higher-yielding ones. This insanity threatens the US dollar with a currency crisis.
Add on to that all the geopolitical uncertainties of expanding wars and bitter US political divisiveness with critical elections looming, and it's hard to imagine a more-bullish backdrop for gold. And the gold stocks will ultimately leverage its gains by the usual 2x to 3x for the GDX majors. Despite gold's current upleg already surging 26.3%, it hasn't matured. That's evident in the three stages of buying fueling major gold uplegs.
They are sequentially speculators' gold-futures short covering, then their gold-futures long buying, and finally investors returning. Those first two smaller stages push gold high enough for long enough to ignite the much-larger latter two stages. Those monster 2020 uplegs averaging 41.4% gold gains were fueled by huge American-stock-investor buying. GLD+IAU holdings averaged colossal 32.9% builds during their spans!
That means GLD and IAU shares were being bought faster than gold, forcing those ETFs to shunt that excess demand into underlying physical gold bullion. They act as conduits for American stock-market capital to migrate into and out of gold. GLD and IAU have to issue new shares to offset excess demand, or their share prices will disconnect from gold's to the upside. The proceeds are used to buy more bullion.
In gold's current upleg, the stage-one gold-futures short covering is spent. But as of the latest-available weekly Commitments of Traders report from late March, specs still had room to do fully 2/3rds of the stage-two long buying that was originally likely back in early October! That's defined by secular trading ranges of total spec longs. And astoundingly, stage-three investment buying still hasn't even started yet.
From early October to midweek, so far in gold's 26.3% upleg GLD+IAU holdings have actually slumped 4.9%! American stock investors have been so distracted by the mega-cap-tech-led stock-market bubble they haven't even started chasing gold yet. But they will as it keeps powering higher while these dangerously-overvalued and euphoric stock markets inevitably roll over, likely into a serious major bear market.
So while gold stocks are building steam, they are only getting started. They have a long ways higher to mean revert merely to reflect today's prevailing gold prices, let alone where their metal is heading. And while majors dominating GDX can amplify gold upside by 2x to 3x, fundamentally-superior smaller mid-tiers and juniors fare much better. They are better able to consistently grow their gold production at lower costs.
We've long specialized in that smaller-gold-stock realm at Zeal, and our newsletter trading books are full of excellent trades. Nearly all have been added within this current gold upleg, and as of midweek their unrealized gains are already running as high as +72.2%! The average across all such trades in our latest newsletters was +31.0%, but all these stocks have the potential to double or triple before this gold upleg matures.
Successful trading demands always staying informed on markets, to understand opportunities as they arise. We can help! For decades we've published popular weeklyand monthlynewsletters focused on contrarian speculation and investment. 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.
Our holistic integrated contrarian approach has proven very successful, and you can reap the benefits for only $10 an issue. We extensively research gold and silver miners to find cheap fundamentally-superior mid-tiers and juniors with outsized upside potential. Sign up for free e-mail notifications when we publish new content. Even better, subscribe today to our acclaimed newsletters and start growing smarter and richer!
The bottom line is gold stocks are finally building steam after being overlooked for years. Traders are starting to return, attracted by gold's powerful breakout surge to new record-high streaks. Those are generating expanding and increasingly-bullish financial-media coverage, growing awareness of this sector's mounting upside momentum. Traders love chasing that, and their resulting buying accelerates it.
And gold stocks' upside potential is massive. Not only have they been battered technically, but they are deeply undervalued fundamentally. They are earning fat and fast-growing profits thanks to these high prevailing gold prices. Those will entice professional fund investors back to this long-forgotten sector, which will supercharge gold-stock gains. The window to buy in relatively low ahead of them is starting to close.
###