Lifestyle Changing Moves Coming For the Junior Miners?
The commentary below is from the March 6th issue of my Mining Stock Journal. In that issue I discussed the Equinox/Calibre merger, Fortuna Mining, Discovery Silver, Heliostar Metals, Lion One Metals, Rugby Resources and Integra Resources. I also addressed subscriber questions about i-80 Gold.
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“And this is why you are going to see an enormous revaluing of the asset class. The fact is there is a major structural underweight (of the gold space by institutions) that’s been built up over decades just at the point where gold is becoming increasingly relevant." - King World News interview with Jonathan Haycock, former Wall Street professional who now runs the Egon Von Greyerz family office
That assertion by Jonathan Haycock was in response to learning that, in the last six months, there's been just one day of cash inflows into GDXJ (through February 22nd). This is quite surprising given that the price of the gold has risen since the beginning of October 2024 from $1,850 to near $3,000 (continuous futures contract basis), outperforming the major stock indices and any other significant asset classes. Haycock went on to cite some interesting stats: In 1932, gold and gold miners were 20% of total global assets; by 1948 that number was 30%; in 1981 gold and gold miners represented 26% of global assets; at the end of 2024 that number was just 1%.
One caveat in interpreting those stats that I think is important to mention. Prior to 1971 China was essentially a non-factor in terms of analyzing global investment portfolio statistics. Clearly now with respect to gold and silver, China is the 600 pound gorilla. While the west has been chasing fiat currency tech bubble dreams fueled by an enormous increase in fiat currency money supply, the eastern hemisphere - particularly China, Russia and India - have been furiously converting paper currency into physical and silver (recall that toward the end of 2024 Russia announced it was allocating $52 billion to investing in gold, silver, platinum, palladium and gemstones in its sovereign wealth fund (note: the western bullion banks a have large paper short positions in all of those metals except gemstones).
The statistic that surprised me was just one day of inflows into GDXJ in the last six months. In my opinion the reason for that is the investment funds and retail investors that prospectively might invest in the mining stocks, particularly the mid-cap and small-cap producers which make up a large percentage of GDXJ, are too busy chasing momentum on the Nasdaq, Soxx or cryptos.
The two charts below illustrate both the comment from Haycock and the fact that stock investors are obsessed with chasing non-mining stock equities, particularly tech stocks:
The top chart shows the ratio of the gold price to the Arca Gold Bugs stock index (HUI). The vertical line shows the point at which the gold price peaked (September 2012) in the first bull cycle within the ongoing secular precious metals bull market. Between 2001 and 2004 the mining stocks outperformed gold. That changed in late 2007 when gold was used as a flight to safety asset during the great financial crisis. Once the Fed started printing a lot of money, the miners outperformed gold until the entire sector was hammered starting in late 2012.
Since then, except for two brief periods in 2016 (8-month mining stock rally relative to gold) and 2020 (6-month mining stock rally relative to gold), gold has been outperforming the mining stocks.
The bottom chart shows the HUI:SPX ratio vs the price of gold since 2000. In the first precious metals bull cycle (2001 - 2011) the mining stocks outperformed the stock market and the HUI:SPX ratio was highly correlated with the gold price until the bull cycle ended. But since the "false start" in 2016, the HUI:SPX ratio has underperformed gold by a considerable amount. However, I think this is getting ready to change.
As gold and silver continue to move higher, the profit margins at producing gold miners will continue to expand. Well managed mining companies are making enormous profit margins at the mine level and generating operating profit margins well in excess of 40%. That's a high operating profit margin even for a high-growth tech company. At some point large macro mutual funds looking for performance will have no choice but to turn their sights on the larger cap mining stocks. In turn more aggressive investment funds are going to throw money at smaller-cap producers and junior project development stocks. When the current bull cycle transitions into this phase, the mining stocks will be off to the races - particularly the junior project development stocks.
Just a "mean reversion" (marked by the black arrows) of those two charts, meaning the gold:HUI ratio and the HUI:SPX ratio correct back to their mean level over the last 25 years, would translate into enormous moves in the stock prices for the companies that produce gold and silver and potentially lifestyle-changing revaluations for the junior project development stocks.
A subscriber asked about the relative unresponsiveness of the miners to the big move in the metals. Here's my answer: "I'm sure there's any number of explanations. The bottom line is that, if you truly believe that gold and silver are going much higher, which I do, you need to be invested ahead of the eventual flood of capital into the miners. In 2008, when the initial surge started at the beginning of November, the HUI doubled between the start of November and year-end and GDX more than doubled. Over the next 2 1/2 years, both the HUI and GDX more than doubled again.