Gold up. Gold Miners Down
Clive Thompson
Retired Managing Director of Wealth Management at Union Bancaire Privée UBP SA, Geneva, Switzerland. An unblemished 47 year career in Trusts, Wealth Management and Swiss Private Banking
Gold up. Gold miners down.
The chart above starts in mid-2020 just as the Covid 19 pandemic was sweeping the world. Gold miners have under-performed the gold price as well as the S&P 500 since 2011. Gold is up more than 40% in 4 years, whilst the gold miners represented by the two VanEck Gold Miners ETFs (GDX and GDXJ) are flat to down.
Historicaly, gold miners were seen as a leveraged play on the gold price. When gold went up, gold miners went up faster. And vice-versa. This is normal behaviour due to the leveraged effect on their profits.
If a gold mining company has a cost of production of $1500 and ounce, and the gold price is $2000, it will make a profit of $500 an ounce. But if the gold price rises 25% to $2500, the mining company's profits will rise 100% to $1000 an ounce.
Gold recently rose to record levels. Gold mining shares should be rising faster. They're not. The dis-connect is very obvious in the months of August and September this year. I've circled this on the right hand side of the chart above. As gold (in orange on the chart) climbed to new all-time records the gold mining ETFs (in light blue and dark blue) fell nearly 10%.
The reason this is happening is a general level of disillusionment with gold mining company shares.
Gold previosly peaked close to $1900 in 2011. It then went into general decline for the next 9 years, forming a saucer shape until it reached the $1900 level again in mid-2020. That's roughly where my chart starts. You can see the period from 2011 in the chart below. From 2011 you should have owned stocks, not gold.
During those 9 years people became very disillusioned by the falling gold price and by the even faster falling gold miners. At one point, the VanEck Gold Miners ETF (GDX) was down 80% from its peak in 2011. Even today GDX is more than 40% below the 2011 peak.
Gold investors were missing out on the soaring bull market in stocks, particularly tech stocks. Since 2011 the S&P 500 is up 500%, Gold is up 30% and GDX is down 40%. You can see this in the chart below.
The incentive to sell gold mining stocks and flip into tech stocks has been huge. At every opportunity investors would dump their dull, boring, under-performing gold miners for the latest glamourous tech stock.
That's what's been happening since July. As some tech stocks dumped, investors who had missed them on the way up, see this dip as their opportunity to get into the raging tech boom. They may be late, but they believe there's plenty more to come. Some even see tech stocks as continuing their moon trajectory forever. "We're on our way to infinity". Sadly that's already true with some of the p/e ratios.
If you want to buy something, you sell a dog. Right now gold mining companies look like dogs. Miners down, tech up. Run with the crowd. (I didn't say "lemmings")
That's why they are selling the gold miners. To raise cash to jump on the latest hot stock.
The question for gold bulls must be "When will the tide turn?"
The tide will turn.
I can't tell you when.
But I can tell you what will cause it to turn.
It will turn when the bull market in tech stocks stops.
Not immediately. To start with, everything will be down. But when the dust settles those who were burned will be looking for anything but tech. That will be the time when the gold mining stocks will start catching up with the gold price. It will start slowly at first, then whoosh!
Who remembers Netscape, Lucent Technologies, Inktomi, Lycos, JDS Uniphase, Global Crossing, Palm, Infospace, Juniper Networks, Alta-vista, AOL, Excite, and Nortel Networks? These were some of the darlings of the dot-com bubble which popped in early 2000. Where are they now? Gone!
Even the survivors took more a decade or more to recover their 1999 peaks. In the chart below you can see how gold out-performed Amazon, IBM, Microsoft, Intel, and Cisco in the decade following the dot-com craze.
But here's what you are waiting for. What WILL happen to gold when today's tech bubble pops? I can't tell you WHEN it will pop, or maybe it's even popping as I write this. But it WILL pop. That's when you need to move fast. Neither gold, nor gold miners will wait for you "to see what happens".
In the eleven years since the dot-com stocks peaked the S&P 500 fell by 20%. The gold price soared by 580%. The next 11 years from 2011 to 2022 saw gold tanking, and stocks soaring.
Since 2011 the S&P 500 has been out-performing gold. And gold has been out-performing gold-miners.
Your guess is as good as mine as to what happens next. But my feeling is that we are very close to the pivot point.
If you feel you missed the recent move in the gold price, it's not too late to buy the gold miners. Their price is down.
Managing Director at SST Australia (Retired)
5 个月Excellent analysis. Many thanks Clive.
Chartered Fellow of CISI - Manages the AAA WS Charteris Bond Fund - Winner of the Citywire Best Bond Fund Manager award 2024
5 个月the main driver behind this is that Gold Bullion has been purchased in huge quantities by Asian and Middle East Central Banks for Geo Political reasons including preparation for the soon to be launched Brics currency ( which will be 40% Gold backed ) . These Central Banks have no interest in Silver or Mining Shares neither of which are anywhere near their previous peaks . However at some stage the 2nd round effects will kick in probably started by M&A activity as the Trade understands the value and cash flows at the current level much better than the Investors.It is M&A activity that has very often kicked off a bull run in the miners in the past and this is now starting to happen eg: 1st Majestic bidding for Gatos.Anglo Gold bidding for Centamin etc Eventually Silver will join in the fun as investors / traders will buy Silver as a catch up trade having missed out on the run in Gold judging by the Miners move in the last 2 days it looks like it may have finally started - our Gold Fund which is full of miners was up 5% overnight and this move has a different feel to it than the many previous false dawn's - let's wait and see - but the sector carries very asymmetric reward with significant upside and not much downside
Vice President of Sales at perron ventures
5 个月Clives reported and comments are always well thought out and astutely communicated if I lived in switzerland and he was still managing money I would not hesitate to give him a portion of my money to invest
Vice President of Sales at perron ventures
5 个月The markets are really getting irrational over the past 14 years. The government intervention in market response to economic forces has ruined investors ability to access were or what might happen in any intelligible way sad and sickening for society as a whole
CEO and Director - HFM / CTA: Gold/FX Manager
5 个月I respectfully disagree with Clive on his cheery optimism for gold equities. I’m not disputing that they may rise in price. (Or they may not.) ? Either way, gold equities are an empirically poor way to participate in the price of gold and there are MANY better ways to do so than via gold equities (or gold equity funds). ? I am no fan of gold ETFs. However, even ungeared, they beat the socks off gold equities and gold funds.? Given that an investor has a positive view on gold and wishes to profit from its gains, they might be better advised to simply invest in a basic ETF (one that actually holds physical gold) and increase or decrease the leverage on their holding by, say, 10%, 20%, 30%, etc…?At least the leverage would be known and controllable. “Only gold is goldâ€. All other things are derivatives of the gold price. Gold equities are remarkably expensive and inefficient derivatives.