A year ago, the price of gold was hovering around $2,000 per ounce. Today, it has risen to approximately $2,650—an impressive increase of over 30%. However, gold stocks have yet to rally to a level that reflects this surge. More importantly, the profits of gold mining companies have soared alongside rising gold prices, creating a significant disconnect between their strong fundamentals and their stock prices. This gap, however, won’t last forever, as gold stock prices are expected to eventually catch up to the companies’ robust earnings.
In short, gold stocks are severely undervalued, presenting a unique contrarian investment opportunity right now.
While gold prices have experienced some pullbacks recently, these remain within reasonable limits and merely reflect a rebalancing of market sentiment and technical factors. Even during mid-November, when market sentiment was at its most bearish, the decline was only 8%, leaving the broader upward trend of gold intact.
Gold prices remain strong despite these slight corrections. Leading up to its late-October highs, gold had broken 43 closing records, pushing it into a new higher-price regime. Moreover, as 2024 nears its end, gold’s average closing price for the year is approximately $2,378—significantly higher than in previous years, with averages of $1,798 in 2021, $1,801 in 2022, and $2,077 in 2023.
In contrast, the price of GDX, the leading gold mining stock ETF, has failed to reflect this upward trajectory in gold prices. From 2021 to 2024, the average price of gold increased by 32.2%, yet the GDX price only experienced a modest 3.1% gain. This is a significant market anomaly. Historically, gold mining stocks tend to exhibit greater price elasticity, typically amplifying gold price movements by 2-3 times. But this has not been the case recently, underscoring the severe undervaluation of gold stocks.
In Q3 2024, financial reports revealed that the top 25 largest mining companies (included in the GDX) had an average all-in sustaining cost (AISC) of only $1,431 per ounce of gold. With gold averaging $2,477 per ounce during the same period, the mining companies enjoyed unit profits of $1,046 per ounce, representing a staggering 74% year-on-year (YoY) increase—a fifth consecutive quarter of rapid profit growth. Additionally, for the first three quarters of 2024, these companies’ average unit profit was $980, surging an incredible 94.1% compared to 2022.
Despite these outstanding performance metrics, the GDX’s average annual price in 2024 only rose 16.4%. This valuation mismatch highlights a persistent anomaly in the market.
Using the GDX/GLD Ratio (GGR)—a proxy for assessing the relative valuation of gold stocks compared to gold prices—further reveals this dislocation. The GGR recently hit a low of 0.150x, only slightly above the historical low point of 0.145x. This indicates that gold stocks are trading at their lowest levels relative to gold prices in many years.
Historically, every time the GGR reached exceptionally low levels, gold stocks experienced strong surges afterward. For example:
– Following the 2022 GGR low, GDX rallied by 52.1% in just 4 months.
– Similarly, after the GGR bottomed out in February 2024, GDX skyrocketed by 71.0% over the next 7.8 months.
Based on this historical trend, gold stock prices are not only likely to mean-revert but also to overshoot their average levels.
Among gold stocks, mid-tier and junior mining companies (e.g., the top 25 holdings in GDXJ) are particularly promising. These companies have shown faster growth and lower costs compared to industry majors. For instance, the AISC of these mid-tier and junior gold miners averages just $1,331 per ounce—$100 lower than the $1,431 average of larger gold producers. This suggests that investing in mid-tier and junior miners could generate even greater returns.
Gold stocks are currently an unparalleled bargain. Despite gold prices holding strong near record highs, major gold stocks remain undervalued relative to their record-breaking earnings. The GDX/GLD Ratio highlights this anomaly, showing that the sector is trading near multi-year lows compared to gold.
This unsustainable market mispricing creates a compelling buying opportunity for savvy contrarian investors. History suggests that gold stocks will mean-revert and experience significant rallies, potentially offering outsized returns.
