Almost all investors claim to be inconsistent people, brave and independent thinkers willing to stand up to the masses. And over 90% of motorists rate themselves as better than average drivers, which is an obvious statistical impossibility. However, there is a fierce group that can rightly claim to be true individualism: the believers in gold, and especially gold-mining stocks.
Part of their allure comes from their skepticism about what paper currency can be printed, and it has been, seemingly limitless. Although the Federal Reserve said last week that it would start slowing its monthly asset purchases of $120 billion, this comes after doubling its balance sheet since March 2020, before the Covid-19 pandemic turned into an economic crisis. Other major central banks have engaged in similar monetary expansions.
So far, the aversion to fiat currencies has been expressed in a trip to cryptocurrencies, rather than bullion and mining stocks, the traditional strongholds of inflation. In the meantime, gold lovers and their producers are arguably the most opposite, and perhaps the most lonely investor.
The recent performance of metals and mining stocks did nothing to attract investors. Gold appears to be heading into its first losing year since 2018, as this week’s commodities column indicates. The
SPDR Gold Shares
(Stock ticker: GLD), the largest ETF for bullion, is at 11.9% below its peak in August 2020.
Gold stocks were in bear markets in good faith. The VanEck Vectors Gold Miners ETF (GDX), which tracks the largest companies in the sector, is down 26.1% from its high on July 29, 2020, while the VanEck Vectors Junior Gold Miners ETF (GDXJ), which tracks smaller numbers, is 29.7% below its peak, also reached on that date.
The perception that Bitcoin is a better way to hedge against inflation has led to an outflow of gold ETFs into cryptocurrencies, according to a recent report from JP Morgan’s global strategists, led by Nikolaos Panigerzoglu. Gold’s failure to capitalize on signs of inflation helped drive this shift. No doubt the performance chasers have been following Bitcoin’s 111.9% gain this year or Ethereum’s 511.2% increase.
But among the few people who believe in pride is Trey Rick, managing director of Bristol Gold Group, an advisory firm for institutional investors. In fact, he says, gold stocks are shaping up as the trade of the decade, at least for those willing to deviate from the consensus.
First, he notes that the group’s late performance follows a period of strong returns, with the GDX ETF yielding an annual return of 18.06% in the three years through November 4, despite a negative 17.04% return in the last 12 months, according to Morningstar.
But more importantly, says Rick, only a 2% to 3% transfer of assets by institutional investors would create a tidal wave of funds that would inundate the relatively small group. The entire precious metal mining industry has a market capitalization of 580 billion dollars, which dwarfs the 2.5 trillion dollars of huge stocks like
(AAPL). Elon Musk, President
(TSLA), alone equals about 60% of the gold miners’ full market value, Rick notes cautiously.
So, just a few of a few hedge funds or giveaways can cause a stock to go up. But the group has a bad reputation for being merely a perpetual purchase option for bullion that trades at inflated valuations. Moreover, historically many mines were burdened with bad managements that were dedicated to the capital. After the 2000s bull market, they borrowed for hyper-expansion, just in time to impact the gold bear market by 40% from 2011 to late 2015.
Rick says this has changed Baron. It offers various metrics (as of September 30) showing the NYSE Arca Gold Miners (based on the GDX ETF) trading at a much more modest valuation than the S&P 500. Gold miners achieve a price/earnings ratio of 13.45 times, versus 24.34 for the big-cap benchmark. They also trade at 1.6 times book value, versus 4.51 times the S&P 500. Finally, they provide a dividend yield of 2.31%, which adds up to not a severed liver, compared to the S&P 500’s 1.38%.
What’s underestimated, Rick continues, is that miners are paying off the debt. According to estimates by Canaccord Genuity it cites, it will go from taking on total debt of $18 billion again in 2014 to net cash (in excess of debt) of $15 billion by 2022.
However, feelings towards miners range from apathy to hostility, although inflation proves to be more hawkish than fleeting and their improved management and metrics. Meanwhile, cryptocurrencies are the shiny new thing that is attracting speculative interest as the broad stock market is steadily rising.
Rick says that gold acts as a store of value right now. But in order to “hockey kick off” in the group, the broad market will have to stop recording new highs almost daily. Therefore, there is no urgent need to buy gold stocks, at least not until the group pops up and attracts traders’ interest, most likely upon reversing the initial advance, it is assumed.
For those true opponents looking to put a little of their wallets in these unpopular laggards, Reik prefers the novice miners of the GDXJ ETF. They may become candidates to take over majors in the GDX ETF, which should replace depleted reserves. But remember, while you watch your friends riding bull markets and getting all the investor and media attention, the opponents are the only ones.
write to Randall W. Forsyth at email@example.com