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Gold Stocks Coiling Post-Fed
By: Adam Hamilton | July 9, 2021

The gold miners’ stocks have been grinding sideways for several weeks, after getting whacked by mid-June’s hawkish Fed surprise. While this low drift has really stoked bearish sentiment, the gold stocks are winding up like a coiled spring. Their strong technicals and fundamentals are storing big upside energy, which should soon fuel a sharp rebound rally. Traders will rush back in as gold stocks start surging again.

Gold-stock psychology remains really impaired, with fear and apathy reigning. That ignited at the latest FOMC meeting in mid-June, and has been festering ever since. As expected the Fed did nothing, leaving both its zero-interest-rate policy and $120b per month of quantitative-easing bond monetizations in place indefinitely. Both ZIRP and huge QE are the most-extreme forms of easing, super-bullish for gold and its miners.

But along with that nothingburger of an FOMC decision, the Fed released the latest unofficial federal-funds-rate projections from its individual top officials. Merely a third of those guys thought there might need to be two quarter-point rate hikes fully 2.5 years into the future, way out heading into year-end 2023. That so-called dot plot was more hawkish than expected, goosing the US dollar which scared gold-futures speculators.

So they puked out a massive amount of gold-futures selling, slamming gold 5.2% lower in just three trading days starting with that FOMC decision! I wrote a whole essay on that Fed gold-futures purge that week. As gold stocks are ultimately leveraged plays on the metal they mine, the leading GDX VanEck Vectors Gold Miners ETF collapsed 9.2% in that short span. That gutted confidence in this contrarian sector.

It really shouldn’t have though. The major gold stocks’ downside leverage to gold was just 1.8x on those hawkish dots. Normally GDX amplifies material gold moves by 2x to 3x. And as I explained that week, speculators’ gold-futures positioning going into that event pretty much guaranteed that selloff would be short-lived. These leveraged traders didn’t have the capital firepower available to sustain big selling for long.

That huge gold-futures purge indeed exhausted itself just two trading days after that FOMC decision. Gold’s closing low on the Friday after that Wednesday Fed meeting was $1,763, which has essentially held since. And GDX’s closing low of $34.13 in the immediate wake of the FOMC has proven reasonably solid too. While this primary gold-stock benchmark slumped 1.4% lower in late June, it quickly rebounded.

So the major gold stocks have been grinding sideways on balance ever since that ridiculous hawkish-dots surprise on the prospects of a couple rate hikes way out in the distant future. As a financial-newsletter guy, I hear from dozens of traders a day. Based on my e-mail flows since then, a sizable-if-not-large fraction of gold-stock traders are so discouraged they are either giving up and exiting or sorely tempted to.

That will likely prove a big mistake given the continuing super-bullish backdrop for the yellow metal and the companies that wrest it from the bowels of the earth. Since the March 2020 stock panic on all those pandemic lockdowns, the Fed has ballooned its balance sheet by an absurdly-extreme 87.4% or $3,767b! The US central bank has nearly doubled the US dollar supply in just 15.6 months, ludicrously unprecedented.

That hyper-inflationary money-supply growth means far more dollars are available to compete for and bid up gold. Its own global mined supply only grows on the order of 1% annually, vastly slower than not just the US dollar’s mushrooming but all other major fiat currencies’. The Fed deciding to gradually taper QE, which is merely slowing money’s rate of increase, doesn’t even start to unwind all that astounding inflation.

Thanks to that violent purge, speculators’ gold-futures positioning is now super-bullish for gold in coming weeks and months. They’ve exhausted their likely selling potential, leaving little room to dump more but massive room to buy back in. And gold investors have largely ignored those hawkish dots, resisting being spooked into selling by gold’s sharp plunge in mid-June. They’ll resume buying as gold mean reverts higher.

While you wouldn’t know it from all the whining in gold-stock land, both their latest upleg and secular uptrend remain intact. This chart shows GDX over the past several years or so, superimposed over a technical indicator called the Relative GDX. It looks at this gold-stock benchmark as a multiple of its key 200-day moving average, which reveals when this sector is overbought or oversold relative to its own precedent.



Before that distant-rate-hikes boogeyman roared, the major gold stocks dominating GDX were enjoying a young bull-market upleg. This sector benchmark had surged 28.4% higher in just 2.5 months, which had necessitated a perfectly-normal high consolidation to digest those big-and-fast gains. That happened for about a month before that fateful FOMC decision. GDX was trading at $37.59 on the eve of that meeting.

That was only down 5.3% from this upleg’s latest interim high of $39.68 achieved in mid-May. That is just pullback territory after a sharp surge, nothing worrying. In the month after that high-water mark, GDX had averaged a high and solid $38.90 on close. Such mid-upleg pauses to rebalance sentiment are healthy, preparing the way for the next surge higher. Gold stocks weren’t overbought leading into the FOMC either.

Over the past five calendar years, GDX has tended to meander between 80% to 150% of its 200dma. That is the current Relative GDX trading range. At most in early June well before those hawkish dots, this rGDX indicator had crept up to 1.075x. Historically gold stocks need to exceed 1.30x to even start looking overbought. Bull uplegs generally aren’t at risk of rolling over into corrections until the rGDX shoots over 1.40x.

The mission of trading is buying in relatively-low then later selling relatively-high to multiply capital. In rGDX terms, gold stocks should be bought when that indicator nears 0.80x. While gold stocks weren’t pummeled down that far, the Relative GDX has slumped as low as 0.927x in recent weeks. That is well into oversold territory, which means gold-stock traders should be rushing to buy instead of capitulating to sell low.

That post-FOMC gold-stock hammering on gold’s own also stopped right at the support line of GDX’s strong secular uptrend. At worst late last month, GDX had retreated 15.2% from this upleg’s latest interim high in mid-May. While definitely a severe artificially-boosted selloff, that neither torpedoed gold stocks’ latest upleg nor their longer-term secular uptrend. Both remain very much intact as this chart reveals.

So technically gold stocks are winding up like a coiled spring again, basing and storing upside energy that will rapidly be released catapulting them higher. The triggering catalyst will be gold rebounding on its own strong fundamentals. While gold-stock traders can sulk and ignore gold strength for a little while, it always soon attracts them back. Once gold stocks really start moving, traders rush in to chase the momentum.

The major gold miners’ strong fundamentals will add to the upside pressure on their battered stock prices. With Q2’21 just finished, the gold stocks’ earnings season will soon be underway. They generally report their latest quarterly results from three-to-six weeks after quarter-ends. This coming round should prove solid if not strong for several reasons. That will boost gold-miner earnings, pushing low valuations even lower...

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