zealllc.com / Adam Hamilton / February 10, 2017
Gold stocks are on fire this year, powering higher in market-dominating performance. This is a massive reversal from their dark fourth quarter, with 6/7ths of those losses already erased. But this strong new upleg still remains young and small by historical standards. Gold stocks’ recent rally is only the vanguard of another major bull-market upleg. This sector’s bullish technicals reveal vast upside potential from here.
The gold miners are a small contrarian stock-market sector that isn’t widely followed. Hearing about how the gold stocks are faring in the mainstream financial media is pretty rare. So this sector generally flies under the radars of the great majority of speculators and investors. That’s rather unfortunate, because the gold stocks have enjoyed some of the greatest gains in all the stock markets in this young century.
The flagship gold-stock index is the NYSE Arca Gold BUGS Index, which trades under the symbol HUI. BUGS stands for Basket of Unhedged Gold Stocks, as major gold miners can’t be included in the HUI unless their gold production is not hedged beyond 1.5 years. Running all the way back to June 1996, and having no management fees like ETFs, the HUI offers the definitive read on gold-stock performance.
Today’s leading gold-stock trading vehicle, the GDX VanEck Vectors Gold Miners ETF, closely mirrors the HUI’s price action. Since there aren’t that many major gold miners, GDX’s composition is similar to the HUI’s by necessity. But because GDX charges a 0.52% annual management fee, and its managers change around its components and their weightings so much, the HUI remains the gold-stock metric of choice.
All speculators and investors should pay attention to gold stocks because their bull markets and uplegs multiply wealth like no other sector. Their last secular bull ran between November 2000 and September 2011. During that 10.8-year span, the HUI skyrocketed 1664% higher while the broad-market S&P 500 slipped 14% lower! Secular bull markets in gold stocks truly create life-changing dynasty-building wealth.
Last year another major gold-stock bull market was stealthily born, that has great potential to go secular and get huge. Despite their rotten fourth quarter, the gold stocks as measured by the HUI still blasted a market-leading 64.0% higher in 2016! That compares to a mere 9.5% gain in the S&P 500. So with the HUI already up 21.5% year-to-date in young 2017, speculators and investors alike really need to take notice.
All this gold-stock behavior over the past year or so has been textbook early-secular-bull stuff. And if a new secular bull is indeed underway, the gains in gold stocks in the coming years are going to radically dwarf those seen since early 2016. This first chart looks at this young gold-stock bull in HUI terms since last January. This sector’s technicals have turned really favorable again following the fourth-quarter anomalies.
Just over a year ago in mid-January 2016, the gold miners’ stocks had been left for dead. Traders had abandoned them to such an extreme degree that the HUI slumped to a fundamentally-absurd 13.5-year secular low. Gold-stock prices had collapsed back to July 2002 levels, when gold was trading near $305 and had yet to exceed $329 in its young secular bull! But last January gold was 3.6x higher at $1087 at worst.
Just like the rest of the stock markets, gold-mining stock prices must ultimately reflect some reasonable multiple of underlying corporate profits. Back in Q4’15 as traders fled gold stocks, the average gold price was $1105 which was the worst quarter since Q4’09. Yet the elite gold miners of GDX still reported average all-in sustaining costs of just $836 per ounce. They remained very profitable even in gold’s trough quarter.
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