The Stage Is Set

Theme and Background

This chapter focuses on the valuation divergence between gold mining stocks and gold prices. The report notes that despite a 27.71% year-to-date increase in gold prices, mining stocks have only slightly outperformed gold (GDX up 28.41%), and their five-year total return (58.71%) lags far behind gold (78.92%). The author argues that mining stocks are at a critical juncture of breaking out of a five-year trading range, similar to gold’s earlier breakout pattern, but the market generally remains skeptical about the sustainability of gold prices.

Core Views

• Mining stocks are poised for a strong rally: The author believes that gold mining stocks are in a "coiling" phase and are likely to significantly catch up with gold price gains in the remaining months of 2024.
• Counterintuitive judgment: Market consensus holds that current gold prices are unsustainable (most financial institutions predict a decline), but the author sees this as a hallmark of an early bull market—widespread skepticism and low positioning.
• Gold prices remain undervalued: The author argues that gold’s 78.92% rise over five years occurred with minimal participation from Western investors. Once capital reallocates, mining stocks are expected to outperform gold by a much wider percentage margin.

Key Arguments and Data

1. Valuation and Price Performance Comparison:

• As of September 30, 2024, GDX is up 28.41% year-to-date, while gold prices are up 27.71%.
• Five-year total return (2019/10/1–2024/9/30): Mining stocks up 58.71%, gold up 78.92%.
• GDX is breaking out of a five-year trading range, mirroring gold’s earlier breakout pattern but with a lag of approximately six months.

2. Fundamental Tailwinds:

• The average gold price in Q3 2024 rose 5.2% quarter-over-quarter and 18.8% year-over-year compared to Q3 2023.
• Production costs are expected to stabilize or decline in 2025 (in the event of a recession), potentially expanding profit margins.
• The rising trend in the gold-to-CRB index ratio is highly favorable for mining company profitability (see Figure 2).

3. Market Sentiment and Fund Flows:

• Most financial institutions predict a decline in gold prices (Beacon Securities aggregated data, see Appendix A).
• Western investors continue to ignore gold: SPDR Gold Shares ETF (GLD) holdings have been declining for years (Figure 4), and GDX shares outstanding have decreased (Figure 5).
• Financial advisors’ allocation to precious metals is at a five-year low (Figure 6, BofA Global Research data).

4. Currency vs. Gold Supply and Demand:

• Since the launch of GLD in 2004, approximately 38 million ounces of inflows drove gold prices from under $600 to $1,900 in August 2011 (a 300% increase).
• Since 2010, M2 money supply has grown by 248%, while gold production has increased by only 22.2%.
• Over the past 15 years, the amount of U.S. dollars convertible into gold has increased tenfold relative to the physical gold supply.

Companies/Assets Involved

Asset/Company	Role	Key Data	View
GDX (VanEck Vectors Gold Miners ETF)	Proxy for mining stocks	Year-to-date +28.41%; five-year +58.71%	Bullish: Breaking out of a five-year range, with potential to catch up to gold
GLD (SPDR Gold Shares ETF)	Physical gold ETF	Holdings declining for years (Figure 4)	Bullish: Outflows reversing could drive gold prices higher
Home Depot / Costco	Market cap comparison reference	Total market cap of mining stocks roughly equals Home Depot or Costco	Implies small size of mining stocks, making fund inflows highly impactful

Investment Implications

• Increase exposure to gold mining stocks: The author advises investors to remain patient and avoid premature profit-taking. Current valuations remain highly attractive under spot gold price assumptions, and fund inflows are just beginning.
• Focus on Q3 earnings: Q3 earnings reports, due in late October to early November 2024, are likely to be strong (given heavier production in the second half of the year and an 18.8% year-over-year increase in gold prices).
• Beware of the consensus trap: Most financial institutions are bearish on gold, but the author views this as a signal of an early bull market. Once Western investors reallocate, mining stocks are expected to significantly outperform gold.