Gold Miners ETF (GDX)

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Gold-Stock Upside Targets 2
By: Adam Hamilton | April 5, 2024

The gold miners’ stocks are building steam, enjoying mounting upside momentum with gold powering to nominal record highs. Speculators and investors alike are taking notice of this high-potential sector that has long been overlooked. Despite their recent surge, gold stocks remain very undervalued relative to the metal that drives their profits. Their technicals and fundamentals argue for much-higher stock prices ahead.

Over the past five weeks or so, gold has blasted higher in a magnificent breakout rally! It was born as March dawned when a top Fed official hinted at more quantitative-easing Treasury monetizations. Gold shot up 2.0% that day to its first nominal record close since late December, and has achieved a dozen more since. Midweek gold was challenging $2,300, and its total upleg since early October had grown to 26.3%!

Who could’ve seen this coming? Me. The very day after gold bottomed under $1,820, I wrote an essay on gold’s violent breakdown. My contrarian conclusion fighting universal bearishness was, “...gold’s latest plunge was driven by massive gold-futures selling, leaving speculators’ positioning exceedingly-bearish. These super-leveraged traders have probably about exhausted their capital firepower available for selling.”

“That guarantees huge mean-reversion short-covering buying is imminent, which will catapult gold sharply higher.” How high? While most other analysts were forecasting gold to keep grinding lower, I wrote “Yet gold can easily surge 20% to 25% out of excessively-bearish spec gold-futures positioning like today on stage-one and stage-two buying alone!” Those are respectively short-covering buying and long buying.

That’s exactly what happened, as I detailed in a late-February essay on gold futures being reloaded. But while gold has been the belle of the ball, gold stocks have acted like ugly stepsisters. At best since early October, the leading GDX gold-stock ETF has merely rallied 27.9%. That’s appalling, not even 1.1x upside leverage to gold! Normally GDX’s major gold miners tend to amplify material gold moves by 2x to 3x.

The gold stocks have languished and lagged their metal for a variety of reasons, which I explored in an early-March essay. The day before I wrote that one, GDX had plunged to $25.79 which was actually a little under its early-October low of $25.91! Major gold stocks had slumped 0.5% during a 4.8-month span where gold had surged 11.7% higher. While bearish market anomalies feel bad, they offer great opportunities.

Extreme disconnects never last long, soon mean reverting to restore normal relationships. Over the last five weeks or so, GDX has rallied a sizable 28.5% leveraging gold’s parallel surge by 2.2x. Naturally that is working wonders for sentiment, rekindling bullishness and attracting in more traders. As they chase these mounting gold-stock gains, this sector’s outperformance relative to its underlying metal will grow.

This chart looks at GDX technicals over the past few years or so. The last time I ran it in early March, this dominant sector benchmark was right at that anomalous pre-gold-upleg low. But gold stocks have started to surge with gold since, achieving some nice gains. Yet GDX is still only about halfway up into its secular uptrend, still having massive room to mean revert higher. Much bigger gold-stock gains are still coming.



Gold stocks remind me of a great Easter sermon my pastor just gave at church focusing on Thomas the Apostle. After Jesus was crucified, Thomas’s world came crashing down. He heard the impossible news of Jesus’s resurrection, but remained skeptical. John’s gospel records Thomas saying “Unless I see the nail marks in his hands and put my finger where the nails were, and put my hand into his side, I will not believe.”

Forever branded Doubting Thomas for that, he was more of a realist. He wanted some real evidence that Jesus had risen, and soon got it as Jesus visited and spoke with him. Right then Thomas believed, and went on to do many great works including spreading the gospel to India. Gold stocks have been out of favor so long they may as well be rising from the dead! So traders want hard evidence before believing this is real.

GDX surging nearly 30% in just over a month is starting to convince skeptics. The hardline bearishness on this sector that has festered for years is softening, with bullish green shoots sprouting up. In markets, buying begets buying. Traders lover chasing winners to ride their upside momentum. The higher and longer anything rallies, the more capital it attracts accelerating its gains. Doubt quickly transforms into belief.

Gold stocks’ violent upside potential has largely been forgotten in recent years. GDX has enjoyed some modest-to-decent uplegs since 2021, clocking in at +28.4%, +41.4%, +52.1%, and +34.4%. Those are alright, but nothing to write home about. Averaging 39.1% gains, they really weren’t compelling enough to overcome the challenges of contrarian trading. But go back just one more year, and everything changes...

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