Gold miners ETFs – Are they outperforming the broad market?
Gold
miners ETFs – Are they outperforming the broad market?
In today’s
video presentation I had two objectives:
1.
Determine
if the Gold mining stocks are outperforming the overall Stock market.
2.
Determine if there is a better proxy for Gold mining
stocks than GDXJ.
Before looking at the price charts I shared some random thoughts:
1.
Warren
Buffett’s company, Berkshire Hathaway, has been selling a significant amount of
its stock holdings including Apple and Bank of America. Some analysts are
speculating that he is selling NYSE: BAC stock because the bank is believed to
be short 800 million ounces of Silver via COMEX futures contracts. Given what
appears to be a major rally in the price of Gold and the price of Silver, Bank
of America’s short position could cause the bank to suffer significant losses.
At $32 US Dollars per ounce, it would cost BAC $25.6 billion to cover these
contracts. This amount is equivalent to about one full year’s profit for the
bank.
2.
The current rally in the price of Gold is
occurring for several reasons:
a. Because of interest rate cuts by the
Fed and other countries. On top of the recent 50 bps cut, the markets are
pricing in additional 50 bps cuts at each of the next FOMC meetings. If this
occurs, it will be an extremely aggressive pace for taking rates lower (i.e.,
150 bps in three FOMC meetings).
b. The geopolitical situation in the
World is heating up rapidly, with hotspots in at least three locations.
Heightened geopolitical tension tends to drive the price of Gold higher like we
saw in January 2020 when Iranian general Qasem Soleimani was assassinated.
c. China is attempting to stimulate
their economy with interest cuts and other monetary measures. Markets analysts
are describing these moves as a ‘monetary bazooka.’ Of particular interest is
that, for the first time ever, China is publicly intervening in the country’s
Stock markets and making money available for institutional investors to
buy stocks.
3.
Gold
price gains that occur for geopolitical reasons tend to fade away when tensions
decline. If peace were to break out around the World, the price of Gold might
decline. I also pointed out that pigs may learn to fly.
4.
Big
money moves into the large cap Gold mining stocks first. Momentum and
speculators then take the mid cap and small cap miners higher. At some point
money starts to move into the junior Gold mining stocks where the percentage
gains can be impressive.
“Jr Miner” ETFs
I finished
up my random thoughts by pointing out that the “junior” Gold miners ETFs do not
hold junior Gold mining stocks. In most cases, these ETFs hold stocks of mining
companies with market caps well above $1 billion.
I’ve been
giving this fact some thought recently because I have received criticism for
using GDXJ as my proxy for the 2,000 mining stocks that exist in the Precious
metals sector.
Obviously,
no one analyst can monitor 2,000 individual stocks, much less perform in-depth
Technical analysis on their price charts – there simply isn’t enough time in
the day. Because of this time constraint, it is necessary to pick a proxy (or a
few proxies) that represent the entire sector.
The
criticism I received was based on the idea that GDXJ doesn’t represent the
broad mining stock sector because the ETF only holds junior mining stocks. My
response to this criticism is the exact point I am making: none of the
Gold miners ETFs hold junior mining stocks so it does not matter which ETF is
chosen as a proxy for the sector.
Let’s define
junior miners so we have context for this discussion.
In my
analysis of the mining stock sector I use this simple definition: A junior
mining stock has a market cap well under $1 billion US Dollars and produces
less than 300,000 troy ounces of Gold (or Gold equivalent) per year.
As I
demonstrate in the video, the Gold miners ETFs hold stocks of mining companies
with market caps starting around $1 billion USD and higher. There are a few
exceptions to this generalization but, as I show in the video, the weighting on
these junior mining stocks is so low that they provide zero impact on the
overall performance of the ETFs.
I believe
there are several reasons that explain why the “junior” Gold miners ETFs do not
hold actual junior Gold mining stocks:
Volatility
The junior
mining stocks are very volatile. They can easily move 7% or more on any given
day – and this movement can be in either direction. If a junior miner publishes
particularly exciting news, their price may jump 15% or more.
Obviously,
this kind of volatility is not desirable from the Wall Street perspective of
attracting investors with money.
Too many
stocks to pick from
Let’s say
you and I want to start a junior Gold miners ETF. Which mining stocks are we
going to pick? There are 2,000 to choose from and most of these companies will never
produce any Gold or Silver. In fact, most of them will ultimately fail
or fade away into irrelevance (i.e., they will be ignored by investors and
their price will dwindle towards zero).
In this
environment we have to start picking junior miners based on some criteria. In
other words, we have to become stock-pickers and hope we are correct. At that
point, are we actually creating an ETF or have we become money managers with a
Portfolio of high-risk junior mining stocks?
Risk of
failure / delisting
As I stated
above, most of the 2,000 mining stocks will never produce any Gold or Silver.
Many will fail outright – many more will fade into irrelevance. There are
numerous examples of junior mining companies that traded at $2.50 or $3.50 per
share in recent years and today they are literally penny stocks.
As a
company’s stock declines in price it runs the risk of being delisted by the
exchange(s) where it trades. The delisting may occur because the stock’s price
falls below a certain threshold, or because the company can no longer afford to
comply with the regulatory requirements of remaining listed (i.e., filing
required reports, performing audits, etc.).
One of the
ETFs examined in today’s video is holding the stock of a company that was
delisted on July 1st, 2024. In this particular case, the company
chose to be delisted because of the cost of maintaining their listing.
Technical analysis of the price charts
These are
the charts I covered today. Watch the video for details.
Pay
particular attention to the discussion of HUI vs SPX and the 3 Fans technique
applied to the monthly chart of GDXJ. These charts answer the question, “Are the mining stocksoutperforming the broad Stock market?”
Gold - daily
Silver -
daily
HUI vs SPX
NYSE Arca:
HUI – Gold Bugs Index – weekly & monthly
NYSE Arca:
GDX – VanEck Gold Miners ETF
NYSE Arca:
GDXJ – VanEck Junior Gold Miners ETF – weekly & monthly
Monthly – 3 Fans technique
NYSE Arca:
SGDM – Sprott Gold Miners ETF – weekly
NYSE Arca:
SGDJ – Sprott Junior Gold Miners ETF – weekly
NYSE Arca:
GOAU – US Global GO Gold and Precious Metal Miners ETF – weekly
NYSE Arca:
GOEX – Global X Gold Explorers ETF – daily
GOEX components by market cap
NASDAQ: AUMI
– Themes Gold Miners ETF – daily
TSX-V: WRLG
– West Red Lake Gold Mines Ltd – daily
OTC: WRLGF –
West Red Lake Gold Mines Ltd – daily
TSX-V: SIG –
Sitka Gold Corp. – daily
NYSE: IAG –
Iamgold Corp – weekly
NASDAQ: RGLD
– Royal Gold, Inc. – monthly
NYSE: WPM –
Wheaton Precious Metals Corp. – monthly & quarterly
Wrapup – did I accomplish my objectives?
Are Gold
mining stocks are outperforming the overall stock market?
No. There
are some green shoots poking through the ground but they haven’t spread their
leaves fully.
IMO we are
still in a mining stock environment where only two strategies make sense:
1.
Invest
in the large-cap, well-established royalty companies like Wheaton Precius
Metals Corp. (NYSE: WPM). With this strategy you have exposure to the mining
stock sector while minimizing your risk and, you get paid for taking risk.
2.
Pick
individual mining stocks based on the belief that the company has sound
fundamentals. In other words, a stock-picking strategy where the investor
believes they can identify the stocks that will outperform. (While avoiding the
many, many mining stocks that will underperform or go out of business for one
reason or another.)
Is there
a better proxy for Gold mining stocks than GDXJ?
No. All of
the Gold miners ETFs are essentially the same based on the component stocks
they hold. They also look the same from the perspective of performing Technical
analysis on a financial chart. The differences between the ETFs are trivial.
For example, one ETF might hold Lundin Gold while the others do not. But if
that difference is significant to an investor, they should invest in Lundin
Gold directly in lieu of the ETFs or as a supplement to the ETFs.
