Because they are still priced at the considerably lower gold prices of the past, gold stocks are still excellent deals. The strong bull market for gold is driving miners to record-breaking earnings. However, gold stocks are now significantly discounted in relation to their underlying profitability since traders have been reluctant to realise this. Stock prices always eventually return to a normal multiple of company profits, so this startling aberration won’t continue.
This week a year ago, the price of gold was almost $2,000. Since gold had recently reached its first nominal record closing of $2,071 in 3.3 years, those levels were regarded as extremely high! At the time, most traders were still quite pessimistic about gold. “While $2,450 is achievable, personally I’m more comfortable looking for a conservative 25% upleg taking gold near $2,275,” I wrote in my bullish essay that week.
Less than 1% separated GDX from its greatest closing in an incredible 11.8 years as it soared to a 4.2-year high in late October! A secular breakout of that size would have greatly enhanced sentiment and drawn traders to gold stocks. However, as I examined in my most recent quarterlies essay, that was sabotaged the next day by the Q3 results of the biggest gold miner in the world. Newmont’s stock plummeted 14.7% when it missed out on AISCs!
In the best of times for gold miners, sentiment was severely damaged when the single gold stock in the S&P 500 saw its worst daily decline in 27 years. While Gold continued to break new records, GDX was pulled down by NEM and rolled over. Before that Newmont fiasco, the GGR was firmly emerging from its multi-year downward trajectory! Gold’s own long-overdue decline quickly intensified GDX’s selloff, sending gold stocks plunging.
In mid-November, the GDX naturally bottomed with gold, dropping 19.5% to the metal’s 8.0% for typical 2.4x negative leverage. However, the GGR reading of 0.150x that was obtained was astounding! Earlier in its monstrous upleg, gold stocks had traded lower than gold, but that was also quite unusual. The GGR fell to an astounding 0.137x in late February after gold had begun to rise but gold stocks had not really followed.
At a 4.0-year low, gold stocks were the most cheap in relation to gold since the gloomy pandemic-lockdown stock panic of March 2020! At the time, I was constantly talking about that incredible gold stock purchasing opportunity, which turned out to be highly profitable. When the chances favour significant upside, we have long recommended fundamentally better gold stock trades in our weekly and monthly subscription newsletters.
This year, they have executed 79 stock deals, averaging amazing +45.4% annualised returns! The unsustainable abnormality of late February’s stock-panic-grade gold-stock prices in relation to gold almost ensured large mean-reversion normalisation rallies. Although they haven’t fallen to such extremes in relation to gold, the current gold prices are not far from doing so. That suggests that there will shortly be another huge spike in gold stocks.
The last great gold stock buying opportunity in late September 2022 was extremely similar to the current one, with GDX dropping to just 0.150x GLD pricing. The Fed’s most extreme rate-hike cycle ever led to another extreme abnormality. Massive gold-futures selling was triggered by the resulting skyrocketing rates, which sent the US dollar into the stratosphere. That caused gold to drop 20.9%, which GDX magnified by 2.2 times, resulting in a vicious 46.5% decline.
In September and October of 2022, the GGR averaged barely 0.154x, spanning the significant secular bottoming, which saw the GGR drop as low as 0.145x. Those are not far below the current levels, the 0.154x average since the elections, and the 0.150x GGR low in mid-November 2024! Seldom have gold equities been less expensive than they are now, and these unusual extremes are never sustained.
Following that late 2022 episode, GDX surged 52.1% higher over the following 4.0 months. And GDX surged 71.0% in 7.8 months following the extreme GGR low in February 2024! It’s likely that much greater gold stock gains will follow this most recent, extremely low price. As a result, we have been actively adding junior and mid-tier gold miners that are fundamentally better than majors and have rapid growth to our newsletter trading books.
Major gold-stock uplegs always follow super-low-GGR extremes. Additionally, gold miners frequently overshoot proportionately to the upside in addition to mean reverting to typical GGR levels. Prior to the Fed’s wild rate hikes in 2022, 2019–2021 were arguably the last years with a normal market. The average GGR over that secular period was 0.199x. A 33% GDX rise would be necessary for a mean reversion back there.
In the GDX majors, however, a proportional overshoot would increase that to 66%, and the juniors and stronger mid-tiers would do significantly better. And this is predicated on the idea that gold prices stay constant and that gold stocks only rise to this current gold levels. There are compelling reasons why this gold bull market is expected to rise significantly, chief among them being the startling lack of interest by American stock investors in gold at this time. They have a lot of purchasing to do.
Both of gold’s most recent monster-grade uplegs in 2020 required significant purchases of gold ETF shares in order to propel the metal up more than 40%. However, there have been no significant GLD and IAU capital inflows into today’s even larger monster gold upleg! This alluring AI stock bubble has diverted American stock investors, who have largely ignored gold. It’s time for the former to explode, which should cause a wild rush into the latter.
This current Q4 also saw the GDX-top-25 gold miners continuing to generate incredible record earnings. Gold is already mostly over, averaging $2,670 per quarter so far, up 35.1% year over year! The largest gold jump in the 34 quarters will occur if it continues over the following few weeks. I have been examining the most recent outcomes of big gold producers. Whatever happens, the average price of gold will be at its highest level ever in Q4 of 2024.
The average GDX-top-25 all-in sustaining costs for the first three quarters of 2024 were $1,315 per ounce. Due to increased output, many gold miners, including Newmont, are predicting lower AISCs in Q4. However, let’s assume they remain extremely high, close to $1,400, just to be safe. That would result in explosive record earnings of $1,270 per ounce, a 93% YoY increase! Gold miners are making a lot of money.
Many gold equities are already extremely cheap, with price-to-earnings ratios in the low double digits and even single digits! Additionally, their sixth consecutive quarter of massive earnings growth will drive down prices even further. Value-oriented fund investors will be drawn to these huge discounts more and more, and it won’t take much institutional purchasing to push this little contrarian sector higher. With profits, gold stocks will return to normal.
Technically, there is a lot of space for this sector to rise as well. Since early October 2023, gold’s monster upleg has increased by 53.1% at its highest point. Based on its own historical trend, GDX should again leverage that by two to three times, assuming it doesn’t continue to surge higher on balance. That means that big gold stocks have gained between 106% and 159% since GDX’s own October 2023 bottom, sending its share prices skyrocketing to $53 to $67!
Because of the weak feeling towards gold stocks, it is only trading around $39 during the middle of the week. Gold and the stocks of its miners are still being overlooked by investors and traders who are enamoured with this AI stock bubble. They’ve fallen far from grace as a result of that indifference. However, booming prosperity eventually draws significant investment back to every industry. When it comes to combining extremely low valuations with massive earnings growth, gold equities are unparalleled.
As gold continues to rise on balance, the general tone towards gold stocks will change to one of optimism, resulting in a surge in purchases. The financial media will cover gold and gold stocks more favourably the higher they rise, and traders will become more aware of this significant upside and want to jump at the chance to profit from it. Additionally, buying encourages buying, which raises prices, excites additional traders, and draws in more cash.
It is alarming and ridiculous to see gold equities lingering at major-secular-low levels in relation to the commodity fuelling their profits, especially as gold is only 2.5% below the most recent record close midweek in late October! For astute contrarians, however, this unsustainable anomaly offers a wealth of great deals. To multiply money, you must first buy low and then sell high, with the first stage being the most crucial. Undoubtedly, gold stocks are at a low level.
Smaller mid-tier and junior gold miners with strong fundamentals will do better than the GDX, which will enjoy significant valuation-mean-reversion gains. They can even frequently run less expensive gold mines than majors, and they are better equipped to steadily increase their output off smaller bases. The average AISC for the GDXJ-top-25 mid-tiers last quarter was $1,331—actually $100 less than the $1,431 for the GDX-top-25 majors! Smaller mines are excellent investments.
In summary, gold stocks are currently excellent deals. The key gold stocks in GDX are significantly cheap, even though gold is still close to recent record highs. Surprisingly, they are trading at values comparable to those of their metal during the significant secular bottoming in late 2022! Gold miners have achieved six consecutive quarters of massive earnings growth and record profits, but traders still mostly ignore them.
Stock prices always eventually normalise to represent acceptable multiples of their underlying company earnings, therefore this unsustainable aberration won’t endure. The rich-and-fat earnings made by gold miners will drive up the price of their stocks. The onset of overdue mean-reversion purchasing will increase positive sentiment and draw more traders to follow the gold stock’s upward trajectory. It will be profitable to invest before then.
Early in April, that contrarian call was fulfilled, and gold continued to soar higher. This gold upleg peaked in late October, soaring 53.1% in 12.9 months, after growing to monster status in mid-September with gains of 40%+! During that time, gold had an incredible 43 record closures, the most recent of which was $2,786 six weeks ago. As a result, gold was severely overbought and the positions of gold futures traders were severely overextended.
In order to rebalance mood and technicals, gold was therefore at high risk for a healthy selloff, which eventually materialised. However, by mid-November, it had only expanded to an 8.0% pullback at worst, demonstrating that gold’s monstrous upleg is still very much in place. Global demand from Chinese investors, central banks, and Indian jewellery consumers has driven this year’s robust gold price action. A higher price regime is emerging for gold.
Gold has closed this year at an average of $2,378 as 2024 draws to a conclusion. That is significantly more than the averages for 2021, 2022, and 2023, which were $1,798, $1,801, and $2,077, respectively. The higher current gold prices, which significantly influence their underlying earnings, should be reflected in the price of gold stocks. However, the top GDX gold-stock ETF averaged $33.76, $29.88, $35.85, and $34.79 for the same four years beginning in 2021.
The average price of gold increased by 32.2% from 2021 and 2024. However, the average price of gold stocks per GDX only increased by 3.1%! This is a startling outlier because traditionally, the large gold equities that dominate this ETF have typically increased meaningful gold changes by two to three times. Profits from gold mining really leverage rising gold prices, which is what drives that. Gold outperforming mining expenses, which only gradually increase, drives disproportionate growth in earnings.
I thoroughly examine the most recent outcomes released by the 25 biggest component stocks of the GDX following each quarterly earnings season. Gold averaged a stunning record $2,477 in Q3 of 24 according to the most recent report, which was released a month ago. However, the average all-in sustaining costs for the top 25 GDX stocks were far lower, at $1,431 per ounce, suggesting $1,046 in sector unit profits. For the seventh consecutive quarter, those soared by 74.0% YoY!
GDX-top-25 estimated unit profits jumped 87.2%, 42.3%, 34.9%, 83.7%, and 74.0% YoY beginning in Q3’23! The average price per ounce for the first three quarters of 2024 was $980. When current gold prices were 24.3% lower, it was a staggering 94.1% greater than the average for 2022! The fact that yearly-average GDX prices are only 16.4% higher this year, despite earnings almost doubling, is completely nonsensical.
Charting this unsustainable value discrepancy using a different proxy makes it even more startling. Given that gold mining profits are mostly driven by current gold prices, examining gold-stock price levels in relation to gold reveals both undervaluation and overvaluation. The GDX/GLD Ratio, or GGR, is calculated by dividing the daily closes of the GDX by the powerful GLD gold ETFs. It indicates if gold equities are comparatively pricey or inexpensive.
Here, the raw GDX in red is overlayed with this GGR in blue and important technicals. The big gold stocks haven’t had a bad run, as evidenced by the GDX’s maximum gain of 70.2% during the gold’s monster upleg. However, that left the historical 2x-to-3x range well behind, resulting in a somewhat pathetic 1.3x upside leverage to gold. Gold equities are still trading at secular-bottoming levels in relation to their metal because they have lagged so far behind it!
source: mining dot com
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