Tech Falls, Gold Rises, Yet Gold Stocks Remain a Bargain
Thanks to the fund reallocation triggered by the steep drop in U.S. tech stocks, gold equities have recently surged, with $VanEck Gold Miners ETF(GDX)$ climbing 10% so far this month, albeit lagging far behind the surge in gold prices.
Over the past three years, $SPDR Gold Shares(GLD)$ has surged over 30%, while VanEck's fund has only gained 11%. However, if precious metal prices continue to rally, this narrative could shift.
Earlier this month, gold prices hit an all-time high of $2,462 per ounce, pulling back slightly afterward but maintaining a solid outlook. Firstly, the looming U.S. election uncertainty fuels gold's safe-haven demand. Meanwhile, Trump's policies, including hefty tariffs and significant tax cuts, which are currently leading in polls, are more inflationary than Democratic proposals, boosting gold's appeal as an inflation hedge.
Profitability is key for stock prices, and gold miners' earnings are largely tied to gold prices. With relatively fixed mining costs, gold price hikes directly translate into miners' profits. In Q1 2024, the average all-in sustaining costs (AISCs) for the top 25 miners in GDX were $1,277 per ounce, with an average gold price of $2,072, yielding a profit of $795 per ounce. During Q1 of 2023, the average gold price and production cost were $1,892 and $1,302, respectively, with a profit of $589 per ounce.
Here's the kicker: While gold prices rose 9.5% over the year, profits for the top 25 GDX miners soared 34.9%, revealing a 3.7x leverage effect. In a gold rally, this leverage magnifies investors' gains. Yet, gold stocks haven't kept pace with gold's surge, hinting at potential catch-up gains ahead.
Looking ahead to Q2 earnings, TD Cowen predicted a significant 46% jump in miners' profit margins due to soaring gold prices and minimal cost increases. Q2 2024 is shaping up to be robust. If robust cash flows and profit projections materialize, they'll undoubtedly draw investor attention.
Valuation-wise, gold miners are still a Bargain. $Newmont Mining(NEM)$, the world's largest gold producer, boasts a market cap of $54 billion and a trailing P/E of around 14.
$Barrick Gold Corp(GOLD)$, another giant, has a trailing P/E of just 13. Compare that to the average trailing P/E of around 20 for S&P 500 materials stocks. Clearly, gold miners offer compelling value.
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