MarsBars
Gold mining stocks represented by VanEck Gold Miners ETF (NYSEARCA:GDX) and VanEck Junior Gold Miners ETF (GDXJ) have been in the doghouse recently, down nearly 20% over the past two months alone:
The main headwinds for the sector seem to be:
- A growing consensus of higher-for-longer interest rates, which will likely limit the upside for gold prices (GLD) at least in the near term due to competition from higher-yielding cash investments and strengthen the dollar.
- Several operating/labor strike issues for some of the leading miners.
- Sticky inflation – particularly in fuel and labor costs – which are pinching profit margins.
- Likely some momentum trading factors as well, as many investors view gold mining stocks as trading vehicles for short-term leveraged bets on gold price movements rather than long-term buy-and-hold investments. Given the higher-for-longer outlook as well as the soaring popularity of Bitcoin (BTC-USD) with the advent of its ETFs, there is an ongoing considerable flow of funds from gold-related ETFs to Bitcoin-related ETFs (GBTC).
That being said, many leading blue-chip gold miners are trading at significant discounts to their net asset value, despite historically trading at healthy premiums to NAV. As a result, several leading investors are loading up on shares in these stocks, including a billionaire investor who recently sold several big tech stocks and bought gold miners instead. We agree with them that gold mining stocks offer compelling risk-reward right now, and in this article we will discuss why GDX in particular is an attractive way to play the sector.
Why Billionaire Investors Are Loading Up On Gold Mining Stocks
Numerous leading investors are pouring capital into gold mining stocks. These include Jim Rogers, John Paulson, an over $1 billion investment from activist investor Elliott Investment Management, and – perhaps most notably of all – a significant move into blue-chip gold miners Newmont (NEM) and Barrick Gold (GOLD) by billionaire investor Stanley Druckenmiller, who also sold his holdings in big tech giants Alphabet (GOOG, GOOGL), Alibaba (BABA), and Amazon (AMZN) in the same quarter.
Why are these investors – particularly Druckenmiller – pouring so much money into gold miners despite their terrible recent performance, even as tech stocks have been soaring? It largely boils down to three major factors:
First and foremost, valuations are extremely important right now. While tech stocks – and the tech-heavy S&P 500 (SP500) as a whole – sit near all-time highs and numerous leading market valuation models indicate that the market is significantly overvalued, the S&P 500 to Gold ratio shows that gold looks quite cheap on a historical basis:
S&P 500 to Gold Ratio (macrotrends.net)
When you add on top of that the fact that the two miners that Druckenmiller bought – GOLD and NEM – trade at 18% and 10% discounts to NAV, respectively, compared to their historical average ~25% premiums to NAV, the value present in the gold mining sector becomes even more apparent.
Second, geopolitical forces are creating an increasingly bullish environment for gold. Between the numerous wars and threats of war around the world (Russia against Ukraine and NATO, Israel and the U.S. against Hamas, the Houthis, and Iran, Taiwan, Japan, South Korea, the U.S., and other allies against China and North Korea), the growing momentum – particularly among BRICS – to ditch the dollar and adopt gold as a global medium of exchange, and the soaring record-level demand from central banks for gold in recent years, there are numerous geopolitical tailwinds for gold prices, and by extension, gold miners.
Last, but not least, macroeconomic forces are also painting a very bullish picture for gold prices and gold miners. Yes, there is a growing consensus that interest rates will remain higher for longer. However, there is also a broad consensus that the Federal Reserve’s rate-hiking cycle has peaked and that its next move will likely be to cut rather than hike interest rates. Gold and gold stocks have massively outperformed during previous periods following a Fed rate-hiking cycle peaking, so there is reason to believe that they will do so once again. Moreover, gold has historically outperformed the stock market during periods of economic weakness and, with leading recession indicators showing a “very high risk” of recession hitting the U.S. in the near future, it is at least prudent to consider this possibility, if not probability.
What Does This Mean For GDX ETF?
Given that NEM and GOLD are the two largest constituents of GDX, compromising a whopping ~22% of its portfolio, Druckenmiller’s bullish bet on them over the likes of AMZN, GOOG, and BABA signals considerable bullishness for the fund.
Moreover, it is important to keep in mind that NEM and GOLD also have considerable and growing copper exposure and have recently improved mining asset portfolios and stellar balance sheets. With their production efficiency profiles set to improve considerably in the coming years, both of these stocks should also begin throwing off considerable free cash flow in short order. When combined with their compelling valuations right now and the bullish outlook for both gold and copper prices, there is a strong chance that they will deliver exceptional outperformance in the coming years.
GDX’s portfolio is also diversified beyond its exposure to NEM and GOLD by its substantial holdings of Agnico Eagle Mines (AEM) – probably the best-run blue-chip miner, even if it is considerably pricier than NEM and GOLD right now – Franco-Nevada Corp (FNV), and Wheaton Precious Metals (WPM), among other leading miners.
As a result, for investors who want significant exposure to the compelling value offered by NEM and GOLD as well as to follow billionaire Druckenmiller’s move while also wanting more diversified exposure to the sector to mitigate company-specific risk, GDX could be a great way to invest. With an expense ratio of 0.51%, the fund is not cheap, but is not particularly expensive either. Moreover, its trailing twelve-month yield of 1.92% offers a better yield than SPY’s 1.31%, giving investors a nice income boost on top of potentially strong capital gains.
GDX also has around $11 billion in assets under management, providing investors with thin bid-ask spreads and pretty decent options activity to utilize to further leverage and/or hedge exposure to the sector.
Investor Takeaway
GDX has been performing quite poorly over the past two months, even as the broader market has been reaching new highs. However, while many have thrown in the towel on the sector, billionaire investors are investing aggressively. In particular, Stanley Druckenmiller has dumped several of his high-flying big tech positions in favor of taking positions in the sector’s two largest miners.
GDX is an attractive way for investors who want to follow Druckenmiller’s lead into the sector and buy into the investment thesis laid out in this article while still limiting company-specific risk and enjoying considerable liquidity along with the potential to utilize options to further round out their gold mining exposure.
We are currently selling some of our business development companies, or BDCs (BIZD), and other riskier positions and using some of the proceeds to buy gold miners hand-over-fist as part of our opportunistic capital recycling strategy that has delivered long-term outperformance thus far.
