Gold-Stock Breakouts Near

The gold-mining stocks’ usual volatility has proven outsized so far this year, spooking investors.  A fast initial surge in a new upleg was soon fully reversed by a sharp major correction, which spawned much bearish sentiment.  That combined with the great distraction from the Trumphoria stock-market rally has left gold stocks unloved and overlooked.  But their outlook is very bullish, and major upside breakouts near.

It’s hard to find bargains in today’s extreme stock markets.  They’ve been radically distorted by the post-election euphoria centered on universal hopes for big tax cuts soon.  Nearly every sector has been bid up to dizzying valuations.  Except for gold stocks, which everyone still hates.  They may very well be the last remaining contrarian sector in these crazy markets, and thus a great buying opportunity for smart traders.

Gold stocks have been left behind by the wild Trumphoria stock-market rally over the past 5 months. As of the middle of this week, the benchmark S&P 500 stock index is up 10.0% since Election Day.  But the gold stocks as measured by their flagship HUI index are down 1.1% over that span.  The gold stocks have really suffered since the election, which explains the stubbornly-bearish sentiment plaguing them today.

But perspective is everything in the markets, and that post-election snapshot is very misleading.  So far in 2017, the HUI has rallied 12.5% to easily best the S&P 500’s 5.1% gain.  And despite the post-election gold-stock carnage, the HUI still rocketed 64.0% higher in full-year 2016!  That trounced the S&P 500’s mere 9.5% gain.  Gold stocks stealthily remain one of the top-performing sectors in all the stock markets.

Their operating fundamentals are still strong and their usual big spring rally is already underway, which will likely yield big gains for contrarians.  Yet virtually no one cares!  With general-stock euphoria running rampant, there’s little investment demand for gold.  This unique asset is an anti-stock trade tending to move counter to stock markets.  Few investors seek prudent portfolio diversification when complacency is stellar.

Given the gold-mining stocks’ blistering gains in the past, the current total lack of interest even among contrarians is stunning.  But the record-shattering post-election Trumphoria stock-market rally has been exceedingly distracting.  It’s literally unprecedented on many fronts, bewitching investors into forgetting stock markets rise and fall. The resulting stocks-to-the-moon psychology has withered contrarian trading.

So gold-stock sentiment is absolutely dismal today, exceedingly bearish.  I’ve been intensely studying and actively trading this sector for decades.  That includes the last 17 years in the financial newsletter business, where I’m blessed with tons of sentiment feedback via both e-mails and hard newsletter sales.  Gold-stock psychology is so rotten today that it feels much like what I’ve witnessed at past major secular lows.

That’s crazy, as this week the HUI is still 103.6% higher from its last major secular low in January 2016.  If any other sector in all the stock markets had doubled in less than 15 months, it would be celebrated and popular.  Not gold stocks!  While the sentiment is ethereal and impossible to directly measure, there are all kinds of indicators implying how bad it is.  One example is capital volume in the leading gold-stock ETF.

The world’s most-popular gold-stock trading vehicle is the GDX VanEck Vectors Gold Miners ETF.  As of this week, its net assets were running 52.6x larger than its next-largest 1x-long major-gold-miners-ETF competitor.  So when investors and speculators are interested in gold stocks, that’s naturally reflected in GDX trading activity.  And it has just collapsed this year, reflecting waning interest in this contrarian sector.

At best last year, GDX skyrocketed 151.2% higher in just 6.4 months!  Such a volatile price range leaves normal raw daily trading volume much less comparable over time. So I prefer to use a simple construct called capital volume.  It multiplies the number of shares traded each day by that day’s share price.  This effectively normalizes volume in price terms, revealing how much capital is moving in gold stocks via GDX.

This chart looks at GDX capital volume over the past year and a quarter, which encompasses the mighty new bull market in gold stocks.  GDX’s share price in blue is superimposed over raw daily capital volume in red, which can vary wildly from day to day.  So capital volume’s 21-day moving average is included in yellow to smooth out this erratic data.  Calendar months average 21 trading days, so it’s a one-month smoothing.