Gold Miners’ Epic Quarter
Adam Hamilton October 11, 2024 2230 Words
The gold miners are on the verge of reporting another best quarter ever. Q3’s earnings season ramping up soon will prove epic, fueled by dazzling record gold prices and slightly-lower mining costs. That ought to double sector unit profits, extending gold stocks’ long trend of massive earnings growth. Such fantastic results should increasingly catch fund investors’ attention, with their inflows driving this sector way higher.
Gold stocks remain out of favor, greatly lagging gold’s monster upleg over this past year. This has proven one of gold’s mightiest advances in many years, soaring 46.8% over 11.7 months! Historically larger gold miners dominating the leading GDX gold-stock ETF have seen their stock prices amplify gold uplegs by 2x to 3x. Yet instead of seeing normal 95%- to-140% upleg gains, GDX has merely rallied 60.7% at best!
That very-poor 1.3x upside leverage to gold has been a real kick in the teeth for contrarian speculators and investors. Gold stocks need to way outperform their metal to compensate for the big additional operational, geological, and geopolitical risks they heap on top of gold price trends. Yet so far that sure hasn’t happened in this upleg, leaving traders increasingly disappointed with this lucrative high-potential sector.
Two major factors contributed to this surprising anomaly. First gold-stock sentiment was crushed in mid-2022 and hasn’t recovered. Then the Fed’s most-violent rate-hike cycle ever catapulted the US Dollar Index up an incredible 16.7% in 6.0 months to an extreme 20.4-year secular peak! That spawned colossal gold-futures selling, slamming gold 20.9% lower in 6.6 months. GDX cratered a brutal 46.5% during that!
Second while gold blasted up 26.4% year-to-date, traders have been overwhelmingly distracted by the AI stock bubble. While gold achieved 35 nominal-record closing highs so far this year, the S&P 500 bested that with a whopping 44 of its own! Gold and gold stocks are alternative investments, thriving the most when general stock markets grind lower. Instead they’ve been surging, spinning off vast greed and euphoria.
But sooner or later all that will pass, and gold stocks will be bid way higher to reflect these lofty prevailing gold prices. The gold miners’ phenomenal fundamentals overwhelmingly support this bullish thesis. For 33 quarters in a row now, I’ve painstakingly analyzed the latest results reported by GDX’s 25-biggest component stocks. Right after each quarterly earnings season, I write essays explaining how they are performing.
Across individual gold miners, there are always plenty of distorted bottom-line earnings. These include big noncash gains and losses arising from unusual items ranging from acquisitions to impairment charges. But that noise can be distilled out with an excellent proxy for sector unit profits. It simply averages the GDX top 25’s all-in sustaining costs in any quarter, then subtracts them from its average gold price.
These implied per-ounce profits have been skyrocketing, leaving gold stocks deeply undervalued relative to their metal. A year ago in Q3’23, the GDX top 25 reported $622 in unit earnings which soared 94% YoY. Then in Q4’23, those grew again to $659 per ounce which shot up another 42% YoY. That trend persisted in Q1’24, with these major gold miners averaging earning $795 per ounce which powered up 35% YoY.
Then all that accelerated dramatically in the spectacular Q2’24, which I analyzed in depth in a mid-August essay. That quarter’s record average gold price of $2,337 combined with GDX-top-25 AISCs plunging 10.2% YoY to $1,239 catapulted unit earnings to a dazzling record $1,099! That blasted up another 84% YoY. So miners’ last four reported quarters have seen per-ounce profits soar 94%, 42%, 35%, and 84% YoY!
Such explosive profits growth has naturally slammed gold miners’ price-to-earnings ratios dramatically lower, into the teens and even single digits in some cases. With fantastically-bullish fundamentals like this, you’d think traders would be rushing into this high-potential sector. But gold stocks remain mired in apathy, lost in the shadow of this crazy AI stock bubble stealing all the limelight. Yet its days are numbered.
Eventually stock prices always mean revert to some reasonable multiple of underlying corporate earnings. Market-darling AI stocks can’t trade with 60x+ P/Es indefinitely, and good gold stocks can’t remain at sub-15x multiples. Sooner or later some catalyst will spark overdue capital flows to start normalizing all this. It could be the AI stock bubble finally bursting and decisively rolling over, it could prove gold surging even higher.
But maybe the gold miners will stack enough sensational earnings seasons to convince fund managers to return. Their relatively-big buying in this relatively-small sector will drive stock prices way higher, which will eventually fuel greed, euphoria, and maybe even a popular speculative mania. Gold stocks are about to report absolutely-epic Q3 results, their best ever achieved by far! That could prove this sector’s tipping point.
Q3’24’s average gold price soared an amazing 28.6% YoY to a new all-time record $2,477! This is utterly stunning considering just a year ago that highwater mark had been $1,978. Gold’s phenomenal prices last quarter were fueled by major buying from gold-futures speculators, central banks around the world, Chinese investors, and a huge surge in Indian gold imports. I could write entire essays discussing each.
But today realize Q3’s record gold levels have been set in stone, they can’t be revised lower like Biden Administration jobs reports. So the only variable driving sector unit profitability is the GDX top 25’s average all-in sustaining costs. Over the past four quarters they have been trending lower on balance, clocking in at $1,304, $1,317, $1,277, and $1,239 per ounce. That averages $1,284, a conservative baseline.
The majority of these elite major gold miners provide and update AISC guidance throughout the year. And many of them are forecasting higher production and thus lower mining costs in H2’24 compared to H1. Gold mining has massive fixed costs, which growing output spreads across more ounces reducing unit costs. A surprising number of major gold miners continued guiding to considerably-lower costs in Q3 and Q4.
The world’s largest gold miner and GDX’s biggest component by far with a huge 14.6% weighting is a great example. In Q1 and Q2, Newmont reported AISCs of $1,439 and $1,562 per ounce. That averaged a little over $1,500 in H1. Yet in late July NEM reaffirmed its full-year-2024 AISC guidance at just $1,400 per ounce. Unlike most of its peers, Newmont didn’t even give a range. And its 2024 output was H2-weighted.
Back in late February this super-major forecast 47% of this year’s production would come in H1, then 53% in H2. That alone is going to force AISCs lower. To hit that $1,400 AISC target for all of 2024, Q3’s and Q4’s would have to average just $1,300! That is sharply lower from Q1’s and Q2’s, and would make for a big improvement. We are talking about H2 AISCs plunging 13%+ from H1 levels, which would be amazing.
While I really doubt NEM will achieve such low Q3 and Q4 AISCs, they will definitely materially improve. And there are plenty of other GDX-top-25 majors with similar much-better-mining-cost forecasts for H2 compared to H1. Collectively these elite gold miners averaged $1,258 AISCs in H1’24. It seems pretty conservative to imagine them improving 2%ish in this soon-to-be-reported Q3, which would be near $1,230.
We won’t know what the actual average is until Q3 earnings season ends in mid-November, after which I’ll write another essay fully analyzing those collective results. But if GDX-top-25 AISCs come in around $1,230, subtracted from Q3’s phenomenal $2,477 average gold price that yields implied sector profits of $1,247 per ounce! That would crush Q2’24’s previous record of $1,099, and skyrocket over 100% YoY!
You’d sure think a doubling in gold miners’ already-massive profits would impress some fund managers, motivating them to add gold-stock positions. But even if GDX-top-25 Q3 AISCs come in way higher for some reason, profitability is still going to soar. Even if those average AISCs prove much worse up near $1,350, Q3’s unit earnings would still soar 81% YoY to a new record $1,127. Those profits will prove epic.
Crazily due to this AI stock bubble and funds dangerously concentrated in a handful of wildly-overcrowded AI plays, American stock investors’ overall allocations to gold are effectively zero. Entering October, the S&P 500 stocks collectively commanded a staggering $51,247b market capitalization. Yet the combined holdings of the world-dominant American GLD and IAU gold ETFs were merely worth $106b that same day.
That implies a trivial 0.2% gold allocation, despite gold’s record-shattering year! That should be 5% to 10%, since gold has always been an essential portfolio diversifier. Even if it grows to 1%, gold is heading way higher. And fund managers’ allocations to gold miners’ stocks are similarly-tiny. At some point gold miners’ earnings will grow so fat and rich that their stocks can no longer be ignored, and capital inflows will soar.
While the major gold stocks’ imminent Q3 results are going to be jaw-droppingly awesome, this sector does face a near-term speedbump. Gold stocks leverage gold, and it faces high selloff risks during coming weeks. My essay last week analyzed this in depth. Gold simply blasted too far too fast to extremely-overbought levels driven by heavy gold-futures buying, leaving speculators’ positioning extreme.
But despite gold growing really overextended, gold stocks are not since they have lagged their metal so much this year. This chart divides GDX by its own 200-day moving average, creating an overbought-and-oversold indicator I call the Relative GDX. This renders gold-stock moves in constant-percentage terms around a 200dma flattened to horizontal at 1.00x. Over time this rGDX indicator tends to form trading ranges.
The current one based on the last five years of data runs from extremely-oversold levels under 0.75x GDX’s 200dma to extremely-overbought ones over 1.30x. Unlike its metal, GDX still hasn’t yet reached the latter warning levels in this year-long upleg! At the major gold stocks’ latest interim high achieved in late September, the rGDX was merely running 1.249x! Gold stocks don’t need to fully amplify gold’s selloff.
Of course they will to some extent, as they are leveraged plays on the metal they mine. At worst since its latest interim high, gold has pulled back 2.4% as of midweek. GDX did fall 6.8% in that span, making for 2.9x downside leverage on the higher side of that usual 2x-to-3x range. But that ought to moderate since gold stocks remain really undervalued after seriously lagging gold’s powerful advance, as precedent shows.
Gold’s last healthy mid-upleg pullback ran from late May to early June, when it dropped 5.7% rebalancing sentiment. During that span gold bled off excessive greed, GDX only retreated 10.0% making for mere 1.8x downside leverage! Any coming gold-stock downside on another gold pullback should prove relatively-muted as well. The gold stocks never challenged extreme overboughtness, and popular greed never flared.
If gold pulling back forces a gold-stock selloff ahead of or into Q3 earnings, that should prove an excellent buying opportunity. Mid-upleg pullbacks offer the best buy-relatively-low opportunities within ongoing bull-market uplegs. We ratcheted up trailing stop losses on our newsletter gold-stock trades preparing for a retreat, and I’m researching fundamentally-superior mid-tiers and juniors to buy into as it runs its course.
Even with this sector still languishing out of favor, the getting has been good. As of the end of Q3, our two newsletters have realized 54 gold-stock trades so far in 2024. Their average annualized realized gains including all losers are running +31.1%! Over the past quarter-century we’ve run through 1,531 newsletter stock trades averaging 16.0% annualized realized gains, doubling the long-term stock-market average!
So if you’re a speculator and not trading gold stocks, you’re missing out on a volatile sector with lots of opportunities. And if you’re an investor not yet diversified into gold stocks, you’re forgoing huge upside as gold continues powering higher on balance. Gold and its miners’ stocks should be included to some reasonable extent in every portfolio, as they can increase returns while lowering overall portfolio risks.
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The bottom line is gold miners are about to start reporting epic Q3 results. Last quarter’s dazzling record gold prices combined with forecast lower mining costs will catapult unit earnings to astounding levels. They are likely to about double to amazing records, extending gold stocks’ massive-earnings-growth streak to five consecutive quarters. That should increasingly attract fund managers to this long-neglected sector.
While gold faces a healthy rebalancing selloff after getting extremely overbought on excessive gold-futures buying, resulting short-term gold-stock selling should prove muted. This sector remains deeply-undervalued after seriously lagging gold this year, limiting gold stocks’ downside leverage to gold. Any selling is an opportunity to add gold-stock positions relatively-low, before this sector soars to reflect lofty gold levels.
Adam Hamilton, CPA October 11, 2024 Subscribe at www.zealllc.com/subscribe.htm