Miners Might Be The Altcoins Of The Gold Market

Miners Might Be The Altcoins Of The Gold Market
Jonathan Hobbs

almost 2 years ago4 mins

  • Gold tends to do well in times of economic uncertainty, as investors seek out safe-haven assets. Holding shares of gold miners can help capitalize on the rising price of the metal.

  • Mining stocks tend to be more volatile than gold, and are sensitive to fluctuations in its price.

  • The price of gold surged over twentyfold in the 1970s, with the economy facing high inflation and low growth – an outlook that is similar to today’s.

Gold tends to do well in times of economic uncertainty, as investors seek out safe-haven assets. Holding shares of gold miners can help capitalize on the rising price of the metal.

Mining stocks tend to be more volatile than gold, and are sensitive to fluctuations in its price.

The price of gold surged over twentyfold in the 1970s, with the economy facing high inflation and low growth – an outlook that is similar to today’s.

Gold hasn’t exactly shot the lights out this year, but it’s been better than a kick in the shin at a time when growth stocks and altcoins have crumpled. But consider that gold miners might now have taken the place of those investments, with some of the riskiest stocks earning some stellar returns over the last few months. Let’s take a look at why, and how you can buy into this corner of the market…

How have gold miners been doing?

Gold mining companies make their money by digging up gold and then selling it wholesale to bullion banks for a profit. So the price of gold really affects their bottom line. In the 2011-15 gold bear market, for example, the price of gold dropped about 45%: from a high of about $1,900, to a low of $1,050. But gold miners had it way worse. The VanEck Gold Miners ETF (GDX) – which tracks a basket of the world’s largest gold mining stocks – dropped by about 80% over that time.

Yet since that 2015 low, gold has gone up by about 75%, while the more volatile GDX climbed almost twice that (around 140%). The chart below shows what would have happened if you’d invested $100 in each when the price of gold bottomed out.

Value of $100 invested in the VanEck Gold Miners ETF (GDX) vs pure gold. Prices sourced from Yahoo Finance.
Value of $100 invested in the VanEck Gold Miners ETF (GDX) vs pure gold. Prices sourced from Yahoo Finance.

Why have gold miners gone up more than gold?

For one, gold mining companies had to reinvent themselves to stay afloat in the bear market. They cut costs, refinanced debts, and improved their operational efficiency to squeeze out every last ounce of revenue. So when the gold price finally turned a corner, they were (generally) leaner and meaner, leaving more profits for shareholders.

For another, the market has traditionally viewed miners as a leveraged bet on the price of gold. Investors value these companies based on the expected future revenue they’ll extract from their mines – less the costs needed to extract it.

Assume a mining company spends $1,500 to extract an ounce of gold from their mine, and the mine has 100,000 ounces of reserves. Based on that math, it would cost them $150 million to dig up all that gold. If the gold price were $1,600, they’d bring in $160 million – netting them a $10 million profit. Let’s now assume gold rose to $1,700 an ounce (roughly 6%). That would put the mine’s revenue at $170 million. But since it still costs the miner $150 million to extract the gold, their profit margin would double to $20 million.

Of course, there are many other considerations to take into account here. Gold miners have a range of company-specific risks, and their gold extraction costs can go up too. Nonetheless, GDX has mostly worked as a leveraged play on gold since 2011 (both to the upside and the downside.)

Which gold miners stand out?

The price of gold went up over twentyfold in the 1970s, and we seem to be living through a similar stagflationary scenario today. History might not repeat itself here, but holding some gold in your portfolio is still a sensible option given the current economy. Even if its price stays the same, as a portion of your portfolio, gold could hedge you against deeper losses if your stocks and crypto tumble more.

As for gold mining stocks: while they have a lot more downside risk, their upside could be a lot higher if gold continues to shine. Given gold miners are more volatile than gold, they needn't take up as large a chunk of your portfolio.

It also goes without saying that buying a diversified ETF is a lot less risky than buying just one or two mining stocks. But if you’re keen to try your luck at stock picking, start by looking into the largest holdings of the ETF: Newmont (NEM) and Barrick Gold (GOLD) have seen some of the strongest gains this year, up 10% and 17% respectively.

And if you’re looking to dabble in smaller-sized miners, you can also check out the VanEck Junior Gold Miners ETF (GDXJ). This has the potential for more upside as it holds some companies that are still in the early stages of exploration: if they strike gold, their share prices could get an extra boost. Of course, with that extra potential for reward comes extra potential risk. The largest holdings of this ETF are Merdeka Copper Gold (MDK), which also mines copper and silver, and Yamana Gold (AUY), which focuses on responsible gold mining. Those are each up over 30% this year, but their charts look a bit on the toppy side if you ask me.

Looking at the technicals, GDX is currently trading in the $32 region. In trader lingo, it’s trying to make a “support-resistance flip,” where it turns previous price resistance into support. This might offer a good entry point. And if the support fails, you’ll know to manage your risk accordingly.

VanEck Gold Miners ETF (GDX) priced in US dollars. Chart produced with TradingView.
VanEck Gold Miners ETF (GDX) priced in US dollars. Chart produced with TradingView.
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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