What if there were a bull market record and nobody noticed, let alone cared? It’s the financial market corollary to the old philosophical conundrum about the tree falling in the forest and nobody hearing it.
Given continued records for major stock indexes, you’d be forgiven if you didn’t notice that gold is trading at a record—$2,200 an ounce. The precious metal’s competition for attention isn’t just coming from stocks anymore, either. Fans of alternative currencies continue flocking to Bitcoin, which also soared to a record this past week, of $70,000. Why bother with the so-called barbarous relic, in Keynes’ famous put-down?
And if gold isn’t the shiny thing anymore, why care at all about the companies that mine the metal? Even as gold hits a new high, the
exchange-traded fund (better known by its ticker, GDX) trades at roughly half of what it fetched back in 2011.
Indeed, ETFs tell the tale of the public’s waxing and waning interest in alternatives to government-issued money. From a brief moment back in August 2011, the
’ total assets exceeded those of the
at about $76 billion. As of last week, SPY, as large-cap stock ETF is popularly known, had over $500 billion in assets, while GLD had $56 billion. More recently, the introduction of various Bitcoin ETFs has sucked more oxygen from gold’s appeal as an alternative currency.
Despite the outflows from gold ETFs, bullion has nonetheless continued its bull market. As investors and speculators abandoned gold, central banks have been active buyers. They added 1,037 tons in 2023, just shy of the previous year’s 1,082 million purchases. China continues to be an active buyer, holding 2,245 tons at the end of 2023.
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Gold has advanced in the face of headwinds from higher interest rates, especially in real (inflation adjusted) terms, and a firm dollar. “The fact that gold has decoupled from its traditional inverse correlation with interest rates I think is very telling,” says John Hathaway, senior portfolio manager at Sprott Asset Management. “The U.S. sovereign credit is being questioned,” Hathaway adds, resulting in the heavy accumulation of gold from foreign central banks.
The other big disconnect has been between the record bullion price and the prices of miners’ shares. Over the past two years, the
is up nearly 20%, while GDX is down 20%. The entire gold mining industry’s stock market value is about $300 billion, Hathaway points out, less than that of
or
alone.
Hathaway has calculated that gold mining stocks are valued at steep discounts to the current gold price, which sets the group up for a sharp mean reversion. Alternatively, Hathaway says, many mid- and small-cap gold producers would theoretically be attractive to corporate raiders and taken private and run in full liquidation mode with minimal capital investment. That’s meant to illustrate the group’s extreme undervaluation, not as a prediction.
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Cheap stocks can often remain cheap for longer than contrarian buyers may expect, however. What they typically take is a catalyst. And for gold stocks, that has typically been a move by the Federal Reserve toward an easier monetary policy.
“Every Fed pivot has been followed by outsize gains in gold mining equities,” Hathaway wrote. From May 2000 to January 2008, the GDX was up 400%. From January to August 2016, the ETF gained 238%, while from March to July 2020, it was up 208%.
The federal-funds futures market has dialed back its rate-cut expectations for 2024. The market now sees three quarter-point cuts, down from six or seven that were expected at the start of the year. But they are still coming.
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This past week, Fed Chair Jerome Powell confirmed the central bank’s outlook for rate cuts once inflation shows continued and sustainable progress to the Fed’s 2% target. “When we do get that confidence—and we’re not far from it—it’ll be appropriate to dial back the level of restriction,” he told the House Financial Services Committee this past Wednesday.
Those expectations appear fully priced into stocks and for Bitcoin, which has surged 200%-plus over the past 12 months. Over the same period, gold stocks are up just 10%. They could eventually catch up—once Powell & Co. finally start cutting.
Write to Randall W. Forsyth at randall.forsyth@barrons.com