Gold's Multiplying Effect Comes Roaring Back

Written by Adam English
Posted September 15, 2020

Let me show you something a lot of people don't understand about the gold sector.

It'll perfectly illustrate how the market is handing us a fantastic opportunity.

It is profoundly easy to make more money off the same basic trend just by picking the right ticker.

Right now, it means the difference between being up 30% or up 46%. And that is just with ETFs.

This is the gold multiplier effect and it is back in play after a long hiatus.

We can use a year-to-date chart to see this multiplier effect in action.

While gold prices — represented by GLD, though it is trailing spot gold prices by about 1.5% — are up 30% over the last year, gold miners both large — represented by GDX — and small — represented by GDXJ — are up about 46%.

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So what gives? Why the split between the price of gold and companies that are almost solely dependent on the price of gold for revenues?

This is actually how the gold market is supposed to look. Gains don’t happen at a one-to-one ratio. Gold miners, past a certain point, see nothing but greater profits.

Once the capital expenditures — which are massive, to be fair — are done, it is just a matter of pulling more and more money out of the ground.

For a long time, this effect was muted by a lack of investor demand.

This is the stock market after all. If buyers don't show up in great enough numbers, there isn't as much upward pressure on price because there are fewer people bidding against each other for the shares that are for sale.

All eyes are on the broader market and the gains it is posting, with more traditional sectors and blue-chip stocks drawing in investor funds that are pushing valuations into the stratosphere.

While the crowd was focused elsewhere, investment in gold companies fell off.

That has most certainly changed and it is further multiplying the effect of gold price gains on gold miner share prices. The best gold stocks are already starting to draw renewed attention.

However, the extra attention is still relatively low, hinting at a further run for gold miner stocks even as gold prices orbit the $1,950-per-ounce level.

We’re looking at a small window where investing in gold stocks could still be considered a contrarian play as it transitions to a true momentum play.

While gold prices are basically at the same level they were at back in 2011, gold mining stocks — which have dramatically improved their balance sheets, production costs, and cash flows — are still about 33% lower than they were back then.

Very few institutional investors and extreme high-net-worth investors seem to be allocating a substantial portion of their money to gold right now.

In short, people have caught on, but we're still in early days, and there is plenty of potential left.

If you've been kind enough to read my articles in the past you know that I like gold but I'm not a gold bug.

I see a good reason to maintain some exposure to it in any portfolio but not a ton of it.

The goal, after all, is to generate gains without taking on excessive risk. Gold is a great part of that equation these days.

I can understand if people don't like gold at all. Warren Buffett is right, it is just a lump of metal that sits there and does nothing.

Buffett also just bet on gold and ditched his bank positions. That is telling. Anyone who dismisses a gold market like this is doing themselves a massive disservice by letting their gut make the call. Be agnostic about the source of your gains. I'm pretty sure that's where Buffett is now.

Mr. Market is handing investors a great way to profit and the trend has long legs. Take advantage of it while you can by getting in on the best gold miner stocks out there

With plenty of room for gold miners to run and the broader market showing no desire to push valuations much higher, it's the right call to make.

Take care,

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Adam English

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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