Gold stocks’ revaluation year

In just over a month into March 2020, the flagship S&P 500 stock index collapsed 33.9% in the pandemic-lockdown panic! Top Fed officials feared a depression, so they redlined their monetary printing presses. Over the next 25.5 months, the Fed ballooned its balance sheet a radically-unprecedented 115.6% or $4,807b! That’s effectively the monetary base underlying the US dollar supply, which more than doubled.

While the Fed has been gradually shrinking that since, as of the latest data last week its balance sheet is still 65.6% or $2,727b higher than February-2020 levels! With vastly-more money remaining to bid up the prices of goods and services, they surged proportionally and held. The same is true of gold. It averaged $1,394 in 2019 before central bankers around the world panicked, and has revalued much higher since then.

But that process sure hasn’t been linear. Gold did soar dramatically in 2020 as money flooded into the system, averaging $1,773 for a 27.2% surge. But in 2021 and 2022 gold barely moved, averaging just $1,798 and $1,801. 2023 was better with a 7.9% gain to $1,943, but gold still wasn’t reflecting the huge global inflation in fiat-currency supplies. After lagging for a few years, gold finally revalued again in 2024.

Last year gold averaged $2,391, 23.0% better than prior-year levels. And compared to 2019’s average, that was 71.5% higher in line with money-supply growth per the Fed’s balance sheet! Before 2024, gold had never closed above $2,077. So a year ago this week, sentiment was fairly-bearish. Then I wrote a contrarian essay predicting gold’s 2024 breakout upleg. Prevailing gold prices revalued to much-higher levels.

That drove a major paradigm shift in how traders perceive gold prices. A year ago even $2,500 seemed impossibly high, yet today that feels low. And gold’s fantastic 27.2% gains in 2024 accrued despite bearish headwinds. During that remarkable year, gold powered higher through bouts of extreme overboughtness, exceedingly-overextended spec gold-futures positioning, and American stock investors ignoring it!

With the metal that overwhelmingly drives their profits normalizing in new much-higher-price territory, gold-stock prices will inevitably follow. 2025 will likely prove a major-paradigm-shift revaluation year for the gold miners. Their stock prices are wildly too low for their massive record earnings, an anomaly that markets never allow to persist for long. Examples of gold stocks’ enormous disconnect with gold are legion.

As gold soared 27.2% last year, the leading GDX major-gold-stock ETF clocked in at merely 9.4% gains! That made for terrible 0.3x leverage to gold, compared to GDX’s historical range running between 2x to 3x. Because gold stocks heap big additional operational, geological, and geopolitical risks on top of gold prices, they have always way outperformed their underlying metal to compensate traders for those added risks.

From early October 2023 to late October 2024, gold soared 53.1% higher in a monster upleg! I define those as 40%+ gains without any upleg-slaying 10%+ corrections. That was gold’s first monster-level one since mid-2020, when gold blasted up 40.0% out of that pandemic-lockdown stock panic. During that span, GDX skyrocketed 134.1% which made for outstanding 3.4x upside leverage! That’s more typical historically.

Yet at best during gold’s 2024 monster upleg, GDX only rallied 70.2%. That only amplified gold’s upside a pathetic 1.3x, seriously lagging behind precedent. During a 53% gold upleg, the major gold stocks of GDX should’ve soared 106% to 159%! From 2020 to 2024, annual average gold prices surged 34.9% as the profligate Fed ballooned the US-dollar supply. Yet average GDX prices in those years only edged up 0.4%.

Last year major gold stocks were trading at 2020 levels, when gold again averaged $1,773. Gold-stock prices should be much higher with $2,391 gold across 2024. A big gold-stock revaluation higher in 2025 is certainly supported by fundamentals. For many years now, after every quarterly earnings season I’ve painstakingly analyzed the latest operational and financial results reported by GDX’s 25 largest stocks.

All that data can be distilled down into quarterly sector unit profits, which simply subtract the GDX top 25’s average mining costs from average gold prices. During 2020 the last time GDX averaged similar levels, the major gold miners averaged $758-per-ounce earnings. Yet in the first three quarters of 2024, that surged 29.3% to a record $980 per ounce. And Q4’s numbers being added in will push that average even higher.

This just-finished last quarter averaged dazzling record $2,661 gold prices, easily besting Q3’s previous record $2,477. In 2024’s first three quarters, the GDX-top-25 gold miners averaged all-in sustaining costs of $1,315 per ounce. Many of them have guided to lower AISCs in Q4 on better production. But even if we ignore that and conservatively assume $1,400, the major gold miners are looking at $1,261 Q4 unit profits!

That would trounce the GDX top 25’s previous $1,099 record, and boost full-year-2024 average quarterly unit profits to $1,050. That would be 39% above 2020’s levels when GDX last traded near 2024’s average! During their last five reported quarters, these GDX-top-25 sector unit profits have soared 87.2%, 42.3%, 34.9%, 83.7%, and 74.0% year-over-year! Q4’24 at $1,261 would achieve another 91.3%-YoY leap.

The major gold miners are earning money hand-over-fist achieving epic record profits at these awesome prevailing gold prices, yet traders are totally ignoring that. Such valuation anomalies can fester for some time in markets, but never indefinitely. All stock-market sectors and individual stocks eventually migrate to some reasonable multiple of their underlying corporate earnings. Gold stocks won’t prove any different.

Obviously a major-paradigm-shift gold-stock revaluation in 2025 will require big capital inflows, meaning traders will have to grow interested in this sector. If that didn’t happen in 2021, 2022, 2023, or very much in 2024, then why would it manifest in 2025? Because of gold’s own revaluation in 2024! A year ago gold had spent several long years failing to decisively break out above secular upper resistance around $2,050.

So the great majority of traders were apathetic, not expecting much from gold in 2024. Yet even with American stock investors totally ignoring gold to chase the AI-stock bubble, it still powered 27.2% higher last year achieving 41 nominal record closes! Other buyers saw gold’s potential and flooded in, including Chinese investors, central banks, and Indian jewelry consumers. Their capital inflows fueled gold’s revaluation.

Similarly in 2025, there’s likely to be peripheral traders who recognize gold stocks are deeply undervalued relative to much-higher gold prices. It probably won’t be individual investors who lead the charge into this sector, they are too emotional and like to chase momentum. Professional fund managers who are value investors are likely to be the gold-stock-buying vanguard. They will recognize gold miners’ record profits first.

The capital inflows from their early buying will drive GDX higher, growing awareness and interest in this high-potential sector. The longer and higher gold stocks rally, the more other traders will take notice and jump on that bandwagon accelerating those gains. As we saw in gold last year, this self-feeding-buying dynamic is very powerful. Traders will realize gold stocks shouldn’t be trading as if gold was down near $1,775.

While gold miners’ overdue revaluation higher will primarily be fundamentally-driven, GDX’s technicals are also really bullish heading into 2025. This chart covering the last several years shows gold stocks’ mounting secular uptrend. In recent weeks major gold stocks were smashed to seriously-oversold levels well under GDX’s 200-day-moving-average baseline, almost back down to their uptrend’s secular support.

While gold’s own monster upleg remains alive and well, the miners’ stocks have suffered a sharp 23.4% selloff in recent months. That has really tainted sentiment, leaving this sector deeply out of favor as 2025 dawns. The primary driver was gold’s own post-election pullback on the US dollar surging on Trump’s win portending slower Fed rate cuts. I analyzed all that a couple weeks ago in an essay on the Fed testing gold.

This latest gold-stock selling is way overdone relative to the metal itself. At worst gold merely retreated 8.0% into mid-November, well under a 10%+ correction. On New Year’s Eve, gold was only 5.8% under late October’s latest nominal-record close. So GDX plunging 23.1% in that span for huge 4.0x downside leverage is excessive. That argues a V-bounce bottoming into a sharp mean-reversion surge is imminent.

Ironically gold stocks nearly reached psychological escape velocity in late October, when buying becomes self-reinforcing. A week before gold’s latest interim top, GDX surged to a 4.2-year secular high of $44.09. That was just 0.9% under breaking out to a dazzling 11.8-year secular high, which would’ve spawned plenty of bullish financial-media coverage attracting in new buyers! Then a single gold miner torpedoed that.

Gold stocks’ latest selloff wasn’t triggered by gold falling back, but the world’s largest gold miner missing its own AISC guidance in Q3 results. Despite forecasting improving costs, Newmont’s AISCs still surged in Q3’24 which gutted confidence in this only gold miner in the S&P 500. The next day after reporting that, NEM’s stock crashed 14.7%! Its worst down day in 27 years in this best-ever gold environment was shocking.

That really seemed to stunt fund investors’ budding enthusiasm for gold stocks. So GDX was faltering a week before gold’s own post-election selloff began. Newmont’s struggles are company-specific, as I’ve been analyzing for many years. The smaller fundamentally-superior mid-tier and junior gold miners we’ve long specialized in at Zeal are faring way better. I’ve always recommended avoiding deadweight super-majors.

Largely thanks to them, GDX only rallied that miserable 9.4% in 2024. But that doesn’t reflect how this entire sector is faring. For a quarter-century, we’ve published popular weekly and monthly subscription newsletters focused on gold-stock trading. As of mid-December 2024, they had realized 79 stock trades year-to-date. All those including the losers averaged outstanding +45.4% annualized realized gains!

The smaller gold miners outperform the majors because they are better able to consistently grow their production from littler bases, they tend to operate lower-cost more-profitable mines, and their way-smaller market capitalizations are much easier to bid higher. Sooner or later fund managers’ research teams will figure this out. They’ll look beyond the lagging GDX-dominating super-majors to see massive record profits.

That ought to happen in 2025, kickstarting and fueling gold stocks’ revaluation year. In addition to much-higher prevailing gold prices after gold’s revaluation last year, the AI stock bubble will almost certainly burst in 2025. The levitating general stock markets were a huge distraction from all contrarian sectors in 2024, including gold and its miners’ stocks. The S&P 500’s massive 23.3% gain in 2024 rivaled gold’s 27.2%!

And of course the handful of market-darling AI stocks greatly outperformed that. But if those gains mostly dwindle or roll over into losses this year, fund investors will have to look elsewhere to deploy capital. Gold and gold stocks will never be a major destination, but they don’t have to be. Since so little capital is deployed in this sector, even a tiny shift in funds’ allocations will force gold-stock prices dramatically higher.

Illuminating this, on New Year’s Eve the collective market capitalization of all the S&P 500 stocks ran $52,775b. That day the combined bullion holdings of the mighty dominant GLD and IAU gold ETFs were worth under $107b, and the GDX-top-25 gold stocks had total market caps around $339b. So American stock investors’ gold and gold-stock allocations are likely around just 0.2% and 0.6%, pretty much zero!

They could double, triple, or quadruple and still be vanishingly-small, rounding errors within broader portfolios. So in order for gold stocks to experience a 2024-gold-like major revaluation this year, all that has to happen is funds upping their near-zero stakes just a little to tiny allocations. That’s not much of an ask with gold miners’ enormous earnings growth long outperforming every other stock-market sector’s.

If the professional money managers start fearing their huge overallocations in the Magnificent Seven mega-cap techs won’t keep outperforming in 2025, they’ll have to diversify. Among other things, they will look for undervalued sectors achieving fat-and-rich profits and likely to continue to. The gold miners fit that bill perfectly. They’ll never be sizable portfolio allocations, but every portfolio still ought to have some.

It may sound like a pipe dream that gold miners can regain some popularity this year. But they’ve always meandered in great sentiment cycles, falling out of favor before returning to being esteemed. Between much-higher prevailing gold prices after last year’s major revaluation, resulting enormous gold-mining profits, and a long-in-the-tooth AI stock bubble threatening to roll over, gold stocks are likely to enjoy a great 2025.

With GDX seriously oversold, now’s a great time to get deployed. We’ve been rebuilding our newsletter trading books after getting stopped out at awesome realized gains in the recent selloff. We’ve recently added a bunch of fundamentally-superior smaller gold miners with big growth coming. Their stocks are likely to soar, way outperforming their sector as gold stocks revalue to reflect these high prevailing gold prices.

The bottom line is 2025 has great potential for gold stocks to enjoy a major-paradigm-shift revaluation higher. Gold just experienced one last year, which gold stocks greatly lagged. Despite the gold miners earning massive record profits, investors weren’t interested. Gold hadn’t yet rallied high enough for long enough to convince them of its staying power, and the AI stock bubble stole the limelight from everything else.

But with gold consolidating high instead of plunging after soaring in 2024, these much-higher prices are becoming the new normal. That makes gold miners’ fat-and-rich profits durable, leaving their stocks deeply undervalued. Fund managers will increasingly notice that, and start upping their tiny allocations. The resulting gold-stock gains will turn psychology bullish again, fueling increasing buying normalizing prices.

(By Adam Hamilton)