Gold Stocks to Overshoot
The gold miners’ stocks have blasted higher to a powerful upside breakout this month. Amplifying gold’s underlying surge, they’ve achieved major new bull-market highs. Yet despite that big rallying, gold stocks remain undervalued relative to the metal they mine that drives their earnings. They still need to mean revert much higher to reflect prevailing gold prices, with momentum buying fueling a proportional overshoot.
Markets are forever cyclical, flowing and ebbing in endless marches of uplegs and corrections within bulls and bears. Price action is pendulum-like, oscillating between opposing extremes. Those include high and low technicals, overvalued and undervalued fundamentals, and greedy and fearful sentiment. Long-term averages reflect the bottom midpoints of pendulum arcs, mean-reversion targets for stretched prices.
But pendulums pulled way to either side don’t stop in the middle once they start swinging back. Their kinetic momentum carries them well through their midpoints in proportional overshoots to the other side. Markets dragged to either extreme function similarly, not just normalizing to averages but swinging right through to opposing extremes. Gold-stock cycles are no exception, and they recently saw an extreme anomaly.
Gold-mining profits are overwhelmingly driven by prevailing gold prices, as mining costs only change gradually. This is readily evident in the major gold miners included in the benchmark GDX gold-stock ETF. Their last-reported quarterly results were Q1’24’s, where the top 25 GDX gold miners averaged $1,277 all-in sustaining costs. Subtracting those from gold’s average price yields a great sector earnings proxy.
In Q1 gold averaged $2,072, so GDX-top-25 profits ran $795 per ounce. A year earlier in the comparable Q1’23, gold was $1,892 while it cost these elite majors $1,302 to produce. That made for unit earnings of $589 per ounce. So during a year where average gold prices rallied a nice 9.5%, the GDX-top-25 majors’ profits surged 34.9%. This latest real-world example clocked in at excellent 3.7x upside leverage to gold!
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