Major Gold-Stock Breakouts

The gold stocks are off to the races again, with big gains mounting. They just staged major breakouts, shattering a vexing consolidation that had trapped them for an entire year.  Such momentum early in gold’s strong season is a very-bullish portent.  As higher prices improve both technicals and sentiment, buying begets more buying.  With gold-stock prices still quite low in secular terms, their upside remains huge.

Gold stocks are a small contrarian sector without a wide following.  So their latest surge has surprised many investors and speculators.  But it shouldn’t have.  In the markets knowledge is profits, so staying informed about gold stocks’ fundamentals, technicals, and sentiment is crucial.  The traders who did their homework this summer and bought in low when few others were willing are now sitting on fat unrealized gains.

Nearly every summer like clockwork, gold stocks slump to a summer-doldrums low.  Gold miners’ profits and hence ultimately stock prices are driven by prevailing gold prices.  And gold investment demand has always tended to slump seasonally in summers.  On July 7th, the flagship HUI NYSE Arca Gold BUGS Index, which is closely mirrored by the leading GDX VanEck Vectors Gold Miners ETF, hit a demoralizing low of 178.9.

The gold-stock sector was down 1.9% YTD in a year where gold had rallied 5.4% over that span.  That very day, I published an essay titled Gold Stocks’ Summer Bottom.  I explained why summer gold-stock weakness is a great buying opportunity, concluding “So smart contrarians willing to fight the herd to deploy when it’s unpopular are subsequently richly rewarded when gold stocks’ seasonal rallies march much higher.”

From that typical summer-doldrums low, the HUI has already surged 21.7% higher as of this week!  But sadly not many traders rode that whole rally, as most people hate buying low.  In early August when just a third of gold stocks’ recent rally had happened, I wrote another essay explaining gold stocks’ bullish autumn seasonals.  This sector has always tended to rally sharply with gold from summer lows into late September.

A week later when less than half of gold stocks’ latest surge was accomplished, I dug into their technicals to illustrate why this sector was a coiled spring.  The gold stocks had just peeked their heads above their key 200-day moving average, and major breakouts were imminent.  Now a month later they have indeed come to pass just as expected.  These big breakouts were highly probable, leading to big profits for the informed.

Now it’s important for all investors and speculators to understand these major breakouts’ significance and implications going forward.  Such events are very bullish, happening early in major new uplegs.  This first chart looks at HUI technicals since early 2016, when a new bull market in gold stocks was birthed out of extreme secular lows.  Today’s breakouts are the biggest and most important since February 2016, super-bullish.

Back in mid-January 2016, the gold stocks were universally despised and bearishness was off the charts.  They were battered to fundamentally-absurd 13.5-year secular lows, trading at levels last seen when gold was near $305.  Yet it was actually 3.6x higher at $1087!  Gold-stock prices couldn’t stay radically disconnected from their underlying earnings fundamentals forever, thus that incredible anomaly couldn’t last.

So gold stocks reversed hard and took off like rockets, blasting the HUI 182.2% higher in just 6.5 months!  That certainly left them very overbought last summer, which I warned about at the time.  So they started correcting, which is perfectly normal in all bull markets.  But that healthy correction snowballed to truly monstrous proportions thanks to another epic anomaly.  Trump’s surprise election victory indirectly crushed gold.

Gold investment is so important in all portfolios because gold tends to move counter to stock markets, which is rare.  Gold is effectively the anti-stock trade, the ultimate portfolio diversifier.  So the incredible Trumphoria stock-market surge in the election’s wake decimated gold investment demand.  That dragged the gold stocks far lower than they deserved to be fundamentally.  The HUI plunged 42.5% in 4.4 months.