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Gold Mining Stocks at 8-Year Lag Behind Gold Prices: Rally Ahead?

Moomoo News Global wrote a column · Apr 12 08:34
Gold has been on an unstoppable upward trend this year, with $Gold Futures(AUG4)(GCmain.US)$ breaking through historical barriers of $2200 and $2300. On April 12th, the gold price surged again, with $Gold Futures(AUG4)(GCmain.US)$ reaching the milestone of $2400 per ounce, peaking at $2416.5.
Gold Mining Stocks at 8-Year Lag Behind Gold Prices: Rally Ahead?
Despite the remarkable upswing in gold prices, it appears that some gold mining companies have yet to keep up with the pace completely. Specifically, the $VanEck Gold Miners Equity ETF(GDX.US)$ has experienced a mere 11% uptick this year, which is comparatively less significant than the 16% YTD surge in $Gold Futures(AUG4)(GCmain.US)$. This has left investors anxious to know whether this trend gap will narrow and whether gold mining stocks will provide some opportunities in the near future.
Wall Street Analysts Believe It's Not Too Late to Join the Gold Rally
Typically, gold prices are negatively correlated with real interest rates, which represent the cost of holding gold, and the US dollar, which is the primary currency for gold pricing. However, this time is different, as gold prices have surged alongside rising US Treasury yields and a stronger US dollar. Even the continued outflow of funds from physically backed gold ETFs has failed to hinder this trend, rendering traditional models seemingly ineffective.
Analysts suggest that several factors have driven the current gold rally:
● On the one hand, there are signs of a slowdown in the Fed's progress against inflation, making gold, a traditional inflation hedge tool more attractive.
● On the other hand, geopolitical risks, global economic uncertainty have increased the demand for gold as a safe haven.
● Moreover, as market concerns about US fiscal credit intensify, especially as the election approaches, the dropping credibility of the dollar-dominated credit currency system has accelerated the pace of central bank gold purchases, further supporting gold prices.
● Furthermore, expectations of a Fed rate cut and FOMO (fear of missing out) sentiment may also boost gold prices.
Looking ahead, Wall Street banks remain highly optimistic about the future of gold prices. BofA commodities strategist Michael Widmer has listed gold as one of his favorite commodities, with a projected price of $3,000 per ounce by 2025. UBS has recently raised its 2024 year-end target to $2,400 and sees the possibility of gold prices surging as high as $2,500 this year. UBS has even predicted that if history repeats itself, "an investor with a two to three-year view could expect to see gold potentially double from here to more than $4,000."
The Surge in Gold Prices Does Not Seem to Be Significantly Boosting Gold Mining Stocks Yet
Traditionally, gold mining stocks tend to benefit from a rise in gold prices and show a decent performance. However, currently, gold miners are clearly lagging behind the upward trend in gold prices.
Gold Mining Stocks at 8-Year Lag Behind Gold Prices: Rally Ahead?
The data shows that since the beginning of the year, $Gold Futures(AUG4)(GCmain.US)$ and $SPDR Gold ETF(GLD.US)$ have risen by approximately 16% and 15%, respectively. However, the $VanEck Junior Gold Miners ETF(GDXJ.US)$ and $VanEck Gold Miners Equity ETF(GDX.US)$, which measure the performance of major mining company stocks, have only increased by 13% and 11%. In terms of individual stocks, $Royal Gold(RGLD.US)$ has only risen by 2% this year, and $Newmont(NEM.US)$, which is the largest holding in the VanEck fund, has even fallen by about 5%.
Screening range: Top 10 Holdings in GDX Source: moomoo
Screening range: Top 10 Holdings in GDX Source: moomoo
If we measure the performance of gold mining companies relative to the gold price with the GDX/GLD ratio, it has recently dropped to the 8-year low level of approximately 0.0140, indicating further weakness in the stock price performance of gold miners. This has also attracted market attention.
Gold Mining Stocks at 8-Year Lag Behind Gold Prices: Rally Ahead?
Why are Gold Mining Stocks Struggling to Rise? What's Next?
Analysts believe that the difference in the upward trend between gold prices and gold mining stocks may be related to the impact of rising costs on the profits of gold mining companies.
The increase in costs due to rising inflation has led to a decrease in the profits of gold mining companies. Most companies are facing upward pressure on costs such as wages, exploration, and even interest expenses. For example, $Newmont(NEM.US)$'s total operating expenses in 2023 are 43% higher than analyst expectations. This also explains why, despite the expected increase in revenue in recent years, profit margins and earnings per share expectations have declined. In addition, $Newmont(NEM.US)$'s $15 billion acquisition of Nucleus Mining has also been questioned by shareholders due to lower-than-expected gold production.
Valuation may be another concern. Compared with the peer, China's mining leader $ZIJIN MINING(02899.HK)$, some underperforming gold miners such as $Royal Gold(RGLD.US)$ have a higher P/E TTM ratio, while $Newmont(NEM.US)$ is still reporting losses.
Screening range: Top 10 Holdings in GDX  Source: moomoo
Screening range: Top 10 Holdings in GDX Source: moomoo
Despite this, as gold prices remain at high levels for a longer period of time, the likelihood of analysts raising their revenue expectations for gold companies is increasing. Moreover, if inflationary pressures ease and the outlook for cost control improves, gold mining stocks are expected to see a rebound.
David Rosenberg of Rosenberg Research wrote that:
"With gold prices projected to go higher (a move towards $3,000 is not out of the question)...we believe this group should not be overlooked - offering an excellent risk/reward proposition."
Since the beginning of this month, gold mining stocks have been catching up with the price of gold at an increasing pace, confirming this trend. Although the YTD increase in gold mining stocks lags behind that of gold prices, the increase in $VanEck Junior Gold Miners ETF(GDXJ.US)$ and $VanEck Gold Miners Equity ETF(GDX.US)$ this month has been significant, with increases of 10% and 9% respectively, which is significantly higher than the increase in gold prices. This trend was also observed in the recent trading day.
Source: moomoo
Source: moomoo
Source: Bloomberg, Financial Times, moomoo, Barron's
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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