AXMIN Inc (TSXV: AXM)
AXMIN Inc. (TSXV:AXM) is a Canadian-based exploration and development company with a strong focus on central and West Africa.
This month, gold miner stock prices have made a strong breakthrough, hitting new bull market highs. However, compared to gold prices, gold stocks are still undervalued and have significant room for further upward movement.
Gold prices are the primary driver of gold producers’ profits, while stock prices reflect a reasonable multiple of company earnings. Therefore, to understand the valuation of gold stocks, the GDX/GLD Ratio (GGR) is a good indicator.
In simple terms, the GDX/GLD ratio reflects the relationship between gold stock prices and gold prices. The specific calculation formula is the daily closing price of the Gold Miners ETF VanEck Gold Miners ETF (NYSE: GDX) divided by the daily closing price of the U.S. Gold ETF SPDR Gold Shares (GLD).
On February 28, GDX plunged to $25.79, and the GDX/GLD ratio fell to a four-year low of 0.137x, slightly above the 0.133x during the 2020 pandemic. Generally speaking, gold stock prices have a leverage effect of 2 to 3 times the price of gold. However, since early October last year, gold prices initiated an upward trend with a cumulative increase of 11.7%. Logically, GDX’s increase should be between 23% and 35%, but it actually fell slightly by 0.5%.
Extreme values of GGR are significant trading signals; they often mark major cyclical reversals and the tops of pendulum arcs. The more extreme the value, the higher the probability of mean reversion and price spikes. Take 2020 for example; at that time, GDX plunged 38.8% within a few weeks but soared 134.1% in the following 4.8 months.
However, the market situation at that time was exceptional: the stock market’s VIX fear index surged to 83, and the S&P 500 index plunged 33.9% in just over a month. But at the end of February this year, the market showed no signs of panic, with the VIX index being below 14. Yet the GGR still approached its low during the pandemic’s stock market crash. Astonishingly, excluding 2020, this time the GDX/GLD ratio reached its lowest level in more than eight years.
From 2019 to 2021, the average of the GDX/GLD ratio was 0.199x. This can be considered a relatively reasonable mean baseline. Based on last week’s gold price (GLD), for GGR to revert to the mean, GDX would need to rise another 18% to approximately $45.25.
However, the market is always cyclical, swinging like a pendulum between two extremes, and gold stocks are no exception. Price movements will not stay at the bottom middle point of the pendulum arc; instead, they will continue to move towards the opposite extreme under the influence of momentum. If the GDX/GLD ratio rises to the top of the other side proportionally, GDX would need to rise another 54% to above $59.25, resulting in a cumulative increase of 130% compared to the end of February.
