Diverging: Gold and its Miners

I am beavering away at my gold price variable array which I mentioned in an earlier Substack. The general objective is to create a set of graphics which will, at a glance, give people a sense of where the market for gold and gold company shares is headed. Part of that process is taking a look at assorted variables vis a vis other variables. One way of doing that is using the excellent and free tools at Yahoo Finance.

It is a bit tough to read, but the thick, dark blue line is the Shanghai Gold (USD) Futures (Dec), the golden yellow line is VanEck Gold Miners ETF (GDX) and the pink line is VanEck Junior Gold Miners ETF (GDX). The right axis is % above base.

The Shanghai December Gold future is up 34.66%, the GDX is up 5.16% and the GDXJ is down 10.02%.

Subbing out Shanghai and inserting COMEX USD Gold Futures (Dec) we get this chart:

Gold up 47%, GDX up 24.9% and GDXJ at 0%.

There are lots of arguments to be had about the different baselines and the different rules for the Shanghai and COMEX future writing (Shanghai demands actual gold in its vaults before you can write a contract, COMEX, essentially, lets you write naked.) But what I find striking is the divergence on each of the charts between the price of gold and the price of shares in gold producers.

The gap seems to have begun in April 2022 when gold began to sell off a bit and the GDX and GDXJ crashed hard. By April 2023 the GDX closed the gap but, by May, had fallen right back off as gold traded flat.

The GDXJ never closed the gap and, as COMEX gold traded “flat”, remained depressed.

Using Shanghai Futures the divergence is even clearer: the April 2022 gold future price peak and subsequent decline created a decline in both GDX and GDXJ and the gap has just kept growing.

Now, my bullish friends will suggest that the two ETFs are coiled like springs storing energy for the next gold bull run. They will point out that GDX and GDXJ, rose much more quickly than the gold price itself in the August 2020 gold run-up.

Bears will point to the last couple of years when the ETFs generally underperformed the price of gold and, especially, to the GDXJ’s lackluster performance.

My own takeaway is more modest. Generally, the gold ETFs trend downward when there is not much happening with the price of gold and only come alive when gold goes for a run.

However, a smart investor seeing gold take a run, could do well taking a position in GDX and very well if they caught GDXJ on the hop.

One last chart for context:

If you look over the last 20 years, not adjusting for inflation, the last three years have each had gold peak prices over $2000 per ounce. There have been swings but the actual price of gold never dropped below $1500.

A pretty strong argument can be made that both the GDX and the GDXJ, since 2022, have been significantly underpriced relative to the value of the gold their companies are producing.

Some of that undervaluation can be attributed to secular factors such as the rising costs of actually producing gold and the slow decline in grade many big producers are experiencing. But I am pretty sure that these secular factors are relatively minor compared to the overall market’s simply having lost interest in gold and gold producers. After all, there is Tesla to buy and Bitcoin to trade.

For gold bugs it is always 2006, for pessimists it is always 2011, for the rest of us, divergence may make GDX and GDXJ interesting buy-and-hold opportunities.

[Disclaimer: This is not investment advice. I am not an investment professional. I am down about 30% at the moment. I will write about companies that I hold. I will disclose any holdings. Do your own due diligence. Do it hard. Call the CEO.]

Note:

Here are the top holdings of GDX:

And here are the top holdings of GDXJ: