Two weeks ago, I talked about how my June call for the gold market is playing out exactly how I predicted.
If you’re just joining us, back in June I held my quarterly Zoom call with Founding members. And on that call I zeroed in on the gold market. Specifically, I said gold looked oversold and that it would be a good time to pick up gold stocks.
I even said I expected the gold market to start moving sometime in August. (You can watch a clip about gold from that call here.)
My reasons were simple. First, new Federal Reserve chair Kevin Warsh threw a wrench into Wall Street analysts’ jobs. On his first day, he told them there would be no more free handouts. Meaning the Fed would no longer tip its hand on what it would do with interest rates.
In response, the consensus view was that the Fed would raise interest rates multiple times this year. That was weighing on gold. So I said if the Fed didn’t raise rates, what would that do for the price of gold?
Second, I’ve experienced many breakouts in the price of gold over the years. And I’ve seen it break out specifically in August.
Putting those things together gave me confidence to make that call. And it’s playing out almost exactly as I expected.
But now the question is, where do gold and gold stocks go from here? What’s next?
Unloved and Under Owned
As I said last week, I don’t believe the Fed will raise interest rates this month. That’s typically good news for gold.
That doesn’t mean I expect gold to double from here. But it could head higher and possibly make a run at an all-time-high by the end of the year.
Gold itself isn’t a small asset class. If you look at the “market cap” of the metal itself (total mined ounces multiplied by price), it’s just over $30 trillion. Compare that to U.S. stocks at a market cap of about $77 trillion, and it may give you some context for how big the physical gold market is.
Yet almost no investors actually own any gold.
According to Goldman Sachs, last December, gold exchange-traded funds accounted for just 0.17% of U.S. portfolios. They estimate that every 0.01 percentage-point increase in gold’s share would lift its price by 1.4%.
More than that, gold and mining companies as a percent of global assets are near all-time lows.
At around a 3% allocation, according to the World Gold Council, it’s far below the historical average.
Meaning there’s a lot of catching up to do. But again, gold itself is only one part of the story. The other is what could lead to outsized gains for your portfolio in the months ahead.
Money Machine
Gold mining is a terrible business… at least most of the time. It eats up capital, and, unless you’re a well-established player, there’s almost no hope of a successful exit.
There’s an old saying in the gold mining business: If you want to make $1 million mining gold, start with $2 million.
That long history is probably why many investors just ignore the sector outright. But today, I see gold miners as almost impossible to ignore…at least for those looking for a place to put money to work.
Right now, gold mining companies are printing cash. Free cash flow (FCF) yield – how much cash a business is actually generating – is about 10-times higher at senior gold miners than it was in 2020.
Meanwhile, net debt at these companies is half of what it was six years ago. All this means is that gold miners are becoming far more financially stable as their profits grow. And they’re earning more money than they ever have before.
At the same time, gold miners are the cheapest we’ve seen versus the S&P 500 in at least a decade.
Think about that for a second. These are companies that are printing cash. They’re carrying far less debt than they did at the start of the decade. And investors are pricing them as if the entire sector is going out of business.
And that’s not even the end of the story.
Take a look at the chart below. It shows the short interest in both the VanEck Gold Miners ETF (GDX) and the VanEck Junior Gold Miners ETF (GDXJ). Both of these funds are good proxies for the gold mining sector.
GDX holds a basket of the largest gold miners in the world. GDXJ has the smaller, more speculative gold mining companies.
The chart shows investors are aggressively betting against the gold sector today. More than they have in the past 10 years. While the entire sector is generating record cash flow. Shedding debt. And trading at a relatively low valuation.
That’s a setup that screams of a potential short squeeze. And it’s something subscribers of Strategic Trader are set up to take advantage of with a number of gold-related warrants. Warrants that can give us leverage to the move in the underlying gold stocks they represent and, ultimately, gold itself.
But even if you’re not playing it with warrants, I believe gold stocks should be a part of your portfolio today. Whether it’s through an ETF like GDX. Or individual names.
And that’s even with the recent strong move in gold stocks.
As I shared with my Founding members on our Strategic Trader Slack server recently, a 40% move in gold mining stocks over a 3-week period last month only happened three times over the last 20 years. It happened in 2009, 2016, and 2020. And in each case, they kept moving higher.
What I’m saying is this… What I see coming down the road for the gold mining sector could be a generational trade. Catch it, and it could be a huge difference-maker in your portfolio.
Invest accordingly.
Regards,
Editor, Strategic Trader