Gold didn't exactly turn out the lights this year, but it's been better than a kick in the shin at a time when growth stocks They have collapsed. The conflict between Russia and Ukraine increased investment in raw materials. But consider that gold miners may now have taken over these investments, with some of the riskiest stocks delivering stellar returns in recent months. Let's take a look at why and how we can make an investment in commodities in this sector...
How have the gold miners fared?
Gold mining companies make their money by mining gold and then selling it wholesale to bullion banks to generate profits. The price of gold really affects your results. In the gold bear market of 2011-15, for example, the price of gold fell about 45%: from a high of about $1.900 to a low of $1.050. But the gold miners had it much worse. He VanEck Gold Miners ETF (GDX), which tracks a basket of the world's largest gold mining stocks, fell about 80% during that time. However, since that 2015 low, gold is up about 75%, while the more volatile GDX is up almost twice as much (about 140%). The chart below shows the growth comparison between the Van Eck ETF and gold.
Comparison between Van Eck ETF price (orange) vs gold price (blue).
Why have gold miners earned more than gold?
On the one hand, gold mining companies had to reinvent themselves to stay afloat in the bear market. They reduced costs, refinanced their debts and improved their operational efficiency to squeeze every last drop of their income. When the price of gold finally turned around, they were (generally) lower and worse, leaving more profits for shareholders. On the other hand, the commodity investment market has traditionally seen miners as a more profitable option on the price of the extracted commodity. Investors value these companies based on the income they will extract from their mines, subtracting the expenses necessary to extract it.
Global gold production forecast from 2014 to 2024. Source: GlobalData
Suppose a mining company spends $1.500 to extract one ounce of gold from its mine and the mine has 100.000 ounces of reserves. Based on these figures, it would cost them $150 million to extract all that gold. If the price of gold were $1.600, they would make $160 million, which would give them a net profit of $10 million. Now suppose that gold rises to $1.700 an ounce (about 6%). This would put the mine's revenue at around $170 million. But since it still costs the miner $150 million to extract the gold, his profit margin would double to $20 million. Of course, there are many other considerations to take into account here. Gold miners have a range of business-specific risks, and their expenses for mining gold may also rise. In any case, investment in raw materials has always continued its upward pace due to the scarcity of products in the market.
Which gold mining companies can we highlight?️️
Investment in raw materials is one of those that has generated the most profitability historically. The price of gold increased twenty-fold in the 1970s, and it seems that we are experiencing a similar stagflation scenario today. History may not repeat itself here, but keeping some gold in our portfolios is still a sensible option. Even if its price remains the same, as part of our portfolio, gold could protect us against deeper losses if our stocks and other investable assets fall further. As for gold mining stocks: While they have much more downside risk, their upside could be much greater if gold continues to shine. Since gold miners are more volatile than gold, they do not need to take up such a large part of our portfolio. It is also evident that buying a diversified ETF is much less risky than making a commodity investment through mining company stocks. But if you're interested in trying your hand at stock picking, you can start by looking for the largest ETF holdings: Newmont (NEM) and Barrick Gold (GOLD) have seen some of the strongest gains this year, up 10% and 17%. % respectively.
Performance comparison of GOLD and NEM. Source: Bloomberg
And if you are looking to make an investment in raw materials through smaller miners, you can also consult the VanEck Junior Gold Miners ETF (GDXJ). This has the potential for further upside as it keeps some companies still in the early stages of exploration - if they find gold, their share prices could get an extra boost. Of course, with that additional potential for reward comes additional potential risk. The largest holdings of this ETF are Merdeka Copper Gold (MDK), which also extracts copper and silver, and Yamana Gold (AUY), which focuses on responsible gold mining. Each of them are up over 30% this year, but their charts look a little overdone if you ask me.
Movements of the last 4 years of smaller miners ETFs. Source: Yahoo Finance
Regarding the technical aspects, GDX It is currently trading in the region of $32. In investor lingo, you are trying to do a “support-resistance turn,” where you turn previous price resistance into support. This could offer a good entry point. And if support fails, we will know how to manage the risk accordingly. With the current situation in the world, making an investment in raw materials such as gold or mining companies is an interesting option to observe in the coming months.
The Van Eck ETF is currently at an interesting support point.