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Gold-Stock Upleg Healthy

Adam Hamilton profile picture
Adam Hamilton


  • This post-stock-panic gold-stock upleg continues to look healthy. While the major gold stocks effectively doubled in a couple months, fully 2/3rds was a mean reversion out of extreme stock-panic lows.
  • Gold stocks haven’t rallied excessively from a cross-panic perspective and haven’t yet seen anything resembling upleg-slaying levels of greedy sentiment and overbought technicals.
  • Like usual this gold-stock upleg will follow gold, which continues to see exceptionally-strong investment demand. As long as investment capital is migrating into gold, gold stocks will leverage its gains.

The gold miners' stocks just rolled over into a correction, raising concerns about the staying power of their massive post-panic upleg. These higher prevailing gold prices have driven very strong fundamentals at the gold miners. But they are entering the seasonally weak summer doldrums. And current sentiment and technicals play major roles in governing when uplegs remain healthy or ready to give up their ghosts.

The VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) remains the leading and dominant benchmark for this small contrarian sector. Its $14.3b in net assets this week were a colossal 33.2x bigger than those of its next-largest 1x-long major-gold-miners-ETF competitor! GDX's only real rival is its little-brother, the VanEck Vectors Junior Gold Miners ETF (GDXJ), which is only about one-third of GDX's size. The GDX gold stocks have sure had a wild ride.

Normally the major gold miners of GDX leverage material gold moves by 2x to 3x. Gold stocks' excess gains during gold uplegs are necessary to compensate traders for miners' big additional risks on top of gold-price fluctuations. These include operational risks at individual mines, geopolitical risks in countries hosting gold mines, financial risks from hedging and currency fluctuations, along with many other risks.

GDX started 2020 with a modest 6.0% rally into late February. That was really weak compared to gold though, which overwhelmingly drives gold miners' earnings and thus ultimately stock prices. The yellow metal surged 9.3% by that point, gold-stock leverage to gold ran a miserable 0.6x. Traders are better off owning the metal itself rather than its miners when they are really underperforming. Gold stocks were unloved.

The subsequent stock panic into mid-March spawned by government's draconian COVID-19 economic lockdowns crushed gold stocks. In less than several weeks, GDX plummeted 38.8%. The last couple days of that brutal capitulation selloff were technically

This article was written by

Adam Hamilton profile picture
A lifelong student of the markets, speculator, and investor, decades of experience have forged Adam into a hardcore contrarian. He believes in buying low when others are afraid, then later selling high when others are brave. He founded the financial-market research company Zeal LLC, and continues to write acclaimed weekly and monthly subscription newsletters.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

I own extensive long positions in gold stocks and silver stocks which have been recommended to our newsletter subscribers.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (62)

Paul T. Lambert profile picture
NASDAQ 10K intra-day for the first time ever as corona rages on and cities burn. This reminds me of the Dow similarly hitting 10K a couple decades ago -- not long before the crash of 2000. I also remember gold finally hitting $400 again a bit later, which was the start of its real upleg past $1000 and beyond. Same conditions now?
terryongarland profile picture
Now the added market risks in this election year. At the very least a change in power in DC will very bullish for gold..yes a big assumption, but it is backed up by many expectations of.. Increased spending, more taxes, more regulation, dollar decline, etc. Actually a nightmare for stock holders, real estate, anyone with assets and good income.
Which means regardless of political view even Democrats will hedge their bets with Gold.I mean I would if, I was a Democrat.
One of the candidates running for President will slip up early during the campaign and the following clip will happen allowing us to know the outcome sooner than later @terryongarland :


AEGISBMD profile picture

I prefer the Declaration of Independence speech the best!
Johnny Skyhook profile picture
Ronald Reagan increased debt 186%. George Bush increased debt 101%. Barack Obama increased debt 74%. Do we even need to talk about how much debt increased under Donald Trump? Obviously your facts are influenced by ideological preference, not factual data. Which is fine, but your thesis is basically rubbish. Republicans have consistently had the most profligate administrations. As for deregulation, how did that work out for Boeing?
corav profile picture
Lots of words, very little substance.
It depends who you talk to @corav .
Doc 224899 profile picture
The next up-leg I'm looking forward to is the KL share price. Rebuilding my position with prices in the range of 36-39. Already paid off by the weekend closing yesterday.
jadejet profile picture
@Doc 224899 Well Doc I live near KLGold's Macassa mine. Gold and mining and exploration is in my blood. One drill hole of particular interest which was drilled in the wrong direction just happened to have intersected a super high grade body parallel to the main body which is speculated to extend beyond the mine property onto the old Lakeshore mine right through the town of Kirkland lake through the old McBean mine up to the old Toburn mine at the other end of town mostly owned by KLGold and Agnico-Eagle. There were 5 mines neatly lined up close to each other here at one time. That's just the mines in town proximity. There is speculation that this accidentally found new body of high grade might also extend right through those 5 old mine properties. This camp has already produced 25 million ounces of high grade. If speculation is correct and KLGold owns most of those extended land positions watch for them to buy up what they don't own as an early indicator that there is more to this story than mere speculation. At some time an announcement of some sort could be made. This could end up being more significant than the Fosterville acquisition which became a 30g/t mine and among the lowest AISC of all mines. No rush though. It's all speculation. These things could take years to confirm but it's something to think about and monitor huh? @bjorn2z @kimbillro
Buy gold young man, buy gold. While you're at it buy silver too @jadejet .

@bjorn2z @6228371
whatnext profile picture
Jadejet, I'm surprised the market has basically ignored these intercepts, as well as the buy back that has started up once again. KL gets upgraded and the stock moves down. Any idea what's going on?
I found your post to be very difficult to read and understand. But I only have a Masters in finance. I found EricM comment to be much clearer because he gave a couple basic conclusions
I read "Gold for Dummies Simplified" and still had problems @larry5449 . I understand silver though, my favorite color in a pack of crayons.
EdricM profile picture
Gold stocks, especially juniors, remain cheaply valued relative to the price of gold. Assuming an average prolonged profit margin of $650 per ounce, most miners are still trading at a 10-12 PE ratio and 20% below the value of their gold reserves. In short, miners are still valued at a gold price of $1450-$1500 an ounce. Good enough margin of safety for me.
Do you like GDXJ @EdricM ?
EdricM profile picture
Yes, I have an equal allocation to GDX and GDXJ.
"Gold stocks, especially juniors, remain cheaply valued relative to the price of gold."

"Assuming an average prolonged profit margin of $650 per ounce"

That is not necessarily a reasonable assumption.

"In short, miners are still valued at a gold price of $1450-$1500 an ounce."

That may be where gold is heading.
Increased my AUY yesterday only a gut feeling. Read this today, talk about confirmation bias. Also holding GPL & LRTNF in this sector.
Sammy325 profile picture
Love AUY!!
Added 300 shares PVG to my miners yesterday.
terryongarland profile picture
@nocnurzfred ..PVG is producing and came on stream in BC at perfect time. I believe that a deal for SA is coming in the next 6 months.. just miles from the PVG mine. I have been listening to informed sources. It will be big.
I'm looking for a gold correction to this second leg gold thrust that has topped out. The first up leg began at the end of 2015. I think the correction will persist for a while and carve out an obvious correction on the charts. After that the third leg up thrust will begin that will take gold to all time highs. Since markets like round numbers I am expecting a minimum of $2,000. @jadejet @bjorn2z @Michael1944 @Michael123a .
Johnny Skyhook profile picture
That is how it's looking at the moment.

I'm going to go out on a limb and say we might even see $2,200 an ounce still this year -- but not necessarily consolidated. I'm generally targeting $3000 in medium term.
jadejet profile picture
@kimbillro @bjorn2z @Sorgenfrei @Johnny Skyhook

Hey Bill: I agree with you that gold prices correct a bit then attempt to finally hit record highs in July. Then possibly a retracement before the big push to 2,000 which could serve as main support as gold's price pushes upward. But let's see what the price action tells us over time. Nothing is guaranteed. Gold prices have a way of leaving most people back at the station before making a big advance so watch for gold to rise when you might least expect it to and vice versa. The trend is up and I look for main support as entry points and resistance as shorting points but buy long on an upward breakout. My method this year is to concentrate in capturing the volatility in my favor by going long then short both as an intra-day trader and buy and hold long or short with momentum as a short-term buy and hold.
Now there is one absolutely critical point I'd like to share is this. Silver is in the early phase of its 2 or 3 times in a lifetime parabolic rise to multiples of its current price after markets have bottomed. Have markets bottomed yet?
Let's compare the movement of silver before and after the 2008 financial crisis then compare it to now for a few insights. In the 2008 crisis silvers price fell by the same percentage as markets at about 50%. In March silver prices also fell by the same as markets by about 38%. But in 2008 silver prices started advancing 4 months ahead of the markets while last march both silver prices and markets rose at the same time. I am extracting from this that markets have not bottomed yet and there is a strong possiblity that both markets and silver prices correct and like in 2008 silver prices will start advancing 4 months approx ahead of markets when markets actually bottom then consolidate as silver prices shoot up with a 4 month lead. So if markets tank I am shorting gold and silver stocks and NDX. Once markets bottom then I go long gold and silver stocks and three months later I go long markets all short term buy and hold while intra-day trading the volatility in both gold and silver with an upward bias then trade the ranges again. Anyway, that's my basic plan. Short, sweet, simple, factor in fundamental but trade the technicals. Be ready for a quick change. Stay cool, enjoy the summer, and have a bit of fun and get my mind off all the surreal things happening so fast and significant. Most importantly, stay well everyone. Finally to @bjorn2z Rest well my friend, drink up and be merry because soon we fight the mother of all battles and we will emerge victoriously as we adapt and overcome. Can you feel it, Bjorn? lol
Here's da deal @jadejet and @bjorn2z . If you multiply the high in silver in 1980 at $50 by the inflation factor of 3.25 you get $162 per ounce. It might not get there because where oh where will we ever find another pair of Hunt brothers? But I hope you get my drift. Back then the government held huge stock piles of silver. Today, there is very little silver above ground compared to almost 7 billion ounces of gold. Gold seems to stay at a constant ratio of 3/4 to 7/8 of an ounce per every man, woman, and child world wide. @6228371
An important issue is when the market falls again, will it bring gold/silver down with it again, what do you think? I think it will.
It won't @Captain Oblivious , because the market won't fall much until after the elections.
I’m not so sure of that, quarterly reports will be terrible. This “V” recovery’s for the stock market only, the economy will be an “L”
Johnny Skyhook profile picture
I agree market won't fall much before November -- but if it did, I would expect gold to fall back a bit. Actually I think it will fall but will quickly be pumped back up, so the effect is the same. There could also be a sustained stock rally that would diminish safe-haven appeal if COVID is cured, or we could still see continued climbs simply because of post-election uncertainty and political volatility around the election. My gold position is already pretty well established ahead of next year (when I think we will see more action), but I am still willing to take advantage of dips to build selective longs. Any way you look at it eventually the money printing is a strong thesis for gold.
Will gold reach 2000 this year?
The short answer to that is yes @leeylo999 . Gold will reach $2,000 this year.
Yes, a strong conviction is that it will. Plus Silver could reach a 100 given the right circumstances.
Johnny Skyhook profile picture

Silver at $100? I'd be happy with $24 at this point. I've been hearing the silver moonshot argument forever...do you remember the Peanuts comic strip where Lucy would hold the football for Charlie Brown and then pull it away at the last minute? That's JPM and the silver bull market.

On a positive note silver kills viruses on contact so maybe you can carry a silver eagle in your pocket instead of hand sanitizer?
Franky R. profile picture
Unfortunatly today was a pretty massive hit due to the jobs numbers
Iron K profile picture
GDX GDXJ SILJ SLV GLD all closed at or on the high of the day... I'll take it
2m jobs increase is s joke, with 44m without jobs, the market is just a Ponzi scheme now. Look out below... it’s coming
You are paying commentary tribute to the name of Charles Ponzi @Captain Oblivious .
BayArea2016 profile picture
I think we will see a rotation into gold, bitcoin and guns
I can see a rotation into gold and silver. Thanks
@BayArea2016 - And maybe gun manufacturers' stocks.
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