What in the World is Going on with the Precious Metal Miners?

Gold bars
March 5, 2024 by Matt McCracken

I just have to pose the question, what is the world is going on with the stock price of precious metal miners?  Gold just closed at an all-time and, more importantly, it just completed the confirmation of a bullish “Head and Shoulders Pattern” and yet many mining stocks are languishing near 52-week lows.  Here is the chart of gold:

Gold chart showing bullish head and shoulders pattern

Oddly, despite the impressive showing of the world's oldest form of money, gold mining stocks are deeply out of favor.  Newmont (NEM), the only gold miner in the S&P 500, hit a 52-week low just two days before gold closed at an all-time high.  GDX, the largest gold-miner ETF, was less than 2% off its 52-week low two days before gold closed at its all-time high.  Historically, companies that produce commodities see gains that are several multiples of the commodity itself.  Commodity producers have to cover their cost of production which is largely fixed so as prices go up, their margins increase at a much faster clip.  Why gold mining companies are fairing so poorly in light of record-breaking prices for gold is “a real head-scratcher”. 

From my perspective, it poses a really nice risk/reward opportunity.  If gold continues to appreciate, then the mining stocks should play catchup enjoying sizeable gains.  But if gold falls in value, our stops will be fairly close thus limiting our losses.  Given that both gold and silver are embedded in very bullish patterns, the price of precious metals should be going higher but I have stops in place in case that premise is incorrect.

Due to the multiplier effect, if gold does increase in price, mining stocks could go rocket higher.  The consensus says that when a commodity increases in price, the stocks of companies involved in the production of said commodity should increase even faster. 

Let's consider gold as an example.  To make the math simple, I am going to assume that it costs $1000 to mine an ounce of gold (the commonly accepted figure is $1200 but for this example, I'm going to use $1000).  Until its recent breakout, gold has traded in a range between $1700 and $2000 for several years.  At $2000, the gross margin of an ounce of gold is $1000.  Let's assume for this example, a mining company has fixed costs that equate to $500/ounce of gold they mine.  Thus, at $2000/ounce, the profit the gold mining company would earn would be $500/ounce.  

Let's say gold appreciates 25% to $2500.  The gross margin for each ounce mined jumps 50%, from $1000 to $1500.  And the profit for the gold miner jumps 100%, from $500/ounce to $1000/ounce.  Thus, a 25% increase in the price of gold translates into a 100% increase in profits for the mining company.   

Now that gold is trading at all-time highs, about 20% above its average range over the past three years, then gold mining stocks should also be at all-time highs.  But that is not the case.  Here is a rundown of the current price of a few prominent mining stocks, their all-time high price, and when the all-time high price was established. 

Ticker 

NEM

AEM

AU

KGC

PAAS

Current Price

$36.43

$61.30

$22.17

$6.16

$37.16

All-time high price

$79.68

$80.52

$53.22

$23.98

$15.25

Year established

2021

2020

2006

2008

2020

There is a myriad of legitimate reasons why mining stocks would be trailing the price of the underlying metal.  Most of these companies will be saddled with a large amount of debt as mining is heavily capital-intensive.  Most of these companies would utilize various hedging strategies that would cap the price they receive for their commodity in the near-term.  Finally, there are environmental and political issues that must be accounted for.  But even considering these variables, gold miners should not be trading 50% below their all-time highs, which several of these are.  In 2007 and 2014 when oil hit new highs, the stock for oil companies hit new highs.  When ag products hit new all-time highs in 2022, ag-centric stocks hit all-time highs.  Yet, many of these mining companies are more than 50% below their all-time highs which cannot be explained by the reasons above. 

The stark underperformance of the mining companies is most likely due to the simple fact that the majority of stock market participants have not bought into the bullish narrative surrounding gold's latest rally.  Wall Street bankers who are married to the FED have yet to accept that foreign central banks are buying gold at a record clip.  China's buying alone is off the charts.  Domestic investors are ignoring the fact that foreign governments are breaking free of the US dollar in a way that hasn't happened over the past 100 years when the world went on strike against the British pound.  The UEA just banned the sale of their crude oil in US dollars!

Eventually, investors will jump on the bandwagon of gold mining stocks .  Recently, we have seen what happens to AI chip makers when the market turned bullish on AI.  During Covid, we saw what happened to healthcare stocks.  When energy prices peaked in 2014, energy stocks enjoyed a momentous rally.  Then there was housing stocks in 2007 and tech stocks in the late 90's.  Wall Street is known for chasing fads and gold simply isn't a fad yet.  When it does become one, gold and other commodity-based stocks could see gains equal to several times the gains in the underlying commodities.