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Gold-Stock Upleg Cycles

Adam Hamilton
Jan 20, 2012

Despite gold's powerful secular bull over the past decade, gold stocks remain vexing to investors and speculators. Though this metal's miners have yielded truly colossal bull-to-date gains, they failed to leverage the record-high gold prices seen in much of 2011. So naturally traders aren't very enthusiastic about this sector at the moment. But they sure would be if they understood the gold-stock upleg cycles.

No bull market, no matter how powerful, fundamentally strong, or long-lived, rises in a nice linear fashion. They all flow and ebb, surging forward two steps in major uplegs before retreating back one step in major corrections. Visualize a sine wave oscillating within a rising trend. This seemingly-capricious behavior is actually very beneficial to bulls' health and longevity, it keeps sentiment (greed and fear) balanced.

And unsurprisingly gold stocks, with their extraordinary volatility, are no exception to this ironclad bull-market rule. Gold stocks' amazing bull market has advanced in fits and starts. This technical price action is driven purely by sentiment, the same dynamic that affects every popular market. And since many gold-stock traders love gold's timeless qualities with a nearly-religious fervor, emotions run higher in gold stocks than most other sectors.

Strong feelings really amplify the impact of sentiment. Gold stocks' dazzling uplegs from time to time create huge gains that ignite unsustainable greed and euphoria. But that sucks in all near-term buyers too soon, leaving only sellers. So demoralizing corrections soon follow, dragging the great sentiment pendulum to swing all the way back to the opposite extreme of excessive fear and anxiety. This dynamic creates the bull-market upleg cycles.

Once you understand these gold-stock cycles, much of the anxiety about gold stocks underperforming gold vanishes. They are easiest to see in the flagship gold-stock benchmark, the NYSE Arca Gold BUGS Index. Thanks to its unwieldy name, this Basket of Unhedged Gold Stocks is better known by its symbol HUI (pronounced "huey"). Its component list is comprised of 16 of the largest and most-widely-held gold-mining companies in the world, so it's a great proxy for major gold stocks' performance.

While gold's own secular bull was born in April 2001, the HUI's started a bit earlier in November 2000. If you weren't interested in gold back then, you can't even begin to imagine the sheer degree of popular antipathy for gold and its miners. Only the bravest and hardest-core contrarians dared to tread in this left-for-dead wasteland in the early 2000s. But the HUI's staggering performance since is one heck of an argument for the wisdom of contrarian investing!


Since its humble origins when everyone literally thought gold-stock investors were stupid and/or insane, the HUI has powered 1664.4% higher at best as of September 2011! Over this same secular span, the general stock markets as represented by the benchmark S&P 500 index actually lost 14.2%. Gold stocks have been one of the best-performing sectors of the past decade, if not the very best. Such gains should be legendary today, universally lauded.

But this sure wasn't an easy road psychologically, actually far from it as any gold-stock trader will be quick to attest. The HUI advanced in fits and starts, its enormous uplegs were followed by vexing consolidations lasting well over a year. This made gold stocks a challenging emotional roller coaster for traders, all too easy to get bucked off of for all but the most disciplined. The last time I looked at HUI upleg cycles in late 2007, before the stock panic, I coined this behavior the surge-drift pattern.

Once every couple years or so, gold stocks surge to new bull-market highs in massive uplegs. The realized gains we and our subscribers have earned being heavily long during these surges have made us fortunes. Boy are they fun! But after these surges come the necessary reckonings to rebalance sentiment, in the form of drifts. So gold stocks drift sideways for a year or two after their surges, seeing much-smaller consolidation uplegs at best periodically.

This surge-drift dynamic is certainly logical when viewed through the lens of sentiment, which drives all short-term price action. After any massive upleg's enormous gains, greed grows excessive. All near-term buyers have already bought in, and the traders who had positions early enough to ride the surges to huge profits are thinking about locking in their gains. Their selling soon caps the overextended surges.

Major new highs also spawn widespread worries. Traders always wonder if they are sustainable or if prices will soon collapse back down to the lower levels everyone was comfortable with. So after a surge, a consolidating distribution phase kicks in. Existing gold-stock owners gradually sell, both to realize profits and because they grow discouraged as more time passes since the fast rallies died. But new buyers gradually replace them. The longer that prices consolidate near their new highs, the more traders come to believe they are righteous and fundamentally justified.

This surge-drift pattern continued unabated until 2008's once-in-a-century stock panic. The monster fear superstorm spawned by that epic anomaly ripped every sector to shreds, even gold itself was hit hard. All this heart-stopping fear terrified gold-stock traders, who dumped these miners like they were infected with the Black Death. So the HUI plummeted to crazy levels not seen since mid-2003, even though gold merely retreated to late-2007 levels.

Just before that stock panic slammed the markets, the HUI had enjoyed a massive upleg driven by its fourth surge. So gold stocks were due to consolidate anyway when the stock panic interrupted them. But instead they were crushed to such ludicrously-oversold levels that their fundamentals demanded they rebound fast as I wrote extensively about at the time. We and our subscribers bought gold stocks near their apocalyptic lows in that panic's dark heart, and were subsequently richly rewarded in the sharp post-panic recovery.

By late 2009 the HUI had regained its interrupted consolidation range, and by late 2010 gold stocks were once again surging to new record highs. This bull's fifth surge was anemic for a variety of reasons beyond the scope of this essay, but it led to the consolidating drift we've found ourselves mired in over the past year or so. And at a year old, this drift is starting to get longer in the tooth by bull-to-date standards. Around this far in is when the next surge tends to start slowly marching higher out of the bottom of the drift.

For over a decade now gold stocks have advanced in this surge-drift pattern without fail, even an ultra-rare stock panic merely stretched out an in-progress drift. Surges gradually turned excessive fear into excessive greed and coined enormous realized gains for prudent contrarian traders. Then the subsequent drifts bled off that excessive greed until only fear and anxiety remained. This happened over long-enough spans for traders to grow comfortable with the new higher-price baselines.

Surge, drift, surge, drift, surge, drift. And since we are now in a drift, what comes next? A new surge! Gold stocks' poor performance relative to gold in 2011 is not a harbinger of a sector that is doomed to fade, but a typical basing behavior we have seen many times before in this secular bull. The past year has bled off greed and enabled traders to accept the recent higher price levels as the new norm. Buyers are gradually returning, including elite hedge funds. This is a perfect setup for the next surge's massive upleg!

One problem with secular-scale charts is the earlier price action always looks trivial in comparison with recent price action. While this distortion can be addressed with logarithmic charts, they introduce interpretation problems of their own. So in order to get a better feel for how large the HUI's surge-drift cycles have been, this next chart annotates the size and duration of each major upleg and correction. Gold-stock surges have been fantastically lucrative to ride.


The first three surges' massive uplegs that look minor visually on such a long-term chart were actually enormous. For an index to hit major new bull-market highs, the advances can't be immaterial. We are talking about HUI gains near 145%, 125%, and 137% in merely 6 months to a year! While the last couple surges were more muted than those in the early years, they still saw huge 72% and 64% rallies over similar spans. If you are deployed in quality gold stocks during one of these surges, your capital balloons dramatically.

All the HUI uplegs over this entire bull (excluding the initial post-panic recovery) averaged gains of 80.7% over just 7.9 months! No matter how challenging the HUI's surge-drift pattern makes owning gold stocks psychologically, the prize is well worth the pain. We are talking about 11 separate opportunities over 11 years to almost double your capital in gold stocks! This is incredible during a secular stock bear where the general stock markets merely drifted sideways.

But the necessary cost of these awesome uplegs was the subsequent corrections essential to rebalance sentiment. They protected this gold-stock bull from soaring too fast and burning itself out prematurely. Excluding that mind-boggling 70.6% plummet during the stock panic, the HUI's average correction ran 26.1% over 2.8 months. Considering gold stocks' enormous upside potential during a secular gold bull, such retreats are relatively minor in the grand scheme even for buy-and-hold investors who ride them out.

The latest big swing in the gold-stock upleg cycles was the 23.5% correction over 3.7 months that likely ended in late December. This is right in line with the average, and means the next cyclical move due is a gold-stock upleg. And given where we are in the surge-drift cycles late in a major consolidation, there is an excellent chance that this next gold-stock upleg will mushroom into a full-blown massive surge one.

While cycle analysis is purely technical by nature, fundamentals certainly support this bullish gold-stock outlook as well. A couple weeks ago I dug into where the gold stocks were trading relative to gold, their primary fundamental driver. And amazingly gold stocks are so unloved and out of favor today that they are back down near levels only seen before during the stock panic! The HUI would have to soar far from current levels merely to return to average valuations relative to gold.

When bullish fundamentals coincide with the end of a correction late in a drift in the gold-stock upleg cycles, it is about the best setup ever seen for gold stocks. They are now due for a major upleg, and more and more big-money traders including elite hedge funds are arriving at this very conclusion. With the gold price remaining so high yet gold-stock prices still so low, investors and speculators are starting to understand that gold stocks need to surge again.

Take one more look at this chart, and note where the HUI is today (call it roughly 500) and when it originally achieved these levels. Back in March 2008 when the HUI broke through 500 for the first time in history, gold was approaching $1000 for the first time ever. Yet today with gold 2/3rds higher, which translates into radically-higher profits for gold miners, the HUI is still languishing near 500. Mark my words, there is no way this anomaly is sustainable!

In the stock markets, any company's stock price is ultimately bid up to reflect the earnings stream its underlying business can generate. Gold stocks are no exception. They aren't going to stay at early-2008 levels while gold continues powering far higher. And this 2008 comparison is particularly interesting in terms of upleg-cycle analysis. You could actually make the case that the current drift is about 4 years old instead of just over 1, implying the gold-stock spring is more tightly wound. So the coming surge ought to catapult gold stocks much higher to make up so much lost ground.

But even if the next great surge to major new highs somehow tarries, we are still due for an upleg regardless. Today is a fantastic time in the gold-stock upleg cycles to buy gold stocks at low prices. And as the charts above show, such opportunities never last for long. With such high odds that the next major surge is due imminently, I sure wouldn't want to risk not having big exposure in elite gold stocks.

These opportunities are magnified even more since gold itself is due for a major upleg as well. As I detailed last week, the combination of an overbought US dollar and oversold gold is a recipe for a strong upleg in the yellow metal. And nothing gets investors and speculators interested in buying gold stocks faster than a major gold rally. With the US dollar ready to launch gold, the gold stock opportunities are even more compelling.

At Zeal we've been actively trading this gold-stock bull since the very beginning. Over the past decade I've probably done more analytical work studying it than almost anyone else on Earth, devoting thousands of hours. The resulting knowledge and experience have led to gigantic realized gains in gold stocks for us and our subscribers over the years. Our overall trading track record since 2001 is stellar. All 598 stock trades (about 4/10ths gold stocks) recommended in our subscription newsletters have averaged annualized realized gains of +48%! Not too shabby during a secular stock bear.

And lately thanks to this bullish setup we've started buying again. This time we are focusing on junior gold producers, companies with far-better potential to soar than the majors in the HUI. We are drawing from the pool of our dozen favorites profiled in a comprehensive new fundamental report. This fascinating 34 pages is the fruits of hundreds of hours of expert world-class research, where we started out with around 100 junior gold producers trading in the US and Canada and gradually narrowed this population down to our fundamental favorites. Buy yours today while gold stocks still remain cheap!

All our hard work ultimately flows into our acclaimed weekly and monthly subscription newsletters. In them I draw on our vast experience, knowledge, wisdom, and ongoing research to explain what the markets are doing, why, where they are likely heading, and how to trade them with specific stock trades as opportunities arise. Wouldn't you like our decades of experience in your corner, helping you cut through the noise to make better trading decisions? Subscribe today and start thriving!

The bottom line is this powerful secular gold-stock bull has always advanced in fits and starts. This surge-drift pattern has certainly been vexing psychologically for traders who don't understand it. But it has actually enhanced this bull's health by keeping sentiment balanced, a huge boon for its ultimate longevity. And today these gold-stock upleg cycles suggest a major surge to new bull-market highs is imminent.

After spending well over a year basing high, and remaining incredibly cheap relative to prevailing gold prices, gold stocks are starting to catch the attention of serious capital. As we've seen in the past similar situations late in consolidation drifts, the new buying feeds on itself and gold stocks are soon soaring. While it definitely takes a contrarian bent to buy after a long drift, the potential rewards are immense.


Jan 20, 2012
Adam Hamilton, CPA

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

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