The SPDR Gold Trust (NYSEARCA:GLD) is on a hot streak so far this year. The related gold mining stocks and funds such as the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) are enjoying even greater gains. The GLD ETF is up 13.5% year-to-date, and 35% over the past 12 months. Meanwhile, the GDX gold mining ETF has posted huge returns. It’s up 22% year-to-date, and 75% since last May.
Naturally, some traders are thinking about taking profits here. It’s been a big move, after all. But don’t miss the forest for the trees. Gold traders are used to the bear market that had been running in precious metals since 2012. Thus, their inclination has been to sell every advance.
But the trend has changed. Gold is in a new expansion phase, and investors should be strapped in for the ride. In fact, precious metals were already in an uptrend even prior to 2020. And now, the novel coronavirus has greatly accelerated that dynamic.
GDX and Gold Mining Stocks: It’s 2008 All Over Again
Even as the financial crisis was already well under way, in 2008, the price of gold soared to an all-time high of $1,000 an ounce. To many investors, that record-high price probably seemed like an ideal opportunity to sell. When other things are plunging, the first instinct might be to sell the asset that has appreciated. But even at $1,000 an ounce, it was as actually a great time to buy. Gold’s price nearly doubled over the following three years and rose to $1,900 an ounce in 2011.
Today’s gold market feels eerily similar to the 2008 version. The price of gold just hit a seven-year high of $1,747 an ounce and is setting up for what I believe will be a rapid double over the next couple of years.
This rally is causing a huge ripple effect in gold mining stocks like GDX. In fact, almost all of my gold stock recommendations have doubled already. But I think they’re just getting warmed up. The current economic crisis has created a perfect situation for the gold mining industry.
Even in Recession, Gold Miners Can Grow Earnings
One key point to consider is that almost every stock market sector will being delivering negative earnings growth over the next several quarters. One sector that will not be following this downtrend is the gold mining sector. It will be producing strong year-over-year growth – perhaps even the strongest growth of any major sector.
To give one example of how this is already playing out, look at mining giant Newmont Mining’s (NYSE:NEM) earnings report from earlier this month. Newmont reported that revenues soared 43%, EBITDA surged 63%, and adjusted net income nearly doubled.
Gold miners enjoy tremendous margin expansion as the price of gold soars. Newmont proved that out with income surging far more than revenues, and we’re seeing similar trends out of other miners this earnings season.
The low price of oil offers another huge tailwind for the mining firms. Investors complained that mining stocks didn’t capitalize as much on the 2003-2011 gold price boom as they would have expected. However, earnings growth was capped because there was huge commodity price inflation at the same time. Remember that oil shot up to as much as $147 a barrel during that period. Other things you need to build mines, like steel, also surged in price. Thus, while miners could sell gold for far higher prices, they lost much of those gains to inflation.
This time around, other commodities are dirt cheap. For example, diesel fuel for mining trucks is near 20-year lows. Steel prices have dropped. There’s no labor inflation either; after nearly a decade of low gold and silver prices, there is no shortage of capable geologists willing to work for reasonable wages.
Gold Mining Stocks Verdict
Long story short, this could be the start a golden age for precious metals miners and GDX. In many ways, this resembles 2008. The ingredients are there to set off a major run in the price of gold. Don’t look at $1,700 an ounce as expensive — it could be just the beginning of a major multiyear move to far higher price levels.
Meanwhile, gold miners are ideally positioned heading into this surge. Few have hedged their production heavily, leaving more upside as prices surge. Cost inflation is minimal. And the aggressive monetary stimulus being used to fight the coronavirus recession should provide a sustained flight-to-safety trade along with a demand for inflation hedges.
As we get past the virus and start to consider the long-term economic impacts, there will be more concern about inflation. The amount of central bank stimulus put into the economy is unprecedented, and it will boost asset prices. Gold mining stocks should be one of the biggest beneficiaries in coming months and years.
P.S. Where Did All the Gold Go?
Billionaires like “Bond King” Jeffrey Gundlach… Ray Dalio… Stanley Druckenmiller… and Paul Tudor Jones are bullish on the yellow metal…
78-year-old billionaire investor Sam Zell just bought gold for the first time in his life!
What do they know that the average person doesn’t? What does this mean for the future of the economy?
I think you’ll be surprised when you see. Click here to see the full story.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. Eric does not own the aforementioned securities.
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