The small contrarian gold-mining sector remains deeply out of favor, universally ignored. Thus the gold stocks are largely drifting listlessly, totally devoid of excitement. But that’s the best time to buy low, when few others care. The gold stocks continue to form strong technical bases, paving the way for massive mean-reversion uplegs. And they remain exceedingly cheap relative to gold prices, which drive their profits.
Being a gold-stock investor feels pretty miserable and hopeless these days. The gold stocks have been consolidating low for 14.2 months now, stuck in a seemingly-endless sideways grind. There are still gains to be won, but they are mostly within that low-trading-range context. We haven’t seen one of the huge uplegs gold stocks are famous for since the first half of 2016. So most traders have given up and moved on.
That’s understandable psychologically, but unfortunate for multiplying wealth. Sometimes it takes a while for gold stocks to catch a bid, but once they get moving they often soar. This sector is so small relative to broader stock markets that even minor shifts in capital flows can drive enormous gains. While it’s hard waiting for gold stocks to return to favor, the vast upside when they do is well worth the buying-low pain.
The leading gold-stock measure and trading vehicle is the GDX VanEck Vectors Gold Miners ETF. It was the original gold-stock ETF launched in May 2006, and still maintains a commanding advantage in popularity. This week, GDX’s net assets of $7.7b were 24.0x larger than its next-biggest 1x-long major-gold-stock-ETF competitor! GDX is as big as all the other gold-stock ETFs trading in the US combined.
GDX’s price action shows why gold stocks are such compelling investments when everyone hates them. After gold stocks were universally despised in mid-January 2016, GDX soared 151.2% higher in just 6.4 months! After the previous time sentiment turned so overwhelmingly against gold stocks in October 2008, GDX rocketed 307.0% higher over the next 2.9 years. Buying gold stocks low has proven very lucrative.
That quadrupling of GDX after 2008’s first-in-a-century stock panic was actually the tail end of a vastly-larger secular gold-stock bull. Many years before GDX was even a twinkle in its creators’ eyes, that gold-stock bull started stealthily marching higher out of total despair. It can’t be measured by GDX since that ETF started too late, but the classic HUI NYSE Arca Gold BUGS Index reveals the magnitude of that bull run.
Over 10.8 years between November 2000 and September 2011, the gold stocks as measured by the HUI skyrocketed an astounding 1664.4% higher! And that was during a long bear-market span in the general stock markets, where the flagship S&P 500 drifted 14.2% lower. The gains in gold miners’ stocks as they mean revert from out of favor to popular are so epically enormous that they far outweigh any time lost waiting.
Gold stocks are even more attractive today given the exceedingly-overvalued and dangerous US stock markets, which are on the verge of a long-overdue major bear. Market valuations remain deep in literal bubble territory despite early-February’s correction. The simple-average trailing-twelve-month price-to-earnings ratio of the elite S&P 500 stocks was still 31.5x at the end of last month, above the 28x bubble threshold!
The market-darling stocks investors love today are crazy-expensive, portending huge downside in the next bear. The most-popular stock among professional and individual investors alike is Amazon.com, a great company. Yet AMZN stock is now trading at a ludicrous 252.5x earnings! That means if profits held steady it would take new investors today a quarter millennium just to recoup their stock purchase price.
Meanwhile the world’s largest gold miner in 2017-production terms, Barrick Gold, is now trading at a TTM P/E of 9.5x. That’s dirt-cheap by any standards! And ABX’s profits-growth potential is greater than AMZN’s. Last year Barrick mined 5.32m ounces of gold at all-in sustaining costs of $750 per ounce. That was $508 under gold’s average price of $1258 last year, fueling fat full-year profits over $1.5b on $8.4b in sales.
Every 10% increase in prevailing gold prices boosts Barrick’s earnings by 25%. And the average gold price so far in 2018 is already up 5.7%, so gold miners’ profits are growing fast. I’m not a Barrick Gold investor, and am just using this leading major gold miner as an example. There are plenty of smaller mid-tier gold miners with far more upside profits leverage to gold prices. Gold stocks are darned attractive!
They are one of the last bargain sectors remaining in these overheated stock markets. They are one of the only sectors that can rally in major bear markets, because they follow gold which drives their profits. Gold investment demand surges in weak stock markets, which brings investors back to gold stocks. At some point, investors are going to figure out how compelling gold stocks are today and stampede back in.