Finally, Gold/Silver Miners Outperform the Metals

Launch pad or trap?

Normally, when gold and silver are rising, it’s a good idea to buy the related mining stocks on the assumption that they’ll go up even more than the metals. That’s why mining stocks are frequently referred to as “leveraged plays on the price of the underlying commodity.”

But for most of the current gold bull market, that didn’t work. Gold had a nice run while the mining stocks languished, and only lately has the natural order begun to reassert itself. The following chart compares GLD, a (theoretically) physical ETF that tracks the price of gold, to GDX, an ETF that holds most of the big gold mining stocks. Notice how in early 2024 the metal (blue area) was stable while the mining stocks (green line) tanked. This was disheartening for people who expected $2000+ gold to light a fire under the miners.

But since late February, GDX has outperformed GLD and is now up slightly more in percentage terms year-over-year.

Same thing in silver, where SIL (silver mining stocks) underperformed SLV (physical silver) early in 2024 but more than caught up by mid-September.

Possible Explanations

This could mean one of two things:

1. The current prices of gold and silver are up enough to make the miners highly profitable and their stocks compelling. This is reasonable given the good Q2 results reported by gold mining giants Newmont, Barrick, and Agico Eagle in August. Since the gold price is higher now than in Q2, the next batch of earnings reports should be even better. So maybe knowledgeable investors are jumping into the big miners in anticipation of at least one and maybe many more pleasant earning surprises.

2. Gold and silver have gone up long enough to pull in momentum investors who care more about upward-sloping lines than mining fundamentals. This is topping behavior and might be more of a trap than an opportunity.

So which is it?

Rick Rule gives some context in a recent Kitco interview. Listen till the end for his (optimistic) thoughts on emerging industry sentiment:

From the accompanying Kitco article:

Rule said it is a good market to invest in. He sees opportunities due to the disparity between rising commodity prices and stagnant equity prices. He focuses on companies with proven management teams and large-scale projects. Rule is open to investing in jurisdictions with perceived political risk.

But a lot of juniors are too small to make it, said Rule.

“Most of the juniors are subscale. They are so small that general administrative expenses consume most of the capital they raise,” said Rule.

“Those companies are doomed to fail. I suspect that three quarters of the juniors that are public worldwide — Australia, Canada, the United States, Great Britain — are valueless, absolutely valueless.”

Rule said the cost of oil has dropped, which helps, but other costs keep climbing.

“Energy costs have moderated, which is a good thing,” said Rule. “But the social take, which is to say taxes, royalties… things like that are increasing — at about 15 percent compounded. Labor costs are going up, spare parts are going up, finished steel is going up.

“I think there will be continued disappointment among investors about the fact that the margins, the producing margins, aren't increasing as fast as one would hope, given the increase in gold price.”

Rule said investors have to keep scale in mind. Bigger is better.

“Everything that can go wrong with a big mine can go wrong with a small mine,” said Rule. “But a small mine can never make you big money.”

Standing out is key, Rule said. It is a crowded field.

“I ask companies today about their social media strategy,” said Rule “If they don't have one, that's the end of the discussion.”

The Takeaway

Gold and now silver are high enough to generate big revenue increases for their miners. But despite lower energy costs, margins are still being squeezed, preventing higher revenues from becoming free cash flow for many miners.

So focus on the quality names most likely to convert growing revenues to rising profit (see the Five-Stock Portfolio series in the Table of Contents). And with explorers and small mid-tiers, go for scale. The bigger the deposit, the better the odds of a high-premium buyout offer.