After months of being dead money, gold prices are finally showing some signs of life.
Until very recently, prices for the yellow metal had mostly been declining from a dramatic peak reached early in the first quarter. Gold (GC00) had reached a record above $5,600 in January, following a parabolic run-up for prices of precious metals. But just as bullish sentiment seemed to be reaching a fever pitch, the trade started to falter, as investors turned their attention to hot semiconductor stocks and other popular artificial-intelligence-related names.
Gold eventually bottomed below $4,000 an ounce last month - a decline of about 30% from the January peak. But over the past few weeks, prices have started moving higher once again, as concerns about inflation and the credibility of the Federal Reserve appear to be helping revive investor interest.
As of Thursday's settlement, front-month gold futures for August were up $192.90, or 4.8%, this week to $4,242 an ounce, and on track for the largest one-week percentage gain since the week ending Feb. 6, according to Dow Jones Market Data. Gold prices have risen during two of the past three weeks.
Noah Weisberger, chief strategist at BCA Research, told MarketWatch that the recent increase in prices for gold, as well as shares of gold miners, made sense because it reflected investors' "concerns over the forward outlook for inflation and inflation-fighting." That could mean gold has more room to move higher, perhaps even to fresh record highs.
Weisberger said that investors seemed to become more worried following Kevin Warsh's July press conference, during which the Federal Reserve chair discussed the Federal Open Market Committee's decision to leave its target range for the federal-funds rate unchanged.
"We haven't given him much grace," Weisberger said of Warsh. "To the extent that there is sustained inflation, any diminution of the Fed's credibility would be reflected in higher gold prices and higher share prices for gold miners.
"Part of our motivation to add gold miners or gold exposure to the portfolio is bond-market risks," he added.
Gold-mining stocks
Investors looking to profit from further upside in the gold market have options. They can trade futures, buy ETFs like SPDR Gold Shares GLD or - if they're looking for more potential upside - buy shares of gold miners.
One interesting aspect of the gold miners is how cheaply priced some of the largest companies in the group are relative to their earnings.
The VanEck Gold Miners ETF GDX is the largest ETF tracking the industry, with $25.4 billion in assets under management. It is passively managed and holds 59 stocks of miners based in nine countries.
Investors generally prefer looking at forward price-to-earnings ratio for stocks, which divides share price by consensus 12-month earnings-per-share estimates. But for a group of companies so heavily dependent on volatile commodity prices, it may be more helpful to focus on trailing 12-month earnings instead.
On a weighted basis, the GDX ETF trades at a trailing P/E of 14.1 and a forward P/E of 10.4, while the S&P 500 SPX trades at a trailing P/E of 28.1 and a forward P/E of 20.2, according to FactSet.
Weisberger said cheap valuations for gold miners as a group were "noteworthy," and that many of these companies have boosted their profit margins and cleaned up their balance sheets.
"The biggest risk is the gold prices themselves, but [gold miners] are a pretty clean equity play, which is why we like them," he said.
In addition to offering a hedge against macroeconomic risks, Weisberger highlighted another benefit: "If you looking for a diversified bet within the equity market, GDX is not correlated to any of the AI themes that we can identify.
"In a market in which the upside is being driven by cash-flow-negative companies, it is not a bad ballast to have cash-creating companies in the portfolio as well," he added.
Top holdings of GDX
Here are the largest 10 holdings of the VanEck Gold Miners ETF, with a summary of opinion among analysts polled by LSEG, as well as forward and trailing P/E ratios:
All of these stocks have majority "buy" or equivalent ratings. The first data column shows the 12-month upside potential implied by the consensus price targets.
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