Gold miners’ stocks have endured epic volatility in this past month, literally crashing before blasting back higher in a violent V-bounce. That preceding wicked capitulation flush savagely forced the weak hands out, paving the way for gold stocks’ next major upleg. The resulting fierce rebound signals it is already underway, with plenty of speculators and investors now chasing the huge gains this sector is famous for.
Perspective is essential and exceedingly-valuable for traders. If you don’t know where we’ve been and how we got here, you can’t figure out where we’re likely going. Context is necessary to frame this past month’s extraordinary gold-stock action, and to successfully game where this sector should be heading. Extreme volatility creates extreme opportunities, neither of which come around very often. Carpe diem!
The leading and most-popular gold-stock benchmark is the GDX VanEck Vectors Gold Miners ETF. It was the first gold-stock ETF launched way back in May 2006, giving it a first-mover advantage that has grown into an insurmountable lead. GDX’s $10.2b in net assets this week were running 34.4x larger than the next-biggest 1x-long major-gold-miners ETF! GDX’s recent raging action reveals what just transpired.
The gold stocks have been in a bull market
Since January 2016, but understanding March 2020’s chaos begins in September 2018. This sector had just finished a deep correction driven by forced capitulation selling on cascading stop-loss triggering, heralding a new upleg. The major gold stocks dominating GDX powered it 76.2% higher over the next 11.8 months into early September 2019, when GDX peaked at $30.95.
As I warned in an essay that week, gold stocks were very overbought. My conclusion then was “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.”
That proved right, as GDX fell 15.4% over the next 1.3 months into mid-October. Then the major gold miners’ stocks started grinding sideways, which isn’t uncommon in corrections. They usually take some time to unfold, as fulfilling their sentiment-rebalancing mission of bleeding away the excessive greed from the preceding upleg topping doesn’t happen overnight. But oddly that healthy correction was soon truncated.
In late December the gold stocks suddenly surged to break out from their correction downtrend. Their dominant primer driver, the yellow metal they mine, experienced surging futures buying in the last weeks of 2019. Gold’s breakout rally then extended on extraordinary events, first the short military conflict between the US and Iran then later the scary COVID-19 outbreak in China spreading into a global pandemic.
I was skeptical of both gold’s and gold stocks’ rallying in January and February. The reason was gold’s usual dominant primary drivers of speculators buying gold futures and investors buying gold outright were missing in action. I warned about gold’s peculiar and precarious surge in late February, concluding then that “gold’s staying power up here is questionable.” Gold had just surged above $1600, challenging $1650.
You can’t imagine the firestorm of hate mail, ridicule, and flak that rational data-driven contrarian stance generated! Lots of essay readers and newsletter subscribers were angry with me for refusing to buy into gold stocks high. Our trading books had been mostly in cash since gold stocks’ last upleg topped back in early September. There simply hadn’t been a good high-probability-for-success setup to redeploy since.
As I explained in another essay in mid-February, the gold stocks had stalled. At GDX’s $31.05 peak on February 24th driven by $1659 gold, this leading gold-stock ETF had merely eked out a 0.3% gain in the 5.7 months since its real upleg first peaked in September! And gold-stock sentiment was really greedy bordering on euphoric. This sector is far too volatile to risk buying in high, that mostly results in tears.
CNBC’s famous Jim Cramer starts his show every evening with “Other people want to make friends, I just want to try to make you money.” In late February most gold-stock commentators were tickling traders’ ears rationalizing their bullishness. My favorite Warren Buffett quote, which I put on the masthead of our weekly newsletter decades ago, warns “Be brave when others are afraid, and afraid when others are brave.”
So despite the heaps of contempt hurled at me by readers, I stood my ground and stayed totally out of gold stocks. The trades recommended in our newsletters took the opposite side of the herd, betting for sharp gold-stock declines with inverse-leveraged gold-stock ETFs and gold-stock-ETF put options. What happened next vindicated the data and wisdom of a studied contrarian approach, slaughtering naysayers.
This GDX gold-stock-bull chart is stunning, highlighting the extreme brutality of the wicked capitulation out of late February’s unstable gold-stock highs. That minor marginal new high in late February extended that gold-stock upleg per GDX to +76.7% in 17.5 months. But then the overdue major correction hit with a vengeance, exhibiting a shocking ferocity that surprised everyone including me.
It was an utter bloodbath!
Despite the mounting global COVID-19 pandemic in late February, despite the plunging US stock markets outbreak fears drove, gold rolled over hard as that month waned. Investors weren’t materially buying this metal, and gold-futures speculators’ positioning was so extreme that their buying firepower was exhausted. I’d hammered home those points with fresh data in every weekly and monthly newsletter I’d written.
In the final 4 trading days of February, GDX plunged 15.6%. That may have been enough to bleed off the recent near-euphoric sentiment in normal times, and the major gold stocks indeed bounced after that into early March. As always their fortunes were slaved to gold’s, which was overwhelmingly being driven by speculators’ gold-futures trading. They in turn were looking to the US dollar for trading cues like usual.
While I’d also recommended put options on the leading S&P 500 ETF and gold ETF in our subscription newsletters, I certainly didn’t expect a stock panic. These events, technically defined as the S&P 500 plummeting 20%+ in 2 weeks or less, are exceedingly rare. The last one erupted recently in October 2008, which was the first true stock panic in 101 years since the infamous Panic of 1907. These aren’t predictable.
But one of the countless lessons from October 2008’s stock panic is gold doesn’t perform well in such exceedingly-extreme fear environments. That’s contrary to what everyone expects from this safe-haven asset, which usually moves counter to stock markets when they are selling off. And if gold gets sucked into stock panics’ epic fear maelstroms, the gold stocks are the last place you want to be during such events.
In 21 trading days ending in late October 2008, a single month, the flagship US S&P 500 stock index plummeted 30.0%! Yet in that identical span, gold collapsed 16.7%. The reason is terrified traders were fleeing everything for cash, which catapulted the US Dollar Index 12.6% higher. That unleashed massive gold-futures selling from speculators, crashing GDX a mind-boggling retirement-slaying 54.3% in that month!
So had I suspected COVID-19 would spawn a stock panic, which I sure didn’t, I would’ve screamed to dump all gold stocks! Very fortuitously for our subscribers, we were already fully out and short this sector for the other reasons described above. Heeding the data, which already looked all wrong in late February as gold and gold stocks peaked, protected us from the vicious carnage to come.
Discipline would pay off big
While China’s obviously-fabricated COVID-19 case counts had magically stopped growing exponentially and froze in mid-February, the rest of the world’s were exploding. On February’s final trading day, the US had 62 confirmed cases. Only a month later this week on March 31st, they had rocketed parabolic to 177,452! That along with governments’ draconian responses shutting down the economy annihilated stocks.
The monster single-day selloffs in the US stock markets mounted, from the S&P 500 plunging 4.4% in late February to plummeting 7.6%, 9.5%, and 12.0% in ridiculously-ugly down days into mid-March! The fear that generated was naturally staggering, with the leading VIX implied-volatility fear gauge rocketing up to an unthinkable 82.7 on that final epic S&P 500 down day. That unleashed a frantic rush into cash.
After peaking at $1675 on March 9th while the US Dollar Index was still weakening, those counterintuitive stock-panic dynamics took over. Over the next 8 trading days as the S&P 500 choppily collapsed another 12.3%, the US Dollar Index blasted 8.1% higher! That’s an incredibly-big-and-sharp move for the world’s reserve currency. That unleashed the massive pent-up gold-futures selling that I’d warned about in late February.
So despite some of the most-extreme market fear we’ll see in our lifetimes, gold plunged 12.1% in those 8 trading days! Despite gold-stock traders’ contrarian bent, they certainly aren’t immune to fear which was spreading like wildfire. With gold cratering from $1675 to $1472 in under 2 weeks, the gold stocks didn’t stand a chance. Regardless of their outlook going into a stock panic, they will get ravaged like everything else.
On March 9th when gold hit that major 7.1-year secular high of $1675, GDX had already retreated 12.0% since its late-February peak. But thanks to that ultra-rare stock panic, the losses to come would dwarf that. On March 11th, 12th, and 13th, GDX plummeted a catastrophic 8.4%, 11.4%, and 14.8%! Those latter two horrific capitulation days constituted a formal crash, which is a 20%+ plummeting in 2 days or less.
GDX closed at $19.00 on Friday the 13th, taking its total losses since late February to an extraordinarily-brutal 38.8% in just 0.6 months! Again I sure as heck didn’t expect anything that extreme, we realized the big profits on our short-gold-stock trades well before that stock-panic nadir. A crash like that triggered all the stop losses existing in the markets, forcing everyone out but the most-hardened long-term investors.
Another vexing quirk of stock panics is it’s impossible to tell in real-time just how low they’ll plummet on that epic selling. Trying to catch the neutron-star-heavy falling knives spawned by stock panics is super-risky. It’s more prudent to wait until the violent V-bounce that follows stock panics. But even piling into those are risky, as there are often false bounces in the exceedingly-volatile chop before panics truly bottom.
The gold stocks were certainly radically oversold with GDX way down at $19.00, it was trading at just 0.694x its 200dma! And at 38.8%, GDX’s total plummeting since late February was in line with this gold-stock bull’s prior couple outsized corrections which saw 39.4% and 31.3% losses but in longer timeframes of 4.4 and 19.1 months. GDX had also plunged into a major multi-year support zone around that $19 level.
Monday mornings often see another wave of capitulation
GDX’s trading volume on those two crash days was unbelievably extreme too, adding to the evidence that capitulation had exhausted itself. On the 12th and 13th as GDX plummeted 11.4% and 14.8%, this ETF’s trading volume ran 2.3x and 4.1x the 3-month average into late February’s peak! The bigger the volume, the greater the odds a sharp move is climaxing. GDX’s last 2 days in October 2008’s panic saw just 1.9x and 1.6x.
So it was tempting to game a bottom late on Friday the 13th and start redeploying, but I didn’t. Extreme selloffs tend not to end on Fridays, because the traders getting eviscerated have the whole weekend to stew over their catastrophic losses. Thus Monday mornings often see another wave of capitulation as traders pushed to their psychological limits run screaming for the exits. That happened again in gold stocks.
Right out of the gates on Monday the 16th, GDX collapsed another 14.8% to hit an exceedingly-brutal intraday low of $16.18! That was more than enough to trigger any new stop losses added on the prior trading day. But those gold-stock levels were fundamentally-absurd given prevailing gold prices and resulting gold-miner profitability, which I’ll discuss shortly. So buyers started returning fueling a stunning reversal.
GDX suddenly started soaring that morning, in one of the most-violent V-bounces gold stocks have ever seen. This leading major-gold-stock benchmark skyrocketed 41.8% higher within hours, closing 18.4% higher! Technically it wasn’t an outside-reversal day which often mark trend changes, as GDX didn’t rally above the prior trading day’s intraday high. But it was close enough for odds to favor the bottom being in.
So the very next day I started aggressively redeploying in fundamentally-superior beaten-down gold stocks in our weekly subscription newsletter. Ultra-rare extreme stock panics eventually spawn some of the greatest buying opportunities ever seen. So I’d spent much time in March painstakingly researching gold stocks, wading through their latest results to uncover the ones with the best fundamental outlooks in 2020.
GDX’s violent V-bounce continued on the 17th, with this ETF soaring 13.4% higher! In just 2 trading days, it had skyrocketed 34.2%. But nothing comes easy in stock panics, and that rebound was way too extreme to be sustainable. So the next day GDX once again crashed with a mind-boggling 22.8% loss! That sure looked like a secondary capitulation low, and gold stocks have been grinding higher on balance since.
That stock-panic-driven extreme capitulation flush had to force out all the weak hands, run all the existing stop losses on gold-stock positions. It utterly eradicated all the greed that had plagued this sector near its late-February peak, leaving nothing but fear and despair. All that looked like a decisive major bottoming that paved the way for gold stocks’ next major upleg. And boy you sure want to be riding those when they run!
This gold bull’s maiden upleg mostly in the first half of 2016 saw GDX blast stratospheric with a monster 151.2% gain in just 6.4 months. And its last one effectively peaking in early September 2019 enjoyed an excellent 76.2% gain in 11.8 months. Given the crushing black depths of this stock-panic plummeting, this sector’s upside potential is again really big. GDX would have to soar 64.8% merely to regain its bull high.
With gold-stock technicals about as devastated as they can get at this COVID-19-fueled stock panic’s apparent nadir, and gold-stock sentiment utterly miserable with everyone having given up, this gold-stock setup is crazy-bullish. And add in major gold miners’ awesome fundamentals, and this gold-stock bull’s next upleg has great potential to grow huge. The GDX gold miners’ Q4’19 results proved outstanding!
I wrote a whole essay on them that week GDX was literally crashing, which was right after they finished releasing their latest financial and operational reports. In Q4’19 the elite top 34 GDX gold miners reported average all-in sustaining costs of $942 per ounce. With gold averaging an excellent $1483 that quarter, the major gold miners were enjoying fat profits near $541 per ounce. And odds are Q1’20’s will prove even better!
Despite the stock panic sucking in gold through big gold-futures selling sparked by a soaring US dollar on safe-haven cash demand, Q1’s prevailing gold prices were much better. Gold still averaged $1582 last quarter, up another 6.7% quarter-on-quarter and a colossal 21.4% year-over-year! Over the past four quarters the GDX gold miners have averaged AISCs of $910, and they should remain stable around there in Q1.
So $1582 gold less $910 AISCs implies the major gold miners earned enormous $672-per-ounce profits last quarter! That’s up a massive 63.9% YoY from Q1’19’s $410. So when the major gold miners’ Q1’20 results are released between late April to mid-May, amazed investors should flock to this truly-exceptional sector. The gold miners’ earnings will be soaring while COVID-19 shutdowns wreak havoc on most other sectors.
All this argues that a major new gold-stock upleg is getting underway, portending big gains coming! Gold supports this outlook too. The extreme fear and devastation unleashed by stock panics elevates gold investment demand for years after. Investors with stock-heavy portfolios who weren’t diversified before the panics wisely up their gold allocations after.
Every investor needs 10% to 20% of their holdings in gold
After 2008’s stock-panic low, gold soared 166.5% higher over the next 2.8 years on persistent inflows of investment capital! In essentially that same span, GDX rocketed 307.0% higher! The major gold stocks could easily quadruple again in the coming years out of this COVID-19 stock panic’s lows. As always, the best gains will be won by those buying in the soonest and lowest after these recent extreme panic lows.
While GDX enjoys excellent gains in major gold-stock uplegs, they are dwarfed by those seen in smaller fundamentally-superior mid-tier gold miners. As explained in my latest essay on their Q4’19 results just a couple weeks ago, the mid-tiers far-outperform the majors with their superior production growth and smaller market capitalizations enabling bigger ultimate gains. A panic’s wake is a stock pickers’ paradise!
We do all that hard and tedious fundamental work at Zeal, winnowing the gold-stock field to uncover the likely big winners. And we’re currently redeploying in these fundamentally-superior gold stocks after the stunning events of March, which are recommended in our popular weekly and monthly newsletters. Nearing the end of the last gold-stock upleg’s original early-September peak, we realized many big gains up to 110%!
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.
The bottom line is gold stocks literally crashed in mid-March, sucked into an ultra-rare and extreme stock panic! While exceedingly painful for traders who ignored the warning signs in late February and rode it down, this capitulation flush exhausted all potential selling and totally reset sentiment. It left gold stocks radically-oversold and mired in deep despair, perfect technical and sentimental conditions to birth major uplegs.
Indeed gold stocks rocketed higher out of those stock-panic lows in a violent V-bounce, confirming there are lots of traders still eager to buy them relatively low. The major gold miners’ outstanding fundamentals support a major new upleg too, with already-hefty implied earnings still soaring in the just-finished Q1’20. As investors wisely re-diversify back into gold in the stock panic’s wake, the gold stocks will power far higher.
Published by Adam Hamilton of Zeal LLC Specialising in stock-market speculation and investment from a contrarian perspective. This material has been prepared for general information purposes and must not be construed as investment advice.