GDX: The market remains skeptical, even as gold rises to record levels

Holding gold mining stocks rather than having direct exposure to precious metals has been a major disappointment over the past year. With gold reaching a new all-time high, investors were right to expect mining stocks to do well Much higher returns.

Unfortunately, the Van Eyck Gold Miners Fund (NYSEARCA:GDX) is lagging the SPDR® Gold Shares ETF (NYSEARCA:GLD), which is up more than 20% over the past 12-month period.

GDX continues to outperform the broader stock market, with the ETFs generating a total return of more than 27% since I first covered them with a Buy rating in September of last year.

The difference between the GDX and the S&P 500 is larger since my last article on ETFs in February of this year, when I warned of underperformance. Recently investors should not be distracted. Since then, the GDX is up more than 36%, while the S&P 500 is up just 4%.

Although GDX investors have performed better than the broader stock market recently, that has not been enough to justify the higher risks associated with investing in gold mining stocks rather than having direct exposure to gold.

But before we jump to conclusions, we must first take a closer look at the reasons why GDX has underperformed GLD and assess the possibility of reversing this trend in the future.

Rising prices

The most obvious reason why GDX’s upside has been somewhat limited over the past year or so is rising costs. GDX’s three largest holdings – Newmont Corporation (NEM), Agnico Eagle Mines (AEM), and Barrick Gold (GOLD) – saw their all-in sustaining costs per ounce increase from an average of $1,070 in 2021 to $1,330. Until the end of fiscal year 2023.

This increase in the average AISC for the three largest gold miners is about 24%, which is significantly higher than the equivalent increase in the price of gold (XAUUSD:CUR) for the same period. As we can see from the chart below, from December 31, 2021 until January 1, 2024, the spot price of gold rose by approximately 15%. The recent rally in gold has increased this increase to nearly 30% in March and April of this year.

For this reason, the big three gold miners have not been able to increase their margins recently and the upside of their stock prices has been rather limited.

What’s in store for 2024?

However, looking ahead, if oil and natural gas prices remain at current levels, 2024 is expected to be a strong year for gold miners as AISC is expected to remain under control. For example, Newmont management expects AISC to be about $1,400 in fiscal year 2024, compared to $1,444 the previous year.

At Agnico Eagle Mines, as of the end of Q1 2024, management has guided ASIC to be within a range of $1,200 to $1,250 for the full year.

The mid-range of Barrick Gold’s guidance is also not materially different from the company’s reported AISC for 2023.

Hence, margins are likely to improve in the coming months and valuation multiples should follow suit. With the exception of AEM, which is trading at much higher sales multiples and close to fair value, the other two gold miners are currently trading at much lower multiples to their 2021-2022 highs.

Based on these low multiples, it appears that the market is not pricing in any meaningful improvement in NEM and GOLD margin, which could serve as a major catalyst for GDX through the rest of 2024.

Finally, there is the issue of overall equity risk. Unlike direct exposure to gold, GDX is subject to stronger downward movements during periods of market sell-offs and with the broader stock market trading at near record highs, there is a higher risk to GDX than to GLD going forward. However, during the recent market sell-off in 2022, the GDX performed much better than the S&P 500 and especially against the technology sector (see below).

Conclusion

Despite its disappointing performance relative to the gold price, GDX remains attractive to anyone who is not willing to take high risks by selecting individual gold miners. Over the remainder of 2024, we will likely see GDX outperform GLD, provided the stock does not experience a significant sell-off.