GDX Archives - Page 5 of 5

The junior gold miners’ stocks have spent much of the past year grinding sideways near lows, sapping confidence and breeding widespread bearishness. The entire precious-metals sector has been left for dead, eclipsed by the dazzling taxphoria stock-market rally. But traders need to keep their eyes on the fundamental ball so herd sentiment doesn’t mislead them. The juniors’ recent Q4 results proved quite strong.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by securities regulators, these quarterly results are exceedingly important for investors and speculators. They dispel all the sentimental distortions surrounding prevailing stock-price levels, revealing the underlying hard fundamental realities. That serves to re-anchor perceptions.

Normally quarterlies are due 45 calendar days after quarter-ends, in the form of 10-Qs required by the SEC for American companies. But after the final quarter of fiscal years, which are calendar years for most gold miners, that deadline extends out up to 90 days depending on company size. The 10-K annual reports required once a year are bigger, more complex, and need fully-audited numbers unlike 10-Qs.

So it takes companies more time to prepare full-year financials and then get them audited by CPAs right in the heart of their busy season. The additional delay in releasing Q4 results is certainly frustrating, as that data is getting stale approaching the end of Q1. Compounding the irritation, some gold miners don’t actually break out Q4 separately. Instead they only report full-year results, lumping in and obscuring Q4.

I always wonder what gold miners that don’t report full Q4 results are trying to hide. Some Q4 numbers can be inferred by comparing full-year results to the prior three quarterlies, but others aren’t knowable if not specifically disclosed. While most gold miners report their Q4 and/or full-year results by 7 to 9 weeks after year-ends, some drag their feet and push that 13-week limit. That’s very disrespectful to investors.

All this unfortunately makes Q4 results the hardest to analyze out of all quarterlies. But delving into them is still well worth the challenge. There’s no better fundamental data available to gold-stock investors and speculators than quarterly results, so they can’t be ignored. They offer a very valuable true snapshot of what’s really going on, shattering all the misconceptions bred by the ever-shifting winds of sentiment.

The definitive list of elite junior gold stocks to analyze comes from the world’s most-popular junior-gold-stock investment vehicle. This week the GDXJ VanEck Vectors Junior Gold Miners ETF reported $4.5b in net assets. Among all gold-stock ETFs, that was second only to GDX’s $7.9b. That is GDXJ’s big-brother ETF that includes larger major gold miners. GDXJ’s popularity testifies to the great allure of juniors.

Unfortunately this fame created major problems for GDXJ over the past couple years, severely hobbling its usefulness to investors. This ETF is quite literally the victim of its own success. GDXJ grew so large in the first half of 2016 as gold stocks soared in a massive upleg that it risked running afoul of Canadian securities laws. And most of the world’s smaller gold miners and explorers trade on Canadian stock exchanges.

Since Canada is the center of the junior-gold universe, any ETF seeking to own this sector will have to be heavily invested there. But once any investor including an ETF buys up a 20%+ stake in any Canadian stock, it is legally deemed to be a takeover offer that must be extended to all shareholders! As capital flooded into GDXJ in 2016 to gain junior-gold exposure, its ownership in smaller components soared near 20%.

Obviously hundreds of thousands of investors buying shares in an ETF have no intention of taking over gold-mining companies, no matter how big their collective stakes. That’s a totally-different scenario than a single corporate investor buying 20%+. GDXJ’s managers should’ve lobbied Canadian regulators and lawmakers to exempt ETFs from that 20% takeover rule. But instead they chose an inferior, easier solution.

Since GDXJ’s issuer controls the junior-gold-stock index underlying its ETF, it simply chose to unilaterally redefine what junior gold miners are. It rejiggered its index to fill GDXJ’s ranks with larger intermediate gold miners, while greatly demoting true smaller junior gold miners in terms of their ETF weightings. This controversial move defying many decades of convention was done stealthily behind the scenes to avoid outrage.

There’s no formal definition of a junior gold miner, which gives cover to GDXJ’s managers pushing the limits. Major gold miners are generally those that produce over 1m ounces of gold annually. For decades juniors were considered to be sub-200k-ounce producers. So 300k ounces per year is a very-generous threshold. Anything between 300k to 1m ounces annually is in the mid-tier realm, where GDXJ now traffics.

That high 300k-ounce-per-year junior cutoff translates into 75k ounces per quarter. Following the end of the gold miners’ Q4’17 earnings season in late March, I dug into the top 34 GDXJ components. That’s just an arbitrary number that fits neatly into the tables below. Although GDXJ included a staggering 73 component stocks in late March, the top 34 accounted for a commanding 80.5% of its total weighting.

Out of these top-34 GDXJ companies, only 4 primary gold miners met that sub-75k-ounces-per-quarter qualification to be a junior gold miner! Their quarterly production is highlighted in blue below, and they collectively accounted for just 8.1% of GDXJ’s total weighting. But even that is really overstated, as half of these are long-time traditional major silver miners that have started diversifying into gold in recent years.

GDXJ is inarguably now a pure mid-tier gold-miner ETF. That would be great if GDXJ was advertised as such. But it’s very misleading if investors still believe this dominant “Junior Gold Miners ETF” still gives exposure to junior gold miners. I suspect the vast majority of GDXJ shareholders have no idea just how radically its holdings have changed since early 2016, and how much it has strayed from its original mission.

I’ve been doing these deep quarterly dives into GDXJ’s top components for years now. In Q4’17, fully 31 of the top-34 GDXJ components were also GDX components! These ETFs are separate, a “Gold Miners ETF” and a “Junior Gold Miners ETF”. So there’s no reason for them to own many of the same companies. In the tables below I highlighted the rare GDXJ components not also in GDX in yellow in the weightings column.

These 31 GDX components accounted for 76.7% of GDXJ’s total weighting, not just its top 34. They also represented 32.2% of GDX’s total weighting. So over 3/4ths of the junior gold miners’ ETF is made up of nearly a third of the major gold miners’ ETF! These GDXJ components in GDX start at the 12th-highest weighting in that latter larger ETF and extend down to 44th. Do investors know GDXJ is mostly GDX gold stocks?

Fully 11 of GDXJ’s top 17 components weren’t even in this ETF a year ago in Q4’16. They alone now account for 36.6% of its total weighting. 16 of the top 34 are new, or 43.8% of the total. In the tables below, I highlighted the symbols of companies that weren’t in GDXJ a year ago in light blue. GDXJ has changed radically, and analyzing its top components’ Q4’17 results largely devoid of real juniors is frustrating.

Nevertheless, GDXJ remains the leading “junior-gold” benchmark. So every quarter I wade through tons of data from its top components’ 10-Qs or 10-Ks, and dump it into a big spreadsheet for analysis. The highlights made it into these tables. Blank fields mean a company did not report that data for Q4’17 as of this Wednesday. Companies have wide variations in reporting styles, data presented, and report timing.

In these tables the first couple columns show each GDXJ component’s symbol and weighting within this ETF as of this week. While many of these gold stocks trade in the States, not all of them do. So if you can’t find one of these symbols, it’s a listing from a company’s primary foreign stock exchange. That’s followed by each company’s Q4’17 gold production in ounces, which is mostly reported in pure-gold terms.

Many gold miners also produce byproduct metals like silver and copper. These are valuable, as they are sold to offset some of the considerable costs of gold mining. Some companies report their quarterly gold production including silver, a construct called gold-equivalent ounces. I only included GEOs if no pure-gold numbers were reported. That’s followed by production’s absolute year-over-year change from Q4’16.

Next comes the most-important fundamental data for gold miners, cash costs and all-in sustaining costs per ounce mined. The latter determines their profitability and hence ultimately stock prices. Those are also followed by YoY changes. Finally the YoY changes in cash flows generated from operations, GAAP profits, revenues, and cash on balance sheets are listed. There are a couple exceptions to these YoY changes.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying numbers instead of weird or misleading percentage changes. This whole dataset offers a fantastic high-level read on how the mid-tier gold miners are faring today as an industry. Contrary to their low stock prices, they’re doing quite well.

After spending days digesting these GDXJ gold miners’ latest quarterly reports, it’s fully apparent their vexing low consolidation over the past year isn’t fundamentally righteous at all! Traders have abandoned this sector because the allure of the levitating general stock markets has eclipsed gold. That has left gold stocks exceedingly undervalued, truly the best fundamental bargains out there in all the stock markets!

Once again the light-blue-highlighted symbols are new top-34 GDXJ components that weren’t included a year ago in Q4’16. And the meager yellow-highlighted weightings are the only stocks that were not also GDX components in late March! GDXJ is increasingly a GDX clone that offers little if any real exposure to true juniors’ epic upside potential during gold bulls. Sadly this ETF has become a shadow of its former self.

VanEck owns and manages GDX, GDXJ, and the MVIS indexing company that decides exactly which gold stocks are included in each. With one company in total control, GDX and GDXJ should have zero overlap in underlying companies! GDX or GDXJ inclusion should be mutually-exclusive based on the sizes of individual miners. That would make both GDX and GDXJ much more targeted and useful for investors.

VanEck could greatly increase the utility and thus ultimate success of both GDX and GDXJ by starting with one combined list of the world’s better gold miners. Then it could take the top 20 or 25 in terms of annual gold production and assign them to GDX. That would run down near 150k or 105k ounces of quarterly production based on Q4’17 data. Then the next-largest 30 or 40 gold miners could be assigned to GDXJ.

The worst part of GDXJ now including mid-tier gold miners instead of real juniors is the latter are being relentlessly starved of capital. As investment capital flows into ETFs, they have to buy shares in their underlying component companies. That naturally bids their stock prices higher. But in GDXJ’s case, the capital investors intend to use to buy juniors is being stealthily diverted into much-larger mid-tier gold miners.

While there are still some juniors way down the list in GDXJ’s rankings, they collectively make up about 20% of this ETF’s weighting at best. Junior gold miners rely heavily on issuing shares to finance their exploration projects and mine builds. But when their stock prices are down in the dumps because no one is buying them, that is heavily dilutive. GDXJ is effectively strangling the very industry its investors want to own!

Since gold miners are in the business of wresting gold from the bowels of the Earth, production is the best place to start. These top-34 GDXJ gold miners collectively produced 4193k ounces in Q4’17. That rocketed 87% higher YoY, but that comparison is meaningless given the radical changes in this ETF’s composition since Q4’16. On the bright side, GDXJ’s miners do still remain much smaller than GDX’s.

GDX’s top 34 components, fully 19 of which are also top-34 GDXJ components, collectively produced 10,337k ounces of gold in Q4. So GDXJ components’ average quarterly gold production of 140k ounces excluding explorers was 57% lower than GDX components’ 323k average. In spite of GDXJ’s very-misleading “Junior” name, it definitely has smaller gold miners even if they’re way above that 75k junior threshold.

Despite GDXJ’s top 34 components looking way different from a year ago, these current gold miners are generally faring well on the crucial production front. 17 of these mid-tier gold miners enjoyed big average production growth of 30% YoY! Overall average growth excluding explorers was 12.2% YoY, which is far better than world mine production which slumped 1.7% lower YoY in Q4’17 according to the World Gold Council.

These elite GDXJ mid-tier gold miners are really thriving, with production growth way outpacing their industry. That will richly reward investors as sentiment normalizes. Smaller mid-tier gold miners able to grow production are the sweet spot for stock-price upside potential. With market capitalizations much lower than major gold miners, investment capital inflows are relatively larger which bids up stock prices faster.

With today’s set of top-34 GDXJ gold miners achieving such impressive production growth, their costs per ounce should’ve declined proportionally. Higher production yields more gold to spread mining’s big fixed costs across. And lower per-ounce costs naturally lead to higher profits. So production growth is highly sought after by gold-stock investors, with companies able to achieve it commanding premium prices.

There are two major ways to measure gold-mining costs, classic cash costs per ounce and the superior all-in sustaining costs per ounce. Both are useful metrics. Cash costs are the acid test of gold-miner survivability in lower-gold-price environments, revealing the worst-case gold levels necessary to keep the mines running. All-in sustaining costs show where gold needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q4’17, these top-34 GDXJ-component gold miners that reported cash costs averaged just $618 per ounce. That was actually up a slight 0.5% YoY, so the higher production failed to force costs lower.

This was still quite impressive, as the mid-tier gold miners’ cash costs were only a little higher than the GDX majors’ $600. That’s despite the mid-tiers each operating fewer gold mines and thus having fewer opportunities to realize cost efficiencies. Traders must recognize these mid-sized gold miners are in zero fundamental peril as long as prevailing gold prices remain well above cash costs. And $618 gold ain’t happening!

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISC include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

These additional expenses include exploration for new gold to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee gold mines. All-in sustaining costs are the most-important gold-mining cost metric by far for investors, revealing gold miners’ true operating profitability.

In Q4’17, these top-34 GDXJ components reporting AISCs averaged just $855 per ounce. That only rose 0.1% YoY, effectively dead flat, despite the new mix of GDXJ components. That also compares very favorably with the GDX majors, which saw nearly-identical average AISCs at $858 in Q4. The mid-tier gold miners’ low costs prove they are faring far better fundamentally today than their low stock prices imply.

All-in sustaining costs are effectively this industry’s breakeven level. As long as gold stays above $855 per ounce, it remains profitable to mine. At Q4’s average gold price of $1276, these top GDXJ gold miners were earning big average profits of $421 per ounce last quarter! That equates to fat profit margins of 33%, levels most industries would kill for. The mid-tier gold miners aren’t getting credit for that today.

Unfortunately given its largely-junior-less composition, GDXJ remains the leading benchmark for junior gold miners. In Q4’17, this ETF averaged $32.62 per share. That was down a considerable 10.2% from Q4’16’s average of $36.34. Investors have largely abandoned gold miners because they are captivated by the extreme taxphoria stock-market rally since the election. Yet gold-mining profits certainly didn’t justify this.

A year ago in Q4’16, the top-34 GDXJ components at that time also reported average all-in sustaining costs of $855 per ounce. With gold averaging $1218 then which was 4.6% lower, that implies the mid-tier gold miners were running operating profits of $363 per ounce. Thus Q4’17’s $421 surged 16.0% YoY, a heck of a jump! Yet the mid-tier gold miners’ stock prices irrationally slumped substantially lower.

Gold miners offer such compelling investment opportunities because of their inherent profits leverage to gold. Gold-mining costs are largely fixed during mine-planning stages, when engineers and geologists decide which ore to mine, how to dig to it, and how to process it. The actual mining generally requires the same levels of infrastructure, equipment, and employees quarter after quarter regardless of gold prices.

With gold-mining costs essentially fixed, higher or lower gold prices flow directly through to the bottom line in amplified fashion. This really happened in GDXJ over the past year despite its radical changes in composition. A 4.8% gold rally in quarterly-average terms catapulted operating profits 16.0% higher, or 3.3x. That’s right in line with the typical leverage of gold-mining profits to gold prices of several times or so.

But this strong profitability sure isn’t being reflected in gold-stock prices. GDXJ shouldn’t have been lower in Q4’17 with mining profits much higher. The vast fundamental disconnect in gold-stock prices today is absurd, and can’t last forever. Sooner or later investors will rush into the left-for-dead gold stocks to bid their prices far higher. This bearish-sentiment-driven anomaly has grown more extreme in 2018.

Since gold-mining costs don’t change much quarter-to-quarter regardless of prevailing gold prices, it’s reasonable to assume the top GDXJ miners’ AISCs will largely hold steady in the current Q1’18. And it’s been a strong quarter for gold so far, with it averaging over $1328 quarter-to-date. If the mid-tier gold miners’ AISCs hold near $855, that implies their operating profits are now running way up near $473 per ounce.

That would make for a massive 12.4% QoQ jump in earnings for the mid-tier gold miners in this current quarter! Yet so far in Q1 GDXJ is languishing at an average of just $32.88, flat lined from Q4 where gold prices and mining profits were considerably lower. The mid-tier gold miners’ stocks can’t trade as if their profits don’t matter forever, so an enormous mean-reversion rally higher is inevitable sometime soon.

And that assumes gold prices merely hold steady, which is unlikely. After years of relentlessly-levitating stock markets thanks to extreme central-bank easing, radical gold underinvestment reigns today. As the wildly-overvalued stock markets inescapably sell off on unprecedented central-bank tightening this year, gold investment will really return to favor. That portends super-bullish-for-miners higher gold prices ahead.

The impact of higher gold prices on mid-tier-gold-miner profitability is easy to model. Assuming flat all-in sustaining costs at Q4’17’s $855 per ounce, 10%, 20%, and 30% gold rallies from this week’s levels would lead to collective gold-mining profits surging 45%, 77%, and 108%! And another 30% gold upleg isn’t a stretch at all. In the first half of 2016 alone after the previous stock-market correction, gold soared 29.9%.

GDXJ skyrocketed 202.5% higher in 7.0 months in largely that same span! Gold-mining profits and thus gold-stock prices surge dramatically when gold is powering higher. Years of neglect from investors have forced the gold miners to get lean and efficient, which will really amplify their fundamental upside during the next major gold upleg. The investors and speculators who buy in early and cheap could earn fortunes.

Given the radical changes in GDXJ’s composition over the past year, normal year-over-year comparisons in key financial results simply aren’t meaningful. The massive rejiggering of the index underlying GDXJ didn’t happen until Q2’17, so it will be a couple quarters yet until results finally grow comparable again. But in the meantime, here are the apples-to-oranges reads on the GDXJ components’ key financial results.

The cash flows generated from operations by these top-34 GDX components rocketed 104.5% higher YoY to $1743m. That helped boost their collective cash balances by 53.9% YoY to $6577m. Sales were up 102.6% YoY to $4282m, roughly in line with the 87.4% gold-production growth. But again GDXJ was way different a year ago, so this impressive growth merely reflects bigger mid-tier gold miners replacing true juniors.

As long as OCFs remain massively positive, the gold mines are generating much more cash than they cost to run. That gives the gold miners the capital necessary to expand existing operations and buy new deposits and mines. Given how ridiculously low gold-stock prices are today, you’d think the gold miners are hemorrhaging cash like crazy. But the opposite is true, showing how silly this bearish herd sentiment is.

Unfortunately the GAAP earnings picture looked vastly worse. These top-34 GDXJ gold miners reporting Q4 earnings collectively lost $317m, compared to a minor $2m profit in Q4’16. While that certainly looks like a disaster, it’s heavily skewed. Excluding 3 big mid-tier gold miners that reported huge losses in Q4, the other 11 of these top GDXJ gold miners reporting earnings actually earned an impressive $212m in profits.

Yamana Gold, New Gold, and Endeavour Mining suffered huge $200m, $196m, and $134m losses in Q4’17. In each case these resulted from large impairment charges. As mines are dug deeper and gold prices change, the economics of producing this metal change too. That leaves some of the mid-tier gold miners’ individual mines worth less going forward than the amount of capital invested to develop them.

So they are written off, resulting in big charges flushed through income statements that mask operating profits. But these writedowns are something of an accounting fiction, non-cash expenses not reflective of current operations. They are mostly isolated one-time events as well, not representing earnings trends. As gold continues to march higher in its young bull, impairment charges will vanish as mining economics improve.

So overall the mid-tier gold miners’ fundamentals looked quite strong in Q4’17, a stark contrast to the miserable sentiment plaguing this sector. Gold stocks’ vexing consolidation over the past year or so isn’t the result of operational struggles, but purely bearish psychology. That will soon shift as stock markets inevitably roll over and gold surges, making the beaten-down gold stocks a coiled spring overdue to soar dramatically.

Given GDXJ now diverting most of its capital inflows into larger mid-tier gold miners that definitely aren’t juniors, you won’t find sufficient junior-gold exposure in this now-mislabeled ETF. Instead traders should prudently deploy capital in the better individual mid-tier and junior gold miners’ stocks with superior fundamentals. Their upside is vast, and would trounce GDXJ’s even if it was still working as advertised.

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The bottom line is the mid-tier gold miners now dominating GDXJ enjoyed strong fundamentals in their recently-reported Q4 results. While GDXJ’s radical composition changes since last year muddy annual comparisons, today’s components mined lots more gold at dead-flat costs. These miners continued to earn fat operating profits while generating strong cash flows. Sooner or later stock prices must reflect fundamentals.

As gold itself continues mean reverting higher, these mid-tier gold miners will see their profits soar due to their big inherent leverage to gold. GDXJ now offers excellent exposure to mid-tier gold miners, which will see gains well outpacing the majors. All it will take to ignite gold stocks’ overdue mean-reversion rally is gold investment demand returning. The resulting higher gold prices will attract investors back to gold miners.

Adam Hamilton, CPA

March 23, 2018

The gold miners’ stocks remain deeply out of favor, trading at prices seen when gold was half or even a quarter of current levels. So many traders assume this small contrarian sector must be really struggling fundamentally. But nothing could be farther from the truth! The major gold miners’ recently-released Q4’17 results prove they are thriving. Their languishing stock prices are the result of irrational herd sentiment.

The definitive list of major gold-mining stocks to analyze comes from the world’s most-popular gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF. Its composition and performance are similar to the benchmark HUI gold-stock index. GDX utterly dominates this sector, with no meaningful competition. This week GDX’s net assets are 24.4x larger than the next-biggest 1x-long major-gold-miners ETF!

Being included in GDX is the gold standard for gold miners, requiring deep analysis and vetting by elite analysts. And due to ETF investing eclipsing individual-stock investing, major-ETF inclusion is one of the most-important considerations for picking great gold stocks. As the vast pools of fund capital flow into leading ETFs, these ETFs in turn buy shares in their underlying companies bidding their stock prices higher.

This week GDX included a whopping 51 component “Gold Miners”. That term is used somewhat loosely, as this ETF also contains major silver miners, a silver streamer, and gold royalty companies. Still, all the world’s major gold miners are GDX components. Due to time constraints I limited my deep individual-company research to this ETF’s top 34 stocks, an arbitrary number that fits neatly into the tables below.

Collectively GDX’s 34 largest components now account for 90.5% of its total weighting, a commanding sample. GDX’s stocks include major foreign gold miners trading in Australia, Canada, and the UK. Some countries’ regulations require financial reporting in half-year increments instead of quarterly, which limits local gold miners’ Q4 data. But some foreign companies still choose to publish limited quarterly results.

The importance of these top-GDX-component gold miners can’t be overstated. In Q4’17 they collectively produced over 10.3m ounces of gold, or 321.5 metric tons. The World Gold Council’s recently-released Q4 Gold Demand Trends report, the definitive source on worldwide supply-and-demand fundamentals, pegged total global mine production at 833.1t in Q4. GDX’s top 34 miners alone accounted for nearly 4/10ths!

Every quarter I wade through a ton of data from these elite gold miners’ 10-Qs or 10-Ks, and dump it into a big spreadsheet for analysis. The highlights made it into these tables. Blank fields mean a company did not report that data for Q4’17 as of this Wednesday. Naturally companies always try to present their quarterly results in the best-possible light, which leads to wide variations in reporting styles and data offered.

In these tables the first couple columns show each GDX component’s symbol and weighting within this ETF as of this week. While most of these gold stocks trade in the States, not all of them do. So if you can’t find one of these symbols, it’s a listing from a company’s primary foreign stock exchange. That’s followed by each company’s Q4’17 gold production in ounces, which is mostly reported in pure-gold terms.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying numbers instead of weird or misleading percentage changes. This whole dataset offers a fantastic high-level read on how the major gold miners are faring today as an industry. And contrary to their low stock prices, they are thriving!

After spending days digesting these elite gold miners’ latest quarterly reports, it’s fully apparent their vexing consolidation over the past year or so isn’t fundamentally-righteous at all! Traders have mostly abandoned this sector because the allure of the levitating general stock markets has eclipsed gold. That has left gold stocks exceedingly undervalued, truly the best fundamental bargains out there in all the stock markets!

Since gold miners are in the business of wresting gold from the bowels of the Earth, production is the best place to start. The 10,337k ounces of gold collectively produced last quarter by these elite major gold miners actually fell a sizable 1.7% YoY! Interestingly that’s right in line with industry trends per the World Gold Council, as overall world gold mine production also retreated that same 1.7% YoY in Q4’17.

These biggest and best gold miners on the planet certainly had every incentive to grow their gold production. The quarterly average gold price surged 4.8% YoY in Q4’17, really boosting profitability. Of course the more gold any miner can produce, the more opportunities it has to expand thanks to higher cash flows. Investors often punish flagging production too, so the major gold miners really hate reporting it.

Most investors won’t bother studying long and detailed 10-Qs, 10-Ks, or the accompanying management discussions and analyses. So gold miners often issue short press releases summarizing some of their quarterly results. These sometimes intentionally mask production declines by excluding year-ago production, looking at quarter-on-quarter performance instead of year-over-year, or only comparing results to guidance.

As a professional speculator, investor, and newsletter writer for nearly two decades now, I spend a huge amount of time analyzing quarterly results. And I remain a CPA after my previous late-1990s gig auditing mining companies for a Big Six firm. Yet even with this exceptional experience and knowledge, I’m still surprised how deeply I have to dig for some key results miners bury and hide in hundred-plus-page-long SEC filings.

So believe me, major gold miners don’t shout out shrinking gold production from the rooftops. Yet of the 32 of these top-34 GDX gold miners reporting Q4 production as of the middle of this week, fully half saw declines. That was even with four different gold miners climbing into GDX’s top 34 components over the past year, which are highlighted in blue above. The average production decline was a serious 9.5% YoY!

Gold deposits economically viable to mine are very rare in the natural world, and the low-hanging fruit has largely been harvested. It is growing ever more expensive to explore for gold, in far-less-hospitable places. Then even after new deposits are discovered, it takes up to a decade to jump through all the Draconian regulatory hoops necessary to secure permitting. And only then can mine construction finally start.

That takes additional years and hundreds of millions if not billions of dollars per gold mine. But because gold-mining stocks have been deeply out of favor most of the time since 2013, capital has been heavily constrained. When banks are bearish on gold prices, they aren’t willing to lend to gold miners except with onerous terms. And when investors aren’t buying gold stocks, issuing new shares low is heavily dilutive.

The large gold miners used to rely heavily on the smaller junior gold miners to explore and replenish the gold-production pipeline. But juniors have been devastated since 2013, starved of capital. Not only are investors completely uninterested with general stock markets levitating, but the rise of ETFs has funneled most investment inflows into a handful of larger-market-cap juniors while the rest see little meaningful buying.

So even the world’s biggest and best gold miners are struggling to grow production. While that isn’t great for those individual miners, it’s super-bullish for gold. The less gold mined, the more gold supply will fail to keep pace with demand. That will result in higher gold prices, making gold mining more profitable in the future. Some analysts even think peak gold has been reached, that mine production will decline indefinitely.

There are strong fundamental arguments in favor of peak-gold theories. But regardless of where overall global gold production heads in coming years, the major gold miners able to grow their own production will fare the best. They’ll attract in relatively-more investor capital, bidding their stocks to premium prices compared to peers who can’t grow production. Stock picking is more important than ever in this ETF world!

But despite slowing gold production, these top-34 GDX-component gold miners remained quite strong fundamentally in Q4! Their viability and profitability are measured by the differences between prevailing gold prices and what it costs to produce that gold. Despite traders’ erroneous perception gold stocks are doomed, rising gold prices and falling mining costs are making the major gold miners much more profitable.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q4’17, these top-34 GDX-component gold miners that reported cash costs averaged just $600 per ounce. That dropped a sizable 4.4% YoY, showing serious gold-miner discipline controlling costs.

Today the gold miners’ stocks are trading at crazy-low prices implying their survivability is in jeopardy. This week the flagship HUI gold-stock index was languishing near 174, despite $1325 gold. The first time the HUI hit 175 in August 2003, gold was only in the $350s! Gold stocks are radically undervalued today by every metric. And they collectively face zero threat of bankruptcies unless gold plummets under $600.

In Q4’17, these top-34 GDX-component gold miners reporting AISC averaged just $858 per ounce. That was down a significant 2.0% YoY, extending a welcome declining trend. In 2017’s four quarters, these major gold miners’ average AISCs ran $878, $867, $868, and $858. The elite gold miners are getting more efficient at producing their metal, which is definitely impressive considering their collective lower production.

Gold-mining costs are largely fixed during mine-planning stages, when engineers and geologists decide which ore to mine, how to dig to it, and how to process it. The actual mining generally requires the same levels of infrastructure, equipment, and employees quarter after quarter. So the more gold mined, the more ounces to spread those big fixed costs across. Thus production and AISCs are usually negatively correlated.

The major gold miners have to manage costs exceptionally well to drive AISCs lower while production is also slowing. This argues against the popular complaint that gold miners’ managements are doing poor jobs. Because gold-stock prices are so darned low, traders again assume the miners must be plagued with serious fundamental problems. But it’s relentlessly-bearish herd sentiment suppressing gold-stock prices.

These top-34 GDX gold miners are actually earning strong operating profits today. Q4’17’s average gold price ran near $1276, again up 4.8% YoY. That remains far above last quarter’s low average all-in sustaining costs among these major gold miners of $858 per ounce. Thus industry profit margins are way up at $418 per ounce. Most other industries would sell their souls to earn fat profit margins at this 33% level!

A year earlier in Q4’16, the top-34 GDX gold miners reported average AISCs of $875 in a quarter where gold averaged under $1218. That made for $343 per ounce in operating profits. So in Q4’17, the major gold miners’ earnings soared 22.1% YoY to $418 on that mere 4.8% gold rally! Gold miners make such compelling investment opportunities because of their inherent profits leverage to gold, multiplying its gains.

But this strong profitability sure isn’t being reflected in gold-stock prices. In Q4’17 the HUI averaged just 189.4, actually 1.5% lower than Q4’16’s 192.3! The vast fundamental disconnect in gold-stock prices today is absurd, and can’t last forever. Sooner or later investors will rush into the left-for-dead gold stocks to bid their prices far higher. This bearish-sentiment-driven anomaly has grown more extreme in 2018.

Since gold-mining costs don’t change much quarter-to-quarter regardless of prevailing gold prices, it’s reasonable to assume the top GDX miners’ AISCs will largely hold steady in the current Q1’18. And it’s been a strong quarter for gold so far, with it averaging over $1329 quarter-to-date. If the major gold miners’ AISCs hold near $858, that implies their operating profits are now running way up near $471 per ounce.

That would make for a massive 12.7% QoQ jump in earnings for the major gold miners in this current quarter! Yet so far in Q1 the HUI is averaging just 187.1, worse than both Q4’17 and Q4’16 when gold prices were considerably lower and mining costs were higher. The gold miners’ stocks can’t trade as if their profits don’t matter forever, so an enormous mean-reversion rally higher is inevitable sometime soon.

The impact of higher gold prices on major-gold-miner profitability is easy to model. Assuming flat all-in sustaining costs at Q4’17’s $858 per ounce, 10%, 20%, and 30% gold rallies from this week’s levels would lead to collective gold-mining profits surging 43%, 75%, and 107%! And another 30% gold upleg isn’t a stretch at all. In the first half of 2016 alone after the previous stock-market correction, gold soared 29.9%.

GDX skyrocketed 151.2% higher in 6.4 months in essentially that same span! Gold-mining profits and thus gold-stock prices surge dramatically when gold is powering higher. Years of neglect from investors have forced the gold miners to get lean and efficient, which will amplify their fundamental upside during the next major gold upleg. The investors and speculators who buy in early and cheap could earn fortunes.

While all-in sustaining costs are the single-most-important fundamental measure that investors need to keep an eye on, other metrics offer peripheral reads on the major gold miners’ fundamental health. The more important ones include cash flows generated from operations, actual accounting profits, revenues, and cash on hand. They generally corroborated AISCs in Q4’17, proving the gold miners are faring really well.

These top-34 GDX-component gold miners collectively reported strong operating cash flows of $4529m in Q4, surging a huge 21.6% YoY! Running gold mines is very profitable for the major miners, they have this down to a science. Of the 26 of these major gold miners reporting Q4 OCFs, every single one was positive. Most also proved relatively large compared to individual company sizes, looking really strong.

The top GDX gold miners’ actual GAAP accounting profits didn’t look as good, coming in at a $266m loss in Q4’17. While a big improvement over Q4’16’s $588m loss, that still seems incongruent with those great all-in sustaining costs and operating cash flows. Of the 23 of these top-34 GDX components reporting earnings in Q4, 10 had losses. Half of those were big, over $50m. I looked into the reasons behind each one.

These handful of big gold-mining losses that dragged down overall top-GDX-component earnings were mostly the result of asset-impairment charges. Some of the world’s largest gold miners led by Newmont and Barrick with $527m and $314m Q4 losses continued to write down the carrying value of some gold mines. As mines are dug deeper and gold prices change, the economics of producing the metal change too.

That leaves some of the major gold miners’ individual mines worth less going forward than the amount of capital invested to develop them. So they are written off, resulting in big charges flushed through income statements that mask operating profits. But these writedowns are something of an accounting fiction, non-cash expenses not reflective of current operations. They are mostly isolated one-time events as well.

In addition to writedowns totally irrelevant to current and future cash flows, there were also big losses recognized in Q4’17 due to the new US corporate-tax law. With tax rates slashed, deferred tax assets that were created by overpaying taxes in past years were suddenly worth a lot less. These too were non-cash charges, another accounting fiction. Finally some companies realized losses on selling gold mines.

The major gold miners all run portfolios of multiple individual gold mines, each with different AISC levels. They’ve been gradually pruning out their higher-cost operations by selling those mines to smaller gold miners, usually at losses. While this hits income statements in mine-sale quarters, it is one reason the major gold miners have been able to drive down their costs. That will lead to greater future profitability.

In price-to-earnings-ratio terms, the major gold stocks are definitely getting cheaper. Of the 23 of these top-GDX-component stocks with profits to create P/E ratios, 7 had P/Es in the single or low-double digits! There are some really-cheap gold miners out there today, even adjusted for any dilution from past share issuances. Of course P/E ratios automatically do that since stock prices are divided by earnings per share.

On the sales front these top-34 GDX gold miners’ revenues soared 13.9% YoY to $12,236m in Q4. That looks suspect given that 1.7% YoY drop in production and the 4.8% YoY rally in the average gold price. 26 of these gold miners reported Q4 sales, compared to 27 a year earlier in Q4’16. The apparent growth came from some large gold miners that didn’t disclose Q4’16 sales deciding to make that data available in Q4’17.

Cash on balance sheets is also an interesting metric to watch, because it is primarily fed by operating profitability. Nearly all the gold miners report their quarter-ending cash balances as well, whether they report quarterly like in the US and Canada or in half-year increments like in Australia and the UK. The total cash on hand reported by these top GDX gold miners surged 7.0% YoY to a hefty $13,974m in Q4’17!

That’s a big number for this small contrarian sector, and it’s conservative. I just included the bank cash reported, excluding short-term investments and gold bullion. The more cash gold miners have on hand, the more flexibility they have in growing operations and the more resilience they have to weather any unforeseen challenges. Material drops in cash at individual miners were usually spent to grow their production.

So overall the major gold miners’ fundamentals looked quite strong in Q4’17, a stark contrast to the miserable sentiment plaguing this sector. Gold stocks’ vexing consolidation over the past year or so isn’t the result of operational struggles, but purely bearish psychology. That will soon shift as stock markets inevitably roll over and gold surges, making the beaten-down gold stocks a coiled spring overdue to soar dramatically.

While investors and speculators alike can certainly play gold stocks’ coming powerful uplegs with the major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals. Their upside will far exceed the ETFs, which are burdened by over-diversification and underperforming stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.

The bottom line is the major gold miners’ fundamentals are quite strong based on their recently-reported Q4’17 results. While production declined, mining costs were still driven lower. That coupled with higher gold prices generated fat operating profits and strong cash flows. The resulting full coffers will help the gold miners expand operations this year, which will lead to even stronger earnings growth in the future.

Yet gold stocks are now priced as if gold was half or less of current levels, which is truly fundamentally absurd! They are the last dirt-cheap sector in these euphoric, overvalued stock markets. Once gold resumes rallying on gold investment demand returning, capital will flood back into forgotten gold stocks. That will catapult them higher, continuing their overdue mean reversion back up to fundamentally-righteous levels.

Adam Hamilton, CPA

March 16, 2018

The small contrarian gold-mining sector remains deeply out of favor, universally ignored. Thus the gold stocks are largely drifting listlessly, totally devoid of excitement. But that’s the best time to buy low, when few others care. The gold stocks continue to form strong technical bases, paving the way for massive mean-reversion uplegs. And they remain exceedingly cheap relative to gold prices, which drive their profits.

Being a gold-stock investor feels pretty miserable and hopeless these days. The gold stocks have been consolidating low for 14.2 months now, stuck in a seemingly-endless sideways grind. There are still gains to be won, but they are mostly within that low-trading-range context. We haven’t seen one of the huge uplegs gold stocks are famous for since the first half of 2016. So most traders have given up and moved on.

That’s understandable psychologically, but unfortunate for multiplying wealth. Sometimes it takes a while for gold stocks to catch a bid, but once they get moving they often soar. This sector is so small relative to broader stock markets that even minor shifts in capital flows can drive enormous gains. While it’s hard waiting for gold stocks to return to favor, the vast upside when they do is well worth the buying-low pain.

The leading gold-stock measure and trading vehicle is the GDX VanEck Vectors Gold Miners ETF. It was the original gold-stock ETF launched in May 2006, and still maintains a commanding advantage in popularity. This week, GDX’s net assets of $7.7b were 24.0x larger than its next-biggest 1x-long major-gold-stock-ETF competitor! GDX is as big as all the other gold-stock ETFs trading in the US combined.

GDX’s price action shows why gold stocks are such compelling investments when everyone hates them. After gold stocks were universally despised in mid-January 2016, GDX soared 151.2% higher in just 6.4 months! After the previous time sentiment turned so overwhelmingly against gold stocks in October 2008, GDX rocketed 307.0% higher over the next 2.9 years. Buying gold stocks low has proven very lucrative.

That quadrupling of GDX after 2008’s first-in-a-century stock panic was actually the tail end of a vastly-larger secular gold-stock bull. Many years before GDX was even a twinkle in its creators’ eyes, that gold-stock bull started stealthily marching higher out of total despair. It can’t be measured by GDX since that ETF started too late, but the classic HUI NYSE Arca Gold BUGS Index reveals the magnitude of that bull run.

Over 10.8 years between November 2000 and September 2011, the gold stocks as measured by the HUI skyrocketed an astounding 1664.4% higher! And that was during a long bear-market span in the general stock markets, where the flagship S&P 500 drifted 14.2% lower. The gains in gold miners’ stocks as they mean revert from out of favor to popular are so epically enormous that they far outweigh any time lost waiting.

Gold stocks are even more attractive today given the exceedingly-overvalued and dangerous US stock markets, which are on the verge of a long-overdue major bear. Market valuations remain deep in literal bubble territory despite early-February’s correction. The simple-average trailing-twelve-month price-to-earnings ratio of the elite S&P 500 stocks was still 31.5x at the end of last month, above the 28x bubble threshold!

The market-darling stocks investors love today are crazy-expensive, portending huge downside in the next bear. The most-popular stock among professional and individual investors alike is Amazon.com, a great company. Yet AMZN stock is now trading at a ludicrous 252.5x earnings! That means if profits held steady it would take new investors today a quarter millennium just to recoup their stock purchase price.

Meanwhile the world’s largest gold miner in 2017-production terms, Barrick Gold, is now trading at a TTM P/E of 9.5x. That’s dirt-cheap by any standards! And ABX’s profits-growth potential is greater than AMZN’s. Last year Barrick mined 5.32m ounces of gold at all-in sustaining costs of $750 per ounce. That was $508 under gold’s average price of $1258 last year, fueling fat full-year profits over $1.5b on $8.4b in sales.

Every 10% increase in prevailing gold prices boosts Barrick’s earnings by 25%. And the average gold price so far in 2018 is already up 5.7%, so gold miners’ profits are growing fast. I’m not a Barrick Gold investor, and am just using this leading major gold miner as an example. There are plenty of smaller mid-tier gold miners with far more upside profits leverage to gold prices. Gold stocks are darned attractive!

They are one of the last bargain sectors remaining in these overheated stock markets. They are one of the only sectors that can rally in major bear markets, because they follow gold which drives their profits. Gold investment demand surges in weak stock markets, which brings investors back to gold stocks. At some point, investors are going to figure out how compelling gold stocks are today and stampede back in.

Despite the apathetic sentiment plaguing them, the gold stocks are still looking fine technically and even better fundamentally. This first chart looks at gold-stock technicals as rendered by their dominant GDX ETF. Given how bearish traders have waxed on gold miners, you’d think they are spiraling relentlessly lower. But they are actually consolidating nicely, establishing a strong base from which to launch their next upleg.

After plunging to fundamentally-absurd all-time lows in mid-January 2016, GDX soared into a major new bull market. While its 151.2% surge in just 6.4 months was undoubtedly extreme, that emerged out of even-more-extreme lows. And it merely catapulted GDX to a 3.3-year high in early-August 2016, nowhere close to secular topping levels. But the gold stocks were very overbought then, and soon corrected hard.

GDX’s enormous 39.4% correction in 4.4 months after that initial bull peak was also extreme, the result of a couple major anomalies. First gold-futures stops were run on major gold support failing, which ignited parallel cascading stop-loss selling in the gold miners’ stocks. Then investors fled gold in the wake of Trump’s surprise election victory, which led stock markets to soar on widespread hopes for big tax cuts soon.

Gold-stock selling finally exhausted itself in mid-December 2016, the day after the Fed’s 2nd rate hike of this cycle. Just a couple weeks later, GDX entered its now-14.2-month-old trading range that persists to this day. It is a basing consolidation trend running from $21 support to $25 resistance, which makes for a 19.0% trading range. This has held rock solid ever since, which has made gold-stock trading fairly easy.

My strategy has been simple. Given the extreme undervaluations in gold stocks that I’ll discuss shortly, a massive new upleg is likely to ignite anytime. So I want a full trading book to reap those enormous gains when they inevitably arrive. Thus every time GDX slumped down into the lower quarter of its consolidation range, between $21 to $22, I’ve been adding positions in great mid-tier gold miners with superior fundamentals.

All this is shared in real-time with our newsletter subscribers, who graciously support our research work. Buying low in the context of this vexing gold-stock consolidation has driven some great trades despite lackluster overall action. One example is Kirkland Lake Gold, an elite mid-tier miner. I added a new position in our popular weekly newsletter in December 2016. A year later I sold it for a hefty 184% realized gain!

So while this gold-stock trading range has sure felt dull, it has still created plenty of trading opportunities. And over the past month or so since that sharp stock-market correction, GDX has largely meandered in that lower quarter of its range near support again. That means it’s an excellent time to deploy capital in the unloved and cheap gold miners’ stocks today. Another surge higher is due, and it could be a big one.

While GDX $21 support has proven strong since the end of 2016, so has GDX $25 resistance. The gold stocks have tried and failed to break out above $25 four separate times since early 2017. A couple of the attempts were close, but weren’t sustainable as gold retreated. Once that $25 breakout finally comes to pass, investors will realize something different is happening and rush to chase gold stocks’ upside momentum.

Before early February’s sharp stock-market plunge that changed everything, I was looking to the release of gold miners’ Q4’17 operating and financial results as a potential catalyst to fuel that $25 breakout. That didn’t happen though, as gold and especially gold stocks were sucked into the fear surrounding the unprecedented stock-market volatility shock a month ago. That dragged GDX back down near support, which held.

This recent support approach is probably a blessing in disguise, offering another chance for investors to deploy capital in cheap gold stocks before they really start moving again. The great and sad paradox of the markets is investors are least willing to buy when stocks are low and out of favor, which is the exact time they should be buying before later selling high. Gold-stock prices can’t and won’t stay this low forever.

With stock-market volatility back, the highly-likely catalyst to ignite that GDX $25 breakout is gold rallying on resurgent investment demand. Gold is largely ignored when stock markets are high and investors are euphoric, as they feel no need to prudently diversify their portfolios. But once stock markets sell off for long enough to spook investors, they start shifting capital back into gold which often moves counter to stocks.

With the US stock markets still trading deep into bubble territory in late February, and euphoria remaining rampant as evidenced by the blistering bounce rally following that early-month plunge, there’s no way the stock-market selling is over yet. It will have to resume sooner or later with a vengeance to actually start rebalancing away greedy sentiment. When that happens, gold and gold stocks will soon catch major bids.

The fact gold stocks have held strong in their consolidation trading range for well over a year now is a glass-half-full kind of thing. It testifies to relatively-strong investment demand given the terribly-bearish sentiment pervasive in this sector. The longer prices base during bull markets, the greater the upside potential in their next upleg. It likely won’t take much of a gold rally to blast GDX back up through $25 again.

This strong technical picture and an inevitable sentiment mean reversion are reason enough for gold stocks to surge dramatically higher. But supercharging that is the dirt-cheap state of gold stocks today in fundamental terms. That includes current gold-mining profits compared to prevailing gold-stock prices, as well as near-future earnings-growth potential as gold itself continues mean reverting much higher ahead.

I’m well into my quarterly research work analyzing the Q4’17 results from the major gold miners of GDX. Unfortunately due to the complexities of preparing annual reports, the Q4 reporting season up to 90 days after quarter-ends is double the 45-day deadlines for Q1s through Q3s. So all the data isn’t quite in yet, but I expect to have enough to delve deeply into the major gold miners’ Q4’17 results in next Friday’s essay.

In the meantime, a great fundamental proxy for gold-stock valuations is the HUI/Gold Ratio. This is as simple as it sounds, dividing the daily close of that classic gold-stock index by the daily gold close and charting the resulting ratio over time. This reveals when gold stocks are expensive or cheap relative to the metal which drives their profits. And this sector has rarely been more undervalued than it is today!

This week the HGR was way down at 0.131x, meaning the HUI index’s close was running just over 13% of gold’s close. That’s incredibly low historically, showing that the gold miners’ stocks have been wildly underperforming gold. The gold stocks are trading at levels today implying gold and their profits were radically lower. This is a colossal fundamentally-absurd disconnect that can’t last forever, it has to unwind.

GDX and the HUI were way down at $21.57 and 173.4 in the middle of this week. The first time the HUI ever hit this level was way back in August 2003, years before GDX was even born. Back then gold was only running $357, and had yet to trade above $380 in its entire young secular bull. Let that sink in for a second. Gold stocks are trading at prices today first seen when gold was in the $350s fully 14.6 years ago!

This week gold was trading near $1325, an enormous 3.7x higher. That should certainly be reflected in gold miners’ stocks. Today’s super-low gold-stock levels aren’t much above the HUI’s stock-panic lows back in October 2008. There was only a week where the HUI traded lower than today at peak fear in the stock markets, and gold averaged $732 during that extreme span. This week it was trading 81% higher!

This is incredibly illogical, only explainable by irrational sentiment. If any other stock-market sector was trading at levels from a decade or more earlier despite the selling prices of its products doubling to quadrupling, investors would be beating down the doors to buy. That would rightfully be seen as a huge and unsustainable anomaly, a rare chance to buy deeply-undervalued stocks at decade-plus-old prices.

And it’s not just gold that’s far higher, so are the profit margins for mining it. With the new Q4’17 results from GDX’s major gold miners not all out yet, the latest data we have this week is Q3’17’s. During that previous quarter, the top GDX miners averaged all-in sustaining costs of just $868 per ounce. The costs of mining gold industrywide don’t change much, which is what creates profits’ big upside leverage to gold prices.

My still-incomplete Q4’17 analysis shows AISCs very similar to last quarter’s. That makes sense, as the past year’s quarters ending in Q3’17 had collective GDX AISCs of $875, $878, $867, and $868. Mining gold costs similar amounts regardless of prevailing gold prices, at least over medium-term multi-year spans too short for new gold mines to be built. So Q4’17 AISCs are likely to remain around these levels.

Assuming $868 carries forward into Q4’17 and Q1’18, gold-mining profits are really growing. Average gold prices surged from $1276 in Q4 to $1330 quarter-to-date in Q1. That’s up 4.2% sequentially, really strong. This implies major gold miners’ earnings are surging 13.2% QoQ in our current Q1’18 from $408 to $462 per ounce! That would make for strong 3.1x upside profits leverage to gold, which is impressive.

And whether the major gold miners are collectively earning $400, or $450, or even $500 per ounce today, such profits alone are much greater than the $350s prevailing gold price the first time the HUI traded at today’s levels. With fat profits like this heading much higher as this gold bull continues, it’s ridiculous for gold stocks to be priced as if gold was still in the $350s like mid-2003 or the $730s like in 2008’s stock panic.

This extreme anomaly can’t and won’t last. The gold stocks should be priced for today’s prevailing gold prices around $1325. The first time gold hit $1325 in October 2010, the HUI was trading at 522. That is triple today’s ludicrous levels! The gold stocks more than quadrupled in the years following 2008’s stock panic, another irrational situation where sentiment had battered gold stocks to fundamentally-absurd levels.

Between that first-in-a-century stock panic and extreme central-bank easing that really hit full steam in 2013, the last quasi-normal years in the markets were 2009 to 2012. During that post-panic span the HGR averaged 0.346x. If the HUI would merely mean revert back up to those levels relative to gold, it would have to soar to 458. That’s 164% higher than this week’s levels, upside unparalleled in any other sector.

For 5 years before the stock panic, the HGR averaged 0.511x. While gold stocks might not be able to sustain levels so high anymore, they could certainly blast up there in a temporary mean-reversion overshoot. After extremes, prices don’t simply migrate back to the average. Instead they overshoot proportionally to the opposing extreme as sentiment is equalized. That implies a HUI level of 677, 290% higher from here.

No one knows how high gold stocks can go, but there is zero doubt they are radically undervalued given today’s gold prices and the gold-mining profits they generate. Whether you expect this battered sector to quadruple again like after the stock panic, or merely double, that dwarfs the potential of the rest of the stock markets. Especially with the S&P 500 trading at bubble valuations after a long central-bank-goosed bull.

The gold stocks are truly a coiled spring today, ready to explode higher soon and trounce everything else. They are deeply out of favor, incredibly undervalued, and one of the only sectors that can rally sharply when general stock markets sell off. If you want to multiply your wealth this year by fighting the crowd to buy low then sell high, this small and forgotten contrarian sector is the place to be. Nothing else rivals it.

While investors and speculators alike can certainly play gold stocks’ coming powerful upleg with the major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals. Their upside will far exceed the ETFs, which are burdened by over-diversification and underperforming gold stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.

The bottom line is gold stocks are basing technically and cheap fundamentally today. While this small contrarian sector has largely been forgotten, its past year’s consolidation trading range continues to hold solid. The longer the basing, the greater the potential upleg when investors return. And despite trading at levels implying vastly-lower gold prices, the major gold miners are actually earning fat profits today.

Those earnings will surge dramatically as gold continues powering higher in its own bull market. It’s only a matter of time until investors see the extreme market-leading value inherent in the gold miners’ stocks. And with stock-market volatility roaring back after long years of central-bank suppression, diversifying portfolios with gold will soon return to favor. The gold stocks will soar as investment buying drives gold higher.

Adam Hamilton, CPA

March 9, 2018

The precious metals sector continues to correct and consolidate. Gold remains in a bullish consolidation. It recently reached resistance again and even though it has failed to breakout, it remains above long-term moving averages which are sloping upward. However, the gold stocks and Silver remain in correction mode. They are trading below the long-term moving averages and at the lower end of their ranges over the past 12 months. That certainly provides an opportunity but these markets may not truly perform until Gold is ready to breakout.

Bullish Silver commentaries (because of its CoT) have been making the rounds and I don’t disagree. In the chart below we plot the net speculative position as a percentage of open interest. It is at 7.4%, which is the lowest reading in nearly three years. Interestingly, the daily sentiment index for Silver is not at an extreme. Its at 40% bulls. Technically, Silver is wedged in between support and resistance. A break does not appear imminent.

Like Silver, the gold stocks are oversold but we do not see an indication of an extreme oversold condition. In the chart below we plot GDX along with the difference between new highs and new lows. We also plot GDXJ along with the percentage of stocks (from a group of 50 we follow) that are trading above the 50-dma and 200-dma. GDX recently held above $21 again (even with over 20% of the index making new 52-week lows) while GDXJ is starting to show a bit more strength relative to GDX. At the low last Wednesday, 19% of those 50 juniors were trading above the 50-dma while 27% were trading above the 200-dma.

Gold, unlike Silver and the gold stocks, has not corrected much and remains much closer to resistance than support. Also, sentiment in Gold is much more optimistic than in Silver. The net speculative position in Gold is 37%, which dwarfs the 7.4% reading in Silver. Gold’s daily sentiment index is 56% bulls which is comfortably above Silver’s. During bull markets, corrections in Gold tend to push the net speculative position below 30%. Gold continues to maintain support at $1300 but we wonder if it needs to break that level and flush out some speculators before breaking out of its larger consolidation.

The precious metals sector is at an interesting juncture and it remains to be seen how the current disparity will resolve. One scenario is Gold breaks $1300 and this causes a mini-washout in the gold stocks and Silver. The other scenario is Gold continues to consolidate above $1300 and the gold stocks and Silver firm in anticipation of a major breakout in Gold. This is something that could take weeks to answer. In any event, we continue to remain patient and continue to accumulate the juniors we think have 5-fold potential over the next 18 months. To follow our guidance and learn our favorite juniors for the next 12-18 months, consider learning more about our service.

The gold miners’ stocks weathered the recent stock-market plunge really well. As evident in their leading GDX ETF, they were already beaten down before stock markets started falling. The resulting explosion of fear bled into GDX, forcing it even lower. Nevertheless, no major technical damage was done. GDX remained well within its consolidation trend channel and is still within striking distance of a major $25 breakout.

Gold stocks’ behavior during stock-market selloffs can seem capricious. This small contrarian sector generally amplifies the price action in gold, which drives its collective profitability. Gold tends to surge in the wake of major stock-market selloffs, which erode investors’ confidence in stocks’ near-term outlook. That greatly boosts gold investment demand as investors soon rush to wisely diversify their stock-heavy portfolios.

This drives gold prices higher after material stock-market weakness. So naturally the gold stocks mirror and amplify gold’s gains which really improve their fundamentals. But this broader strengthening trend is interrupted by a lot of chaotic noise. The collective greed and fear generated by the stock markets’ daily action heavily influences gold-stock traders, especially when the stock markets are exceptionally volatile.

The gold miners’ stocks are just that, stocks. So it’s not uncommon for them to get sucked into serious down days in the general stock markets, which fuel widespread fear. When the flagship S&P 500 stock index (SPX) falls sharply, nearly everything else is dumped in sympathy including the gold stocks. The SPX truly is the dominant center of the global financial-market-sentiment universe, greatly affecting everything.

Unfortunately sharp SPX down days’ ability to heavily influence GDX wreaks havoc on sentiment in the gold-stock sector. Traders read historical studies proving the precious-metals realm is the best place to deploy capital in and after weakening stock markets. So they rightfully expect gold-stock prices to rally on balance. But when GDX plunges on a big SPX down day, their fear soars and they abandon gold stocks.

Human psychology always tends to overweight the importance of recent and traumatic events, with our minds wanting to extrapolate short-term turmoil out into infinity. Thus when gold stocks get sucked into a sharp general-stock selloff, traders assume they can’t thrive in weak stock markets. They lose the trend forest for the daily trees! This fearful herd sentiment scares them into panicking and selling gold stocks low.

Weakening stock markets are like springtime for gold and its miners’ stocks due to higher investment demand. Just as daily temperatures gradually warm over time during spring, gold stocks rally on balance after material stock-market weakness. But spring weather also includes periodic cold snaps that can feel winter-like. They are just temporary counter trend aberrations though, like gold-stock drops on big SPX down days.

This first chart looks at gold stocks’ recent price action through the lens of GDX, the VanEck Vectors Gold Miners ETF. Since its birth in May 2006, GDX has grown into the leading and dominant gold-stock ETF. As of this week GDX’s $7.6b in assets under management ran a whopping 22.0x larger than its next-biggest 1x-long major-gold-stock-ETF competitor! GDX actually weathered the stock plunge really well.

The sharp stock-market selloff in the past couple weeks has been extraordinary, largely unprecedented on multiple key fronts. The S&P 500 was wildly overvalued and overbought in late January, deep in its longest span ever witnessed without a mere 5% pullback. Volatility was trading near record lows, which catapulted complacency off the charts. Last week I explored all this in an essay analyzing stock selling unleashed.

The first real day of serious SPX selling was Friday February 2nd. The gold stocks certainly weren’t high leading into that, as GDX had closed the day before at $23.70. That was merely on the high-middle side of gold stocks’ consolidation trading range. Really since late 2016, GDX has largely meandered between $21 support and $25 resistance. It had neared a major $25 breakout in late January, but couldn’t punch through.

On Friday the 2nd the SPX plunged 2.1% after rising wages on the US monthly jobs report stoked fears of inflation. 10-year Treasury yields continued their sharp surge since the latest Fed rate hike in mid-December. That SPX down day was the worst since September 2016, before Trump won the election and the resulting extreme taxphoria rally. It generated some real fear which spilled over into the gold stocks.

But that stock-fear bleed-in sure wasn’t the only reason GDX fell 3.3% that day to revisit its technically-important 200-day moving average. With inflation fears mounting, futures traders figured the Fed might have to increase the tempo of this rate-hike cycle. So the US Dollar Index surged a sharp 0.7% higher, which led gold-futures speculators to hammer gold 1.4% lower. GDX’s initial stock-selloff loss was reasonable.

The major gold stocks tend to amplify gold’s underlying price action by 2x to 3x. And GDX’s downside leverage to gold that day ran 2.4x, right in line. Most of the time gold stocks still follow gold, even when stock markets are weaker. But on exceptional SPX down days when fear really flares, that overshadows gold as traders are infected by prevailing herd sentiment. That really started to happen on Monday the 5th.

The SPX selloff greatly intensified as it plunged 4.1%, its worst daily drop since way back in mid-August 2011! That was extreme, as stock markets usually don’t plummet so rapidly from record highs. Because it had been so long since the SPX plunged, fear skyrocketed as evidenced by the VIX implied-volatility index. Foolish traders who had aggressively shorted volatility near record lows scrambled to unwind their bets.

Gold caught a modest bid that day, rallying 0.6% despite the US Dollar Index climbing another 0.4% on safe-haven buying. On days when the SPX plunges yet gold climbs, traders are torn about what to follow so the gold stocks generally split the difference. Indeed that day GDX slid another 0.9%, far milder than the sharp SPX plunge but still worse than gold. That left GDX at $22.71, sliding farther under its key 200dma.

After plunging even deeper early on Tuesday the 6th, the SPX reversed sharply to a 1.7% gain on close as the extreme VIX-futures long buying abated. Gold suffered a 1.1% loss on the stronger stock markets as well as a major 1.4% draw in its leading GLD gold ETF’s holdings. Investors likely dumped GLD shares for a source of capital. Since gold is much stronger than general stocks in SPX selloffs, GLD is easy to sell.

With gold falling sharply GDX dropped another 2.6% on that third day of the SPX selloff. Once again that made for 2.4x downside leverage to gold, which is perfectly normal. Although that decisively broke GDX below its 200dma, at $22.11 it remained well within its long-established consolidation trend channel. With trend support at $21, gold stocks still had a ways to go before they threatened a major technical breakdown.

The SPX selling resumed on Wednesday the 7th with a relatively-minor 0.5% loss. Gold fell by the same amount, as once again the US Dollar Index surged 0.7% on flight-capital safe-haven buying. GDX lost another 1.4% to hit $21.80 on close. That amplified gold by 2.8x, still within that normal 2x to 3x range for the major gold stocks. The gold stocks were weathering that sharp SPX selloff really well by that point.

On Thursday the 8th the stock markets started sliding again on no news, and the SPX fell relentlessly all day long. By the time the dust settled, it had collapsed another 3.8%! Two huge 4%ish down days out of just four trading days was very serious, generating the most fear traders have experienced for at least a couple years. Gold eked out a 0.1% gain with the US dollar flat, and the gold stocks split the difference as usual.

GDX only retreated 0.6% that day the SPX formally plunged into correction territory for the first time since early 2016. That was truly an impressive show of strength given the stock markets rapidly spiraling lower. At $21.68, GDX remained well above its $21 support line that has held rock solid since late 2016. It looked like the gold stocks were nearing selling exhaustion since they fell so little on such a huge SPX down day.

In just five trading days the SPX had plummeted 8.5%! That was a big drop by any standard, let alone off record highs out of near-record-low volatility. Interestingly GDX exactly mirrored that drop, falling an identical 8.5% in that same span. Relative to gold that was excessive, 3.5x the 2.4% gold lost during that same timeframe. But with GDX remaining well within its consolidation trend channel, technical damage was minor.

Last Friday the 9th once again saw the SPX slide rapidly after open before reversing sharply to a large 1.5% daily gain. Gold stocks got sucked into that early fear-spawning selling, which was exacerbated by gold itself slumping lower before a -0.2% close. GDX tested that $21 support intraday, but bounced back to a dead-flat close. This small contrarian sector had successfully weathered an exceptional SPX selloff!

This week the SPX and gold both rebounded, each rallying Monday, Tuesday, and Wednesday. Thus it wasn’t surprising GDX followed suit, rallying 1.3%, 0.1%, and a monster 4.6% by the data cutoff for this essay. Thus over the entire 9-trading-day span of the recent volatility storm, GDX merely slipped 2.9%. That was again between the SPX’s 4.4% loss and gold’s slight gain. The gold miners’ stocks are faring fine!

This Wednesday GDX was back up to $23.01, exactly in the middle of its consolidation trading range of the past year between $21 support and $25 resistance. GDX was back over its 200dma again, and still within striking range of that critical $25 breakout I discussed a month ago. If you had totally tuned out for 9 trading days and ignored the SPX-selloff action, it would’ve looked like gold stocks were still merely basing.

One of the greatest benefits to continuing to study the markets and staying immersed in them is you will gradually become immune to herd sentiment. After you’ve seen enough selloffs, they increasingly lose their ability to scare you. And you remember that sharp selloffs are short-lived, whether in the general stock markets or gold stocks. So you come to accept them as inevitable periodically, and they don’t rile you up.

A great analogy is a beekeeper. Most people are scared of bees, freaking out if bees buzz too closely or land on them. I know I’m no fan of bees invading my personal space. But beekeepers have no fear of bees because they work with them all the time. They certainly respect bees and understand the risks of being around them. But all their experience with bees leads to enough knowledge to negate emotional responses.

Gold stocks have always been a volatile sector. That’s actually a core reason they are so alluring, as this volatility translates into big and fast gains when they are rallying. In roughly the first half of 2016, GDX rocketed 151.2% higher on a parallel 29.9% gold upleg! Volatility is a double-edged sword, sectors that can rally fast will also fall fast. So gold-stock investors must accept periodic sharp selloffs as par for this course.

The major gold stocks as represented by GDX are doing fine. Despite some choppiness as the SPX was flailing about in recent weeks, they are continuing to base in their well-established consolidation trend. They are still on track for a major GDX $25 breakout, which will work wonders to shift sector psychology back to bullish again and spur big capital inflows. The gold miners’ stocks are low technically and cheap fundamentally.

This last chart zooms out to the bigger picture, looking at GDX since 2007 which is largely its entire life. Gold stocks move in great bull-bear cycles like everything else, and they remain incredibly low today. The small highlighted square in the lower right encompasses the entire first chart. These prevailing gold-stock levels are almost as low as during 2008’s epic stock panic, which is absurd based on fundamentals.

This powerful new gold-stock bull ignited in early 2016 remains young and small. Its bull-to-date peak in early August 2016 was merely a 3.3-year GDX high, still very low in secular context. After this sector was sucked into 2008’s stock panic, the major gold stocks more than quadrupled out of those extreme lows. A quadruple from January 2016’s all-time low birthing this bull would catapult GDX back up near $50.

That means the major gold stocks easily have the potential to more than double again from here, seeing another 117% GDX gain in the next couple years! Is there any other sector in all these wildly-overvalued stock markets that can make such a claim? No way. Like gold, the gold stocks are now deeply out of favor thanks to the extreme stock-market bull that may have just peaked in late January. Sentiment is poor.

But as gold inevitably powers higher in the wake of this newest SPX correction on strengthening demand from investors, the gold stocks will follow and amplify its gains. Fundamentally the major gold stocks are still dirt-cheap. That’s readily evident in their quarterly operational and financial reports, which I closely follow and analyze for the major GDX gold miners. I can’t wait for their Q4’17 results over the coming weeks.

The primary measure of industry-wide gold-mining profitability is all-in sustaining costs, what its costs to mine and replenish an ounce of gold. In Q3’17 that averaged $868 for the GDX gold miners. And these costs are pretty stable, averaging $867, $878, $875, and $855 in the four quarters before that. So odds are the major gold miners’ collective all-in sustaining costs will hold near these levels in Q4’17 and Q1’18 too.

Gold averaged $1279 in Q3, leading to fat per-ounce profits of $411. Gold was essentially flat in Q4 with a $1276 average price. That means the GDX-component gold miners are likely to soon report profits of $408 per ounce. I’ll dig deeply into those new Q4 quarterlies as they are released, and publish an essay on the results in mid-March. Since Q4 reporting includes full-year results, regulatory deadlines are twice as long.

The SEC requires normal quarterly reports to be filed within 40 to 45 days after quarter-ends, depending on companies’ sizes. But since they have to prepare annual reports with the quarter that ends fiscal years, usually Q4, that deadline is extended to 60 to 90 days. So by mid-March most of the major gold miners’ Q4’17 results will be out. I expect average all-in sustaining costs to come in flat like usual in these reports.

And that’s super-bullish given what gold is doing. The yellow metal that drives its miners’ profits is faring much better in Q1 than it did in Q4. It’s averaging $1331 quarter-to-date, up 4.3% sequentially from Q4. So if AISCs are stable like usual, profits will surge which investors will anticipate in advance. The same $868 AISC implies Q1 GDX-major-gold-miner profitability of $463 per ounce, soaring 13.3% quarter-on-quarter!

So my month-old forecast of a GDX $25 breakout on Q4 earnings remains highly likely. When investors see how the gold miners are faring in their latest reported quarter, they are going to extrapolate mining costs into Q1. That will portend exploding profitability. GDX only needs to rally another 8.6% from its mid-week levels to hit $25. And once gold stocks break out decisively to the upside, they are off to the races.

In all the markets buying begets buying. The more a sector or asset is rallying, the more investors want to participate. And the more capital they pour in, the more those prices keep rallying. That creates and fuels a powerful virtuous circle of buying. Gold stocks have drifted sideways for so long now that they need to achieve a major upside breakout from their consolidation to catch investors’ interest. That’s not far away.

Despite the roller-coaster ride in gold stocks as the wild SPX volatility bullied them around in the past couple weeks, GDX is still within striking distance of that key $25 breakout. Once that happens, the gold stocks’ popularity will surge again. There’s still time to buy low before lots more investors start returning which will catapult this small contrarian sector sharply higher. The gold stocks look really bullish today!

While investors and speculators alike can certainly play gold stocks’ powerful coming upleg with major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals. Their upside will far exceed the ETFs, which are burdened by over-diversification and underperforming gold stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.

The bottom line is the gold stocks weathered the recent sharp stock-market selloff really well. The SPX plunged for the first time in a couple years, generating a big and sharp fear spike. As usual that spooked the gold-stock traders, who sold and fled. Yet despite the carnage GDX’s major consolidation support at $21 held solid. The gold miners’ stocks soon rebounded sharply back up to the middle of their basing channel.

With GDX trading near $23 this week, that critical $25 breakout to entice investors back remains within easy range. Once the collective gold-mining costs reported in the upcoming Q4 results are compared with higher Q1 prevailing gold prices, strong gold-stock buying should resume. Gold stocks have always been a volatile sector, so there’s no reason for traders to fear periodic selloffs like they suffered in recent weeks.

Adam Hamilton, CPA

February 16, 2018

Gold has staged a superb rebound from the $1310 support zone, but that was overshadowed by the truly spectacular reversals taking place in most of the Western world’s gold stocks!
Please click here now. Double-click to enlarge this gold chart. I like the technical action being displayed right now. Here’s why:
First, $1370 is massive resistance. It’s understandable that gold would build a modest head and shoulders top pattern after arriving at this key price zone.
What’s especially positive is that gold has only modestly declined in the face of this resistance and top pattern. My key 14,7,7 Stochastics oscillator is also modestly oversold now, which is good news.
For even better news, please click here now. Double-click to enlarge. This morning, the dollar broke below key support in the 108 price area against the yen.
When investors bet against central banks, they tend to lose. When they bet against the President of the United States, they can get blown right off the financial map.
The bottom line is that President Trump was elected on a mandate to bash the dollar lower, and it is getting beat on like a rag doll by the yen right now.
The bear flag-like action occurred as the dollar approached this support zone. That is ominous for the dollar bugs, and fabulous news for gold.
Investors don’t need to “back up the truck” when buying precious metal assets right now, but they should be emotionally positive and focused more on gold stocks than bullion.
That’s because there is so much news taking place fundamentally in the gold market that favours the miners. Inflation is rising, mainly because quantitative tightening is pushing money out of government bonds and into the banking system.
That’s raising interest rates, incentivizing banks to lend, and putting pressure on the US government’s ability to finance itself. Please click here now. Double-click to enlarge. Since breaking the neckline of a daily chart head and shoulders top pattern, the US T-bond hasn’t even staged a minor rally!
Another of Trump’s election pledges was that US bond market creditors were going to take a haircut on what they get paid. Looking at the price action in the bond market and statements from new Fed chair Powell, it appears that a haircut is on the cusp of really happening.
Trump is acting like he doesn’t care if the US government defaults, and I would suggest that’s the right course of action to take. Inflate, default, or die. It looks like a combination of inflation and “defaultation” is what Trump has planned to end the US government’s horrific levels of excess size, debt, and abuse of citizens around the world.
The rising risk of a joint bond and dollar market meltdown is why gold has acted like a champ while quantitative tightening and rate hikes accelerate.
While QT and rate hikes are the main gold fear trade theme, there are many other supporting factors.
For example, powerful money managers are beginning to voice concerns that Trump’s spending on infrastructure and his tax cuts could cause “overheating” in the US economy.
When institutions get into that mindset they buy… gold stocks!
On that key note, please click here now. Double-click to enlarge this GDX chart. There may be a classic non-confirmation signal in play for the entire precious metals sector, with most gold stocks breaking their December lows, while gold bullion did not.
The GDX break of its December low was immediately followed by a V-Bottom pattern. Note the position of my key 14,7,7 Stochastics series oscillator. It’s adding to the power of the buy signal in play.
Please click here now. That’s another look at GDX, with an emphasis on the trading volume.
Both Powell and Trump seem more interested in the success of Main Street than in Wall Street or the government bond market. I’ve predicted that Powell will attempt to reverse US money velocity by the summer of this year, and that he will succeed.
That change in focus is great news for citizens who have been encased in vile government red tape for far too long, and it is spectacular news for gold, silver, and mining stocks.
With the dollar, T-bond, and the general stock market on very shaky and inflationary ground, institutional money managers have started to take a serious look at gold stocks. By the summer, I expect them to be consistent buyers every month. It doesn’t take a lot of institutional money to blast gold stocks to significantly higher price levels.
To profit from the imminent inflationary fun, aggressive investors should buy GDX call options. Investors who don’t own gold stock at these price levels or lower should be firmly pressing the buy button today!

Stewart Thomson

Graceland Updates

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.

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The world’s leading gold-stock ETF is nearing a major upside breakout from key technical levels. GDX is getting closer to challenging and powering above $25. That would accelerate the sentiment shift in this deeply-undervalued sector back to bullish, enticing investors to return. Good operating results from the major gold miners in their upcoming Q4’17 earnings season could prove the catalyst to fuel this GDX $25 breakout.

The classic way to measure gold-stock-sector price action is with the HUI NYSE Arca Gold BUGS Index. But the HUI benchmark is being increasingly usurped by the GDX VanEck Vectors Gold Miners ETF as the gold-stock metric of choice. GDX is used far more often than the HUI in gold-stock analyses these days, both online and on financial television. I haven’t seen the HUI mentioned on CNBC for years now.

GDX does have major advantages over the HUI. Most importantly it is readily tradable as an ETF and with options. GDX’s component stocks and their weightings are also regularly updated by elite gold-stock analysts, keeping it current. The HUI is rarely if ever updated to reflect company-specific changes in the ranks of the world’s top gold miners. GDX is dynamic where the HUI is effectively static and outdated.

GDX also has limitations as a gold-stock metric though. It was only born in May 2006, so that’s the limit of its price history available for analysis. And because its managers are paid 0.51% of its assets each year to maintain this ETF, GDX is not as pure of measure of gold-stock performance as a normal index. Over a decade that adds up to a substantial 5% difference. Nevertheless GDX’s popularity continues to grow.

This week GDX had $7.7b in assets under management, dwarfing its direct competitors. That was 21x larger than the next-biggest 1x-long major-gold-stock ETF! GDX’s sister GDXJ Junior Gold Miners ETF weighed in at $4.7b, but that generally includes smaller gold miners. GDX is the undisputed king of the gold-stock ETFs. As a contrarian speculator, I watch GDX’s price action in real-time all day every day.

For an entire year now, GDX has meandered in a relatively-tight trading range between $21 to $25. As gold stocks periodically fell even deeper out of favor, this ETF slumped down near $21 lower support. Then as they inevitably rallied back out of those lows, GDX climbed back up near $25 resistance. That made for a roughly-20% gold-stock price range, certainly narrow by this sector’s standards and tough to trade.

This GDX chart over the past couple years or so highlights 2017’s gold-stock consolidation. With this unloved sector neither rallying nor falling enough to get interesting, investors mostly abandoned it over the past year. So gold stocks largely drifted sideways on balance, which certainly proved vexing for the few remaining contrarian speculators and investors. A GDX $25 breakout would greatly improve psychology.

Last year’s gold-stock performance per GDX was very poor. This ETF’s price climbed 11.1% in 2017, which is better than a kick in the teeth. But gold’s impressive 13.2% gain last year well outpaced the gold stocks’ performance. Normally the major gold miners’ stocks amplify gold advances by 2x to 3x, so GDX should’ve powered 26% to 40% higher in 2017. Gold stocks are only worthwhile if they outperform gold.

That’s because gold miners face many additional operational, geological, and geopolitical risks compared to just owning gold outright. So if the gold stocks don’t outperform gold, they simply aren’t worth owning. Seeing them lag the metal which drives their profits for essentially an entire year is extremely anomalous. It’s a reflection of the entire global markets proving extremely anomalous in 2017, an exceedingly-weird year.

Gold stocks normally perform much more like 2016 than 2017. A couple years ago GDX rocketed 52.5% higher in one of the best major-sector-ETF performances in all the stock markets. That greatly amplified 2016’s underlying 8.5% gold advance by 6.2x. All those gains rapidly accrued in that year’s first half, as GDX skyrocketed 151.2% higher in 6.4 months on a parallel 29.9% gold upleg! Gold stocks can really move.

But last year as extreme record-high stock markets and the even-more-extreme bitcoin popular speculative mania stole the spotlight from gold, gold stocks were largely left for dead. Speculators and investors alike wanted nothing to do with classic alternative investments when everything else proved much more exciting. Thus GDX hasn’t been able to decisively break out above its $25 upper resistance, despite trying.

GDX did power 34.6% higher in 1.8 months early last year, peaking on a closing basis at $25.57 in early February 2017. But that rally fizzled with gold’s when stock markets started surging to new records on hopes for big tax cuts soon from the newly-Republican-controlled US government. By early March GDX had retreated back down to $21.14, right at its $21 support line. At least that held strong throughout 2017.

The gold stocks soon rebounded into another rally, but that topped at $24.57 in GDX terms in mid-April. Again gold had stalled out amidst epic general-stock euphoria. Gold is the key to gold-stock fortunes, as traders only think about the gold miners when gold itself catches their attention. GDX was repelled right at its 200-day moving average, which can prove both major support or resistance depending on market direction.

By early May GDX was right back down to $21.10 again, increasingly establishing the clear consolidation trend seen in this chart. The gold stocks couldn’t rally significantly heading into their summer-doldrums lull, and GDX was soon right back down to $21.21 in early July. That very day I published an essay on gold stocks’ summer bottom, predicting a new upleg once those usual weak summer seasonals passed.

And that indeed happened, with GDX rebounding and then accelerating to power 20.2% higher to $25.49 by early September. That was right at its early-February peak, a critical level technically to see a major upside breakout. But once again gold didn’t cooperate, selling off sharply as general stock markets yet again blasted to another series of record highs on renewed hopes for big tax cuts soon. Taxphoria was huge!

Thus the gold stocks slumped again, falling back down near GDX’s strong $21 support as this ETF hit $21.42 on close in mid-December. That was the day before the Federal Reserve’s fifth rate hike of this cycle, so gold-futures speculators were scared. They irrationally fear Fed rate hikes are bearish for gold, even though history has long proven just the opposite. Gold and gold stocks surged after that hike as I predicted.

From the day before that latest FOMC meeting to this week, GDX rallied 13.8% to $24.37. Wednesday morning when I decided to pen this essay, GDX was nearing $24.50. So the long-awaited decisive $25 breakout is in easy reach. Gold stocks are a volatile sector, with 3%+ daily swings in prices relatively common. So all it will take to propel GDX above its $25 resistance is a few solid-to-strong sector up days.

The upcoming Q4’17 earnings season for the major gold miners in the next few weeks could prove the catalyst to spark serious gold-stock buying. Because gold stocks are so deeply out of favor, the small fraction of traders that even think about them assume they are struggling operationally. Throughout all the markets, traders wrongly attribute prices stretched to anomalous levels by extreme herd sentiment to fundamentals.

A month ago bitcoin skyrocketed near $20k as many traders believed such extremes were fundamentally righteous due to the underlying blockchain technology. Yet it was a popular speculative mania, extreme greed sucking people in. In early December I warned “Once this mania bitcoin bubble bursts, and it will, the odds are very high that bitcoin will lose 50% to 75% of its value within a few months on the outside!”

This week just over a month later bitcoin has indeed been cut in half, falling to $9k intraday. Extreme prices are the result of irrational and ephemeral herd sentiment, not fundamentals. Gold stocks are now stuck on the other end of the psychology spectrum, plagued with extreme fear. Since their prices have been so weak, traders think poor fundamentals must be the reason. But that’s simply not true at all.

As a contrarian speculator and market-newsletter writer for the past couple decades, few people are more deeply immersed in the gold-stock realm than me. Every quarter just after earnings season I dive into the actual operating and financial results of the major GDX gold miners. I’m eagerly looking forward to doing that again with their new Q4’17 results, which will be reported between late January and mid-February.

So now the latest quarterly results available from the major gold miners are Q3’17’s. I explored them for the top 34 GDX gold miners, representing almost 92% of its total holdings, back in mid-November. In Q3’17 these elite gold miners reported average all-in sustaining costs of $868 per ounce. That’s what it costs them not only to produce gold, but to explore for more and build new mines to maintain production levels.

Q3’17’s average gold price was $1279, which means the major gold miners were collectively earning profits around $411 per ounce. That made for hefty 32% profit margins, revealing an industry actually thriving fundamentally instead of struggling as herd-sentiment-blinded traders wrongly assume. Gold miners make such excellent investments because their mining costs generally don’t follow gold prices.

Gold-mining costs are essentially fixed during mine-planning stages, when engineers and geologists work to decide which ore to mine, how to dig to it, and how to process it. Once mines’ necessary infrastructure is built, their actual mining costs don’t change much. Quarter after quarter generally the same levels of equipment, employees, and supplies are needed to mine gold. So all-in sustaining costs hold pretty steady.

In the four quarters leading into Q3’17, the top-34 GDX gold miners’ all-in sustaining costs averaged $855, $875, $878, and $867. That works out to an annual average of $869, virtually identical to Q3’17’s $868 per ounce. Those flat AISCs happened despite the gold price varying greatly in that five-quarter span, with this metal slumping as low as $1128 and surging as high as $1365. Gold-mining costs are static.

So as long as prevailing gold prices remain well above all-in sustaining costs, mining gold remains very profitable and spins out big positive operating cashflows. And relatively-flat mining costs generate big gold-miner profits leverage to gold. These core fundamental truths about gold-mining stocks are what could help their upcoming Q4’17 results ignite the buying necessary to propel GDX above $25 for a major breakout.

These new Q4 results aren’t going to be spectacular, as gold’s $1276 average price last quarter was just under Q3’s $1279 average. But assuming flat all-in sustaining costs as usual, $868 in Q4 would still yield fat profit margins of $408 per ounce. That too is virtually unchanged from Q3’s $411. So the major gold miners as a sector shouldn’t see collective downside surprises in earnings in Q4, avoiding damaging sentiment.

It’s not the Q4’17 results that should spark major gold-stock buying, but their implications for the current Q1’18 quarter. While Q1 is young, gold is averaging nearly $1323 so far as of the middle of this week. That is already 3.6% above Q4’s average, which is a big move higher. If these gold levels hold and the major gold miners’ all-in sustaining costs hold, they are looking at Q1’18 profits way up at $455 per ounce!

That’s a whopping 11.5% higher quarter-on-quarter! Not many if any sectors in all the stock markets can even hope for such massive earnings gains. And if gold continues powering higher in the coming months in a major new upleg, Q1’s average gold price will be pulled higher accordingly. That means even larger major-gold-miner profits growth. These super-bullish prospects ought to rekindle material gold-stock demand.

Investors usually buy stocks not because of current earnings, but because of what they expect profits to do over the coming year or so. Rising gold prices coupled with flat costs give gold-mining profits growth in 2018 some of the greatest upside potential in the entire stock markets. Institutional investors should take notice of this as Q4’17 results are released, leading to funds upping their tiny allocations to gold stocks.

On top of that January tends to be a big news month for the gold miners, as many publish their cost and production outlooks for the new year. These reports tend to be bullish on balance, with the major gold miners forecasting higher production and lower costs tending to garner the most attention. So there’s good odds of positive newsflow over the coming weeks as well, drawing investors’ focus back to gold stocks.

All this shows why the gold miners’ stocks have usually enjoyed strong seasonal rallies in January and most of February. So GDX now has its best chance in a year of decisively breaking out above $25 in the coming weeks. That would work wonders for bearish gold-stock psychology. The more gold stocks rally, the better herd sentiment, and the more traders want to buy them. And GDX’s potential upside is huge.

This last chart encompasses nearly all of GDX’s entire history going back to early 2007, a half-year after it was birthed. Gold stocks remain wildly undervalued today, so GDX $25 and even its $31.32 seen at gold stocks’ latest major interim high in early August 2016 are super-low in longer-term context. GDX is actually still down near stock-panic levels, highlighting vast upside as gold stocks inevitably mean revert higher.

The shaded area in the lower right encompasses the last couple years. Despite GDX seeing one heck of a bull-spawning upleg in early 2016, the gold stocks remain very low. GDX itself actually hit an all-time low in January 2016. The gold stocks were trading at fundamentally-absurd prices as I pointed out that very week. That extreme anomaly was the product of fleeting herd sentiment, it had nothing to do with fundamentals.

So far in young 2018, GDX is averaging $23.66 on close. That’s actually worse than Q4’08’s $25.13, which was during the most-extreme market-fear event of our lifetimes. For the first time since 1907, the general stock markets suffered a full-blown panic in late 2008. Everything else including gold and its miners’ stocks were sucked into that epic maelstrom of fear. Traders were terrified, fleeing in horror from everything.

So GDX plummeted as low as $16.37 in late-October 2008, climaxing a devastating 71.0% drop in just 7.5 months. In that panic quarter of Q4’08, gold averaged just $797. While industry costs were lower then, the major gold miners were still earning much less in both profit-margin and absolute terms than they are today. Yet the average GDX share price was much higher in Q4’08 than it’s been over the past year!

The fact GDX could trade around $25.13 during a stock-panic quarter with $797 gold highlights the sheer madness of today’s gold-stock prices. Since 2017 dawned, GDX has averaged just $22.99 with $1261 average gold levels. Seeing gold-stock prices 8.5% lower despite strong profits and average gold prices being a whopping 58.2% higher makes zero sense! The gold stocks have to mean revert far higher from here.

That’s what happened after the extreme pricing anomalies of that late-2008 stock panic too. Over the next 2.9 years, GDX more than quadrupled with a 307.0% gain! Another proportional mean-reversion bull out of early 2016’s all-time GDX low would catapult this ETF back up near $51. That’s still more than another double from today’s levels. And with gold mining so profitable, this new bull’s gains should be far larger.

The bottom line is the leading GDX gold-stock ETF looks to be on the verge of a major breakout. The upcoming Q4’17 results from the major gold miners along with Q1’s higher prevailing gold prices ought to catch investors’ attention. The gold miners should prove very profitable in Q4, with prospects for big and fast earnings growth in Q1 and all of 2018 as gold powers higher. This should help GDX get bid well over $25.

Once gold stocks power decisively above that vexing upper resistance level of the past year, the shift in trader psychology back to bullish will really accelerate. Gold stocks should enjoy relatively-large capital inflows from institutional investors looking for undervalued sectors in an extremely-overvalued stock market. The forgotten gold miners’ stocks have a good chance to outperform everything again this year like in 2016.

Adam Hamilton, CPA

January 19, 2018

In recent days the gold stocks (GDX, GDXJ) traded within 1% of our downside targets of GDX $21.00 and GDXJ $29.50. Last week we wrote: “the miners are getting oversold and a bounce could begin from those levels.” GDXJ troughed first last week at $29.84 while GDX printed a low of $21.27 on Monday. From their September peaks down to those lows, GDX and GDXJ had declined nearly 17% and 21% respectively. They are oversold, nearly touched good support and now the rate hike is behind them. We expect a rally in the sector well into January.

With a rebound underway we should turn our attention to potential upside targets. GDX closed the week at $21.99. It has resistance at $23.00 including its 200-day moving average at $22.83. GDXJ closed at $31.46. It has resistance at $33.00. Its 200-day moving average is at $33.49. In case we are being too conservative, our optimistic upside targets would be GDX $23.50 and GDXJ $33.50.

While mid to late December has been an excellent buy point over each of the past four years, we do not expect the gold stocks (this time) to match those fabulous returns. The gold stocks are not currently as oversold as they were in each of the past four years. The bullish percentage index (BPI), a breadth indicator is currently at 21.4%. Aside from the December 2015 low (which came in January 2016 at a BPI of 12%), the BPI at previous lows did not exceed 10%. Furthermore, a look at the rolling rate of change for 100 days and GDX’s distance from its 100-day exponential moving average shows that GDX currently is nowhere close to as oversold as those four previous points.

Another reason we should not expect a sizeable rebound is metals prices do not have much room to rally before running into strong resistance. Gold closed the week at $1257. It faces long-term moving average resistance at $1266-$1268 and very strong resistance above $1280. Silver meanwhile could find strong resistance at $16.60 to $16.75. Its 200-day moving average is at $17.01 and declining. Silver closed the week at $16.06.

Precious metals and gold stocks especially have begun a rebound that should last at least three or four more weeks. Due to a lack of an extreme “long-term” oversold condition (like in each of the past four December’s) and the presence of nearby overhead resistance, we would not expect sizeable gains. Another reason is strong fundamentals for precious metals (namely declining real interest rates) are not yet in place. With all that being said, some values are starting to emerge in the juniors and the sentiment in the sector has become encouraging from a contrarian standpoint. Conditions are improving but it remains early to be outright bullish on the sector. In the meantime, the key for traders and investors is to find the oversold companies with strong fundamentals with value and catalysts that will drive buying. To follow our guidance and learn our favorite juniors for 2018, consider learning more about our premium service.

Jordan@TheDailyGold.com

Gold cleared $1300 early in the week and padded its gains on Friday even amid a bullish weekly reversal in the US Dollar. Gold’s breakout was validated by a strong monthly close on Thursday and then a strong weekly close Friday. As predicted, the miners perked up with the breakout in Gold. GDX and GDXJ gained nearly 6% and 7% respectively for the week. Look for the miners to continue to trend higher as Gold attempts to retest its 2016 highs around $1375/oz.

The miners (GDX and GDXJ) have more immediate upside potential. The daily line charts show two levels of resistance. The first level is around $26 for GDX and $38 for GDXJ while the second level is $28 for GDX and $40-$41 for GDXJ.

While Gold closed well above $1300 at $1330/oz, it faces resistance at the 2016 highs around $1375/oz. The net speculative position has reached 248K contracts or 46% of open interest. As the chart below shows, the 2016, 2012 and 2011 peaks in Gold all coincided with a net speculative position of 55% of open interest. If current trends continue, the net speculative position could reach 55% as Gold tests $1375/oz.

Circling back to the stocks, we see that our mini-GDXJ index, which consists of 26 stocks and has a median market cap of ~$100 Million closed the week at a +6 month high. The exploration juniors have led the entire sector this year and we expect that to continue. The price action is healthy as the index is trading above its 50-day, 200-day and 400-day moving averages which are all sloping higher. The index closed at 206 and should reach resistance at 215-220. A correction from there (perhaps in October) could setup a push to the 2016 high.

The breakout in Gold through $1300/oz has sparked the miners and juniors and we expect additional gains in the short-term as Gold has room to run. That being said, do note that the net speculative position in Gold is fairly high. It could reach an extreme level if Gold tests major resistance around $1375/oz. To find out the best buys right now and our favorite juniors for 2018 consider learning more about our premium service.

Jordan Roy-Byrne CMT, MFTA

Jordan@TheDailyGold.com

Welcome to the dog days of summer. The low volatility in precious metals continues. Janet Yellen or some other Fed heads said something Friday. Precious Metals sold off but quickly recovered. It appears that not much has transpired in recent weeks as precious metals have grinded higher, albeit slowly. However, while it may be a fledgling development, the miners appear to be leading Gold now.

In the chart below we plot a number of markets including Gold, GDX, GDXJ, our 55-stock junior index and our optionality index. We marked three points that help inform our analysis.

From point 1 to point 3, the gold stocks went from underperforming Gold to slightly leading Gold. The gold stocks began to underperform in late winter. They peaked in February and did not even come close to reaching those highs in March while Gold made a higher high. Gold retested that high at point 2 in June while miners made another lower high. However, there has been a change from then to point 3. Gold is at the same level at point 3 as point 2 but so are the miners! Furthermore, in recent days (since point 3) the gold stocks have made higher highs while Gold has not.

The most important recent development in precious metals could be the renewed relative strength in the gold stocks. Volatility has been very low and Gold has yet to break $1300/oz but the gold stocks have managed to reverse their previous underperformance. They were lagging badly from late winter through spring. Ratio charts (not shown) show that the underperformance ended in May and the outperformance began only days ago. If that holds up into September and Gold breaks above $1300/oz then the gold stocks could enjoy strong gains over the weeks ahead.

Consider learning more about our premium service including our favorite junior exploration companies.

Jordan Roy-Byrne CMT, MFTA

Jordan@TheDailyGold.com

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