Gold-Miner Valuations Low 2

The gold miners’ stocks remain undervalued, strong buys fundamentally. Their stock prices are too low relative to both underlying corporate profitability and prevailing gold prices. That gives gold stocks big potential to power much higher during gold’s next bull-market upleg, which is already underway. Miners’ stocks way outperform the metal they mine, as their major inherent profits leverage to gold amplifies their gains.

Another young gold-stock upleg is picking up steam as gold recovers from its recent extended correction. Last week I wrote an entire essay analyzing this contrarian sector’s recent advance, explaining the strong technical case for strengthening gold and gold-stock uplegs. The leading gold-stock benchmark, the GDX VanEck Vectors Gold Miners ETF, is breaking out after a textbook-perfect series of higher lows and higher highs.

But this technical confirmation of a young gold-stock upleg certainly isn’t the only reason the miners look so bullish today. Their underlying fundamentals are incredibly strong with gold remaining relatively high. About a month ago I dove into the latest quarterly results from the top 25 gold miners in GDX, which were Q4’20’s. They were super-impressive, yet widely overlooked since gold stocks were deeply out of favor then.

Herd sentiment in the markets is a direct function of recent price action. When something has surged, traders greedily anticipate further momentum gains. But falling prices leave deep bearishness in their wakes, which scare traders into expecting more losses. So they quickly lose interest after significant price weakness, moving on to the next hot thing. GDX had just suffered a major correction, slaying bullishness.

Between early August to early March, GDX fell a serious 30.5% over 6.4 months! That healthy correction accomplished its mission of rebalancing sentiment, eradicating the euphoria surrounding gold stocks’ last upleg topping. And that was really extreme after GDX had skyrocketed 134.1% higher in just 4.8 months! But that sentiment pendulum had swung back to fear by early March, so gold miners’ Q4’20 results were ignored.

Yet despite mostly correcting that quarter, the GDX-top-25 gold miners reported record revenues, adjusted earnings, operating cash flows, and cash treasuries. In year-over-year terms, those surged about 18%, 165%, 54%, and 83%! This incredible stock-market-leading performance was driven by higher prevailing gold prices. Averaging $1,876 per ounce in Q4’20, gold was 26.5% higher from where it traded in Q4’19.

Conventional trailing-twelve-month price-to-earnings ratios in this sector were among the lowest I’ve ever seen. Excluding one outlier, the GDX top 25 averaged P/Es of 23.4x. Four of them had amazingly cheap valuations in the single-digits, while another six were trading in the teens! Another great sector valuation proxy compares the GDX top 25’s average reported all-in sustaining costs to that quarter’s average gold prices.

With that GDX Q4’20 AISC read at $1,038 per ounce, these major gold miners were earning about $838 per ounce in profits. That had soared 50.3% YoY from Q4’19! And that was just the latest in a six-quarter streak of phenomenal earnings growth. The GDX top 25’s overall profitability by this measure rocketed up 53.5%, 57.8%, 55.5%, 66.2%, 49.7%, and 50.3% year-over-year during that super-impressive span!

And this epic gold-miner earnings growth will persist through Q1’21, which will be reported over the next month or so. While gold spent most of last quarter correcting, it still averaged $1,793. That remains the third-highest on record, only behind the preceding couple quarters. And that is still up a hefty 13.4% YoY from Q1’20. And the GDX top 25’s AISCs last quarter will probably come in around their past year’s average.

That was $996 per ounce, implying big sector profitability of $797 in Q1’21. That would still be up a strong 22.8% YoY during a tough quarter where gold corrected hard! The gold miners’ fundamentals continue to be outstanding, despite traders’ bearish outlook on this sector spawned by its recent extended correction. Gold-stock psychology won’t turn really bullish again until their stock prices have rebounded much higher.

But the huge gains to be won by buying in relatively low early on will dwarf those available to momentum players who wait too long to return. This gold-stock bull’s four previous uplegs averaged enormous 99.2% GDX gains over 7.6 months! Another doubling from early March’s deep correction low wouldn’t be a surprise at all. The hard part is mustering enough courage to be contrarian before this upleg grows big.

All the hard valuation data I’ve shared so far requires lots of expertise and time to amass. It is a full-time job to track and analyze this stuff, relentless and demanding. But there’s another alternative valuation proxy that anyone can casually follow in real-time, the ratio of gold-stock price levels to gold. It works because gold is the dominant primary driver of miners’ earnings, and profits ultimately determine stock prices.

Of course, GDX is the best gold-stock index to put in the numerator of this ratio. That matches well with the leading and dominant GLD SPDR Gold Shares gold ETF in its denominator. Dividing the daily GDX closes by the daily GLD closes and charting the results over time shows how gold-stock prices are trending relative to gold. This GDX/GLD Ratio or GGR aids trade timing, revealing under- and overvaluation.

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