The SPDR Gold Trust (NYSEARCA:GLD) is on a hot streak so far this year. The related gold mining stocks and funds such as the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) are enjoying even greater gains.
The Gold Trust ETF is up 13.7% year-to-date and 28.3% over the past 12 months. Meanwhile, GDX has posted big returns as well. It’s also up about 14% year-to-date and 44% since last June.
A few weeks back, I said that gold has become such a compelling trade in the current environment that it is difficult to walk away from.
In fact, I said we have to buy it for many reasons, some of which we’ll go over in today’s issue.
Of course, that’s an exaggeration. Just like any other investment, gold is optional.
Plus, once you look at those big gains over the past 12 months, you might think it’s too late to get in on gold. And longtime gold owners may think it’s time to sell.
However, I exaggerated for a reason: Gold is in a new expansion phase, and investors should be strapped in for the ride.
In fact, precious metals were already in an uptrend even prior to 2020. And now, the novel coronavirus has greatly accelerated that dynamic.
It’s 2008 All Over Again
Even as the financial crisis was already well under way, in 2008, the price of gold soared to an all-time high of $1,000 an ounce. To many investors, that record-high price probably seemed like an ideal opportunity to sell (or at least to avoid buying).
When other things are plunging, the first instinct might be to sell the asset that has appreciated. But even at $1,000 an ounce, it was actually a great time to buy. Gold’s price nearly doubled over the following three years, rising to $1,900 an ounce in 2011.
Today’s gold market feels eerily similar to the 2008 version. The price of gold recently hit a seven-year high of $1,747 an ounce and is setting up for what I believe will be a rapid double over the next couple of years.
This rally is causing a huge ripple effect in gold mining stocks like those held in GDX. In fact, many of my recent gold miner stock recommendations have doubled already. But I think they’re just getting warmed up. The current economic crisis has created a perfect situation for the gold mining industry.
One key point to consider is that almost every stock market sector will begin delivering negative earnings growth over the next several quarters. One sector that will not be following this downtrend is the gold mining sector. It will be producing strong year-over-year growth — perhaps even the strongest growth of any major sector.
To give one example of how this is already playing out, let’s look at the early May earnings report from mining giant Newmont (NYSE:NEM). Newmont reported that revenues soared 43%, EBITDA surged 63% and adjusted net income nearly doubled.
Gold miners enjoy tremendous margin expansion as the price of gold soars. Newmont proved that with income surging far more than revenues, and we saw similar trends out of other miners this earnings season.
The low price of oil offers another huge tailwind for the mining firms. Investors complained that mining stocks didn’t capitalize as much on the 2003-2011 gold price boom as they would have expected. However, earnings growth was capped because there was huge commodity price inflation at the same time.
Remember that oil shot up to as much as $147 a barrel during that period. Other things you need to build mines, like steel, also surged in price. Thus, while miners could sell gold for far higher prices, they lost much of those gains to inflation.
This time around, other commodities are dirt cheap. For example, diesel fuel for mining trucks is near 20-year lows. Steel prices have dropped.
There’s no labor inflation either. After nearly a decade of low gold and silver prices, there is no shortage of capable geologists willing to work for reasonable wages.
The Start of a Golden Age for Gold Mining Stocks
Covid-19 has supercharged the Technochasm.
Long story short, this could be the start of a golden age for precious metals and miners.
The ingredients are there to set off a major run in the price of gold. Don’t look at $1,700 an ounce as expensive — it could be just the beginning of a major multi-year move to far higher price levels.
Meanwhile, gold miners are ideally positioned heading into this surge for at least three reasons:
- Few have hedged their production heavily, leaving more upside as prices surge.
- Cost inflation is minimal.
- And the aggressive monetary stimulus being used to fight the coronavirus recession should provide a sustained flight-to-safety trade along with a demand for inflation hedges.
As we get past the virus and start to consider the long-term economic impacts, there will be more concern about inflation. The amount of central bank stimulus put into the economy is unprecedented, and it will boost asset prices.
Gold mining stocks should be one of the biggest beneficiaries in coming months and years.
P.S. What’s happening out there should terrify you. Across America, millions and millions of people are being left behind. Meanwhile, some Americans just keep getting richer. And it’s all because of a financial megatrend that almost no one in the mainstream media is reporting on… one that’s been going on since before any pandemic and before any recent widespread unrest.
If you want to avoid being left behind in America over the next few years, it’s critical that you understand the radical change that’s taking place in our economy and how to position yourself accordingly. That’s why I recently recorded my in-depth analysis on this subject – including what’s going on and the three steps you must take right now with your money. You can watch that presentation free of charge here.