- Gold mining stocks have seen surprising earnings and revenue growth in the last few quarters.
- Despite the surprising growth rates, the mining stocks have been trending lower.
- The VanEck Vectors Gold Miners ETF has been moving lower and a downward sloped trend channel has formed.
- Bullish sentiment toward gold has been falling and could be reaching a key level.
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Using sentiment indicators as part of your analysis process is partly art and partly science, at least that’s how I fell. When you look at the various sentiment indicators, you have to keep in mind what the underlying fundamentals are telling you about the investment. If it’s a stock, is the company growing earnings and revenue at a rate that is above average, average, or below average? Does the sentiment match up with the growth?
In other words, if a company is seeing strong growth and investors and analysts are more bullish on the stock, that’s to be expected. If investors and analysts are bearish on a stock that is seeing earnings and revenue decline, that’s to be expected.
When it comes to commodities, it’s a little different. Yes you have the same indicators on gold mining stocks that you have with other companies, but sentiment toward the metal itself plays a huge role in determining the price action—at least that’s what I’ve observed.
When it comes to measuring the sentiment toward gold, the best sentiment indicator I have found is the Commitment of Traders (COT) report. In particular, the large speculator portion of the COT report. Last week’s report showed that large speculators have a net long position of 167,528 contracts. That is the smallest net long position since June ’19 for the group.
This is where the art portion comes in to play—interpreting what the science, or data, means. First, I can tell you that it is very rare for large speculators to reach a net short position on gold. The last time it happened was in the fall of 2018 and before that you had to go back around 20 years. The group hasn’t had a net long position under 200K contracts very often over the last two years, so from a relative since, the group is less bullish right now than they have been since June ’19. Gold was trading below $1,300 an ounce back then and it went on to rally up to the $2,063.
We also see on the chart above how gold has been trending lower over the last eight months and that has obviously caused large speculators to become less bullish. To utilize the sentiment properly, I believe you have to take a contrarian approach. When large speculators reach a point where they are too bullish, you should consider lightening up on gold. When they reach a point where they are less bullish (since they are never really bearish) that’s when it’s time to add to your gold holdings.
The Miners Have Seen Tremendous Earnings and Sales Growth in Recent Quarters
Turning our attention to the fundamentals, many mining companies have seen tremendous earnings growth in the last few quarters and the last three years. I looked at the top 10 holdings of the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) and then pulled the earnings growth and sales growth figures from Investor’s Business Daily (IBD).
Only seven of the 10 holdings are listed on U.S. exchanges where I could get the stats from IBD. The table below shows the EPS growth for the most recent quarter, the quarter before that, and the average EPS growth for the last three years. It also shows the sales growth for the most recent quarter as well as the average growth rate for the last three years.
These seven stocks make up just over 45% of the assets in the GDX, so they are a pretty good representation of the growth within the industry or at least within the holdings in the ETF. There are some pretty impressive numbers in this table. We see triple digit earnings growth from three different companies in the most recent quarter—AngloGold Ashanti (AU), Barrick Gold (GOLD), and Newmont Mining (NEM).
Shifting our focus to the sales growth columns we see that all seven companies saw double-digit growth in the most recent quarter with four seeing better than 20% growth. Over the last three years all but two, AngloGold and Wheaton Precious Metals (WPM), have averaged double-digit sales growth on an annualized basis.
Gold miners aren’t typically thought of as high growth stocks, but that is exactly what we have seen in the last few quarters and in most cases the last three years. Both earnings and sales have been growing at unusual rates.
GDX Trending Lower Within a Trend Channel
Looking at the daily chart for the VanEck Vectors Gold Miners ETF we see how a downwardly sloped trend channel has formed off of the August high. The upper rail connects that high with the highs from November and January. That rail is currently at the $35 level.
In each of the instances where the GDX has peaked since August, the fund has moved just above its 50-day moving average. We also see that the daily stochastic indicators have been in overbought territory each time. The 10-day RSI has been in the vicinity of 65 each time.
Based on the pattern in the chart, it looks like the GDX is getting ready for another short-term downturn and will likely head back down to the $31 area at the very least. One thing that is different this time is where the sentiment is toward gold and that could keep the GDX from moving all the way down to the lower rail of the channel this time. If that is the case, the next short-term move lower could give investors a pretty good entry point.
Over the short term, technical factors tend to win out over the fundamental and sentiment factors. However, over the long term, the fundamentals tend to win out and the sentiment indicators tend to be more of an intermediate indicator. Given the lower bullish sentiment on the COT report, I don’t think the GDX reaches the lower rail of the channel this time around.
My Overall Take on the VanEck Vectors Gold Miners ETF
I can see the GDX pulling back again over the next few weeks based on the pattern in the chart. However, the next dip could provide a great entry point for investors with a long-term or intermediate term investment horizon.
I think the mining stocks will start to look better and better to investors as the fundamentals start to stand out more against other industries. Another factor to keep in mind is the inflation picture. Many economists are starting to worry about an uptick in global inflation as governments around the world are providing various forms of stimulus to reinvigorate their economies. With interest rates low, dovish central banks, and governments pushing money in to the economy, inflation is almost certain to increase in the coming years.
Historically gold has been seen as a hedge against inflation, but there are a number of studies that dispute that theory. While gold itself might not be a great hedge against inflation, gold miners have tended to perform extremely well during times of higher inflation. Yes there is a high correlation between gold prices and the performance of gold miners, but that correlation isn’t a one-to-one relationship. Coming out of the financial crisis in 2007-2008, the GDX gained over 230% from October ’08 through December ’09. During that same period gold itself only increased a little over 60%.
I see the GDX making another move lower in the next few weeks, but then I look for the fund to break out of its downward trend as the fundamentals and sentiment takeover as the key factors, moving ahead of the technical factors in importance. I can see the GDX moving back up to the $45 level by the end of the year and then if inflation concerns increase toward the end of 2021, the GDX could continue higher and push toward the all-time high which is up above the $60 mark.
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