The Disconnect Between Gold And Silver Price Action Versus Precious Metals Stocks
Excelsior Prosperity w/ Shad Marquitz – 06-15-2024
This will just be a one-off article digging into the disconnect we’ve seen between the moves in gold and silver prices and the precious metals equities over the last few years. Of course, this necessitates a nuanced discussion, where there are many different factors to consider.
For example, consider how inflation played it’s part in relation to the rise of the monetary precious metals prices, but simultaneously resulted in rising cost inputs for the precious metals mining companies. Another consideration is how investor sentiment in the precious metals resource stocks did not rise like the sentiment of those strictly positioned in the physical metals. As a result, this lackluster to sour mining stock sentiment affected the buying and selling, and diminishing volumes seen in many stocks. There is also the range of individual differences in the PM stocks, as it relates to individual value creation versus equity dilution; drill results and resource expansion and quarterly operations, versus the capital raised and deployed.
With all that in mind, there is no way to do a one-sized-fits-all analysis of the gold and silver resource stocks, as there are over 1,000 companies to consider, and it really depends not just on which stocks investors were positioned in over this period of time, but also precisely when they bought (and over how many tranches?) and when/if they sold any of their positions (and over how many tranches?)… Results and individual perceptions are going to be different for all of us, because no 2 investors bought at the same times, in the same companies, and we all have different unique portfolios that can be performing quite differently. We can look at general trends in the ETFs for one level of understanding, and that is all there is space for in this missive. Throughout this process, we can also dispel some popular narratives about why the stocks are underperforming, that we hear or read so often in the marketplace.
First we really need to dial into the price action in the gold, as the prime mover of the precious metals sector. Now we hear all kinds of narratives about who is buying the yellow metal, and also narratives about why gold is moving a certain way or to certain prices. For the purposes of this article, we are going to set all of those narratives to the side and simply look at price action, that encapsulates all buying and selling, for all reasons, and from all participants.
It is undeniably clear that gold put in it’s Major Low back in December of 2015 at $1045.40, and had a change of direction and general trend, moving up and to the right in a bull market through present time; having just put in a recent all-time high at $2454.20 just last month in May. This is not meant to be a controversial statement, as it is backed up by the pricing evidence and data available clear as day on any chart for anyone that wants to pull it up and review it.
Just for some context and continuity, back in 2001 there was a Major Low put in for gold at $255.80 (where it stopped making lower lows and ended the prior bear market), and it then ran up to put in a Major High of $1923.70 back in September of 2011. We know that $1923.70 was the Major High because it didn’t keep making higher highs after that, and there was a clear trend change in direction down into a bear market. In the same exact way, we know that $1045.40 was the Major Low put in back in December of 2015, because it didn’t keep making lower lows below that (which is what would be required for it to still be in a bear market), and instead it had a clear trend change in direction back into a bull market. That has continued for the last 8 years up until May of 2024 where a new all-time high was put in at $2,454.20.
Now, some technicians could make the argument that the gold bull market that started in December of 2015 at $1045.40 ended in August of 2020 at $2089.20, and then started a new bear market until the triple bottoming in the $1621 - $1618 range in September-November of 2022, and then started a new bull market from $1618.30 up through the present high of $2454.20. However, those are actually intermediate highs and lows, very similar to how there was the intermediate high of $728 down to the intermediate low $563 back in 2006, or the intermediate high of $1033.90 down to the intermediate low of $681 in 2008 during The Great Financial Crisis. The intermediate high of $2089.20 in August 2020 down to the intermediate low of 1618.30 in November 2022 can be seen in much the same way. The major low was $1045.40 for this cycle, and we don’t know where it will end, or if the recent high from last month at $2454.20 will end up being the Major High (but most believe there are still higher levels for gold to run before this bull market cycle is over).
Let’s zoom in a closer to that intermediate low to high back in the 2020 to 2022 time period though. It is important to understand the price action during this period of time for establishing why so many technicians were closely watching the pricing support level down in the $1670-$1680 range, and then so completely thrown off by the false break-down below that support level (and the ensuing bear trap to follow from September of 2022-November of 2022).
This false breakdown down into the $1622-$1618 area over a few months is where gold triple-bottomed and started the next impulse leg to higher-highs over the last 2 years. Late September of 2022 is also where Silver and the PM mining stocks bottomed and started their next ascent higher, so it was a pivotal overall intermediate low for the precious sector during that point in time. This is also the period where the valuations in gold stocks relative to gold prices, and silver stocks relative to silver prices really started to diverge more, and will be important for the key takeaways in the mining stock performance for the balance of this article.
One can understand, in a way, the rationale behind the slew of bear market prognosticators that were calling for $1450, 1375, or $1300 and below during this time period in late 2022, because there was solid lateral price support outlined by the 3 prior troughs at $1673.30, $1675.90, and $1678.40; and it had failed to stem the price decline below it. Technicians and perma-bears jumped on this breakdown of support, claiming it was 2013 all over again (which saw a steep and sudden selloff in gold prices), and so out came all the F.U.D. (Fear, Uncertainty, and Doubt).
Now, at the time on the KE Report, both with guests and on the blog, many of us noted repeatedly that the macroeconomic and geopolitical backdrop, and overall exposure that generalists had to gold, silver, and PM miners back in late 2022 was FAR different than it was in 2013. As a result, the calls for retesting $1450 and $1375 in gold, and for the miners to swirl down the drain back to early 2016 levels seemed hyperbolic and way over the top. Sentiment in the precious metals sector was already terrible, and so it just didn’t have the number of potential sellers nor the potential selling volume that would be necessary to create a waterfall decline like that.
In fact, during the depths of despair in the PM sector, our KE Report website was being routinely trolled that it was the end of days and that people should “sell everything and go to cash.” I watched the big pop higher in Silver in mid-September, then noted the low breadth/sentiment readings in the miners in BPGDM, and reflected on a chart my buddy Robert Sinn (aka Goldfinger) had posted, and submitted this alternative take on the setup in the sector:
@Excelsior on the KE Report blog - Sep 24, 2022
“I liked Goldfinger’s target of $1625 in Gold as potential spot where buying could come in, stop the bleeding, and then cause a reversal squeezing the shorts back higher. It was also encouraging the last 2 weeks to see Silver bounce off $17.40, and then springboard back up into the mid-$19s again, but it lost $19 support already to close this week at $18.91.”
“There is a lot of bearishness out there, and sentiment is getting about as bad as it was in 2015 again, so that is actually a contrarian bullish signal. The BPGDM chart going down to a reading of 7 is also a contrarian bullish signal, as the market breadth in the gold stocks is fugly. There are other readings of gold stocks below their 200-day moving averages, or making new 52 week lows that are now so bearish, that they look contrarily bullish.”
“Still, the markets can stay oversold and irrational longer than many can stay solvent, so these conditions could still deteriorate further. The BPGDM could go to 0 and stay there for a month like it did a few years ago, so it isn’t a great timing tool, but at these low levels, it is definitely showing we are closer to at turn than we are a whole leg lower. So while we could still see things sell off further, scaling into positions into this weakness is a solid approach for those that like to catch tradable rallies.”
I mentioned publicly that I was starting to add to most of my key positions in September and October of 2022, and actually had a few different people email or message me genuinely concerned that I was going to get financially hurt, and 2 different newsletter friends ask me “Why are you buying here?” 3-4 people used the words “just be careful….” It is always lonely buying into extreme overbought conditions, and after I added partial positions or initiated new started positions in about 18 different gold and silver positions, it also did make me nervous.
The uber-bearish backdrop, and calls for the sector to just implode by so many, did concern me that maybe I was going to get spanked hard and was potentially taking on too much risk. However, despite the immediate feelings of buyers remorse and feeling nervous down to the pit of my stomach…. I also remembered back to how it felt buying in December of 2015 – January of 216, and in October of 2018, and in March-April of 2020 when the sector was equally hated, when breadth readings were so low, and when the sector sentiment was terrible, and figured, it was no worse than those times. Also, it is actually less risky buying into extreme overbought conditions, than it is buying when everyone feels smart and is high-fiving one another.
To be clear, I didn’t know if it was going to be the bottom or not… just that it had to be getting close, and that the whole sector was in the worst sentiment I’d seen since the pandemic crash or the early 2016 major lows in the sector. Also, I had started taking some tax losses in August to wash out some gains in base metals and other net positive swing-trades for the year, and the 30-day wash period was up in mid to late September. The stocks I had sold were now at even lower levels that where I’d sold them, so I felt like it was a win-win in that I got to wash out gains, and buy into the F.U.D. at a better cost basis, and silver had started to rally as a potential early shot across the bow. I also had just done an interview with my pal Jordan Roy-Byrne where he had discussed that we may look back at the sudden jump in Silver as an early signal that a turn was taking place. Well.. that’s precisely what played out.
Gold did triple-bottom at $1622.20 in late September 2022, $1621.10 in mid-October 2022, and then the final intermediate low of $1618.30 on November 4th, 2022. After that, gold took off adding over $400 by early May of 2023.
What was even more telling was the move Silver made starting in mid-September 2022, where it popped from an intermediate low of $17.40 up to $20.00 in just over a week, in what had to be a short-squeeze. Then silver plowed up to the $24.77 to end the year, then pulled back to $19.94, but then continued on to make another higher level up to $26.43 by early May of 2023 (coinciding with the peak concerns of the regional banking crisis). Silver is often a confirming signal of speculative sentiment.
Let’s look at how the gold mining stocks responded to the breakout moves in Gold and Silver off their bottoms, by way of the larger gold producers and royalty companies inside of (GDX). GDX is a good gauge of passive PM stock investing flows since it holds the larger cap gold stocks.
Well, of course, the gold and silver mining stocks did respond in kind, and it did end up being a good tradable rally, just like I had noted back on September 24, 2022. However, the rally ended up being more underwhelming than most were expecting, considering the blistering move higher by nearly 52% in Silver prices, and that Gold had packed on $400 bucks in 8 months for nearly a 29% move. The GDX did respond well with a roughly 71% move from the September 26th low of $20.82 up to the high in early May of $35.67, and there were a number of smaller and mid-tier producers up triple digits during that 8-month rally period. Still PM investors expected more…
The problem for many was that it was not a rising-tide-lifting-all-boats type of move, because many lower torque producers, and the junior developers and explorers did not really participate (in fact some barely even budged during that time period). The real problem for the gold stocks though, was that gold had made it back up above $2000 again to $2085.40, but GDX only made it back up to $35.67. When gold had previously been at $2078.80 back in March of 2022 (during the Ukraine war conflict escalation), the GDX had actually gotten up to $40.25, at a lower gold price. So why was GDX not seeing more of a lift north of $40 with gold back up to $2085?
What was even more confusing and disturbing is that when gold was just $4 higher back in 2020 at the $2089.20 peak in August of that year, GDX had peaked out at $43.30. So again, with gold back up at $2085.40, to see GDX only make it up to $35.67 in early 2023 was pretty underwhelming. Sure, one can point out that since the GDX lows in September of 2022 at $20.82, that pricing has been generally up and to the right in an overall bullish trend. GDX even recently got up to a higher level at $37.47, taking out the 2023 peak, which is also a bullish development; but it leaves a lot to be desired based on where the gold prices have been.
For example: When the GDX made it up to $43.30 back in 2020, most of the precious metals stocks, from juniors to seniors were also getting a bid. The lack of participation by so many PM stocks in 2022, and 2023, was disappointing to many precious metals speculators, (that are mostly piled into the juniors).
Fast forward to this most recent peak in GDX at $37.47…. Yes, this recent peak is higher than the peak in 2023, but the confounding thing for many investors is that it is still a lower level than the $40.25 peak back from 2022, and the 2020 peak of $43.30. This is also with a backdrop where gold has broken up to $2454 ($365-$375 higher in price than those prior peaks from 2020 and 2022). So what gives?
Yes, the costs for producers have increased due to inflationary pressures on cost inputs… but keep in mind…. the gold price has also increased! This cover story about margin contraction and narrative to explain away the underperformance of the gold miners doesn’t really work when you do the math, and back things up to the prior cycle and analyze those margins.
The average margins for producers back in 2010 were around $480 per ounce of gold, and in 2011 they were $640 per ounce of gold produced. Back in 2020, they were the highest margins ever in the industry at just over $800 margins per ounce of gold produced, and yet GDX only got back up to $43.30, (nowhere close to the $59.62 peak from back in 2011, and these producers had far better margins). Last year average gold prices were hovering in the $1900s to $2000 so let’s say roughly $1950 and costs were around $1350 per ounce produced giving most producers about a $600 margin, which is a little lower than in 2011, and higher than in 2010, and yet GDX is nowhere close to the high from 2010 at $48.86.
So we can clearly surmise that despite all the narratives about margin compression causing the mismatch in mining stocks to underlying metals prices, that this does NOT begin to even explain away the stark underperformance of mining stocks today compared to the last cycle. Even when the margins have been better (like in 2020) or even the same basic range as in that prior period from 2010-2012, (like they have the last few years), the gold stocks are still WAY undervalued in comparison. Margin compression simply does not explain it.
We see the same undervaluation mismatches in how the ounces in the ground are being valued today, versus in prior peak metals price years of the prior cycle. Back in late 2022 and into 2023 there were advanced gold explorers and developers with ounces in the ground being valued at $7-$20 per ounce, and in the peak years of the last cycle when gold finally got up to $1800-$1900, the ounces in the ground were being valued at $100-$200 per ounce (or more in some M&A deals). Yes, it does cost more today to build large development projects, but not 10-20 times more, so the whole narrative that it is due to inflationary pressures causing Capex blowouts, does not even come remotely close mathematically to explaining the disconnect here folks. Clearly something else is going on here with these valuation mismatches.
So then the final boogeyman that pundits will roll out is the dilution to the equities and the blown out number of shares now compared to then. There is likely more to this point than the prior two scapegoats of margin compression or capex rises, but still this is a very nuanced point that should be dissected company by company. Sure, if XYZ drillplay has diluted out the number of shares in their capital structure and not found any gold or silver, then sure… dilution has cratered the value and upside opportunity in a company like that. However, many of the mid-tier and major producers have more shares out, but they’ve also acquired whole other projects or companies, added in more mines, far more resources, and so one can’t just paint all these companies with a single brush stroke of dilution.
For example, Newmont may be hovering at the same price it was a decade or two before and has more shares out, but it has also acquired both Goldcorp and Newcrest Mining (that were both major miners in their own right adding in so many more ounces and mines than they had a dozen years ago). It is not the same Newmont. Agnico Eagle acquired Kirkland Lake (which had previously acquired Newmarket Gold and Detour Gold and St Andrews Goldfields) and also acquired all of Yamana’s Canadian assets. Barrick Gold acquired Randgold for another mega-merger. So yeah, they have more shares out, but the companies don’t look anything like they did in 2010 and 2011. This is true of dozens of other gold and silver producers that have acquired companies, and projects over the years, and those are the companies featured in GDX; not the blown out junior explorers perpetually raising capital that haven’t yet found economic deposits. Those are apples and oranges when it comes to the dilution. So while dilution has limited the upside of many junior companies, it still doesn’t come anywhere close to explaining away the huge divorce in gold and silver stock valuations that we’ve seen the last few years in the senior or mid-tier producers.
The real boogeyman has been and still is low sector sentiment and participation by retail, institutions, hedge funds, family offices, and high-net-worth generalist investors. There are far fewer commodity desks at funds, and funds with any exposure to commodities at present; (and if they do it’s mostly in oil & gas, or the largest base metals companies). This is a sector that has treated investor capital poorly since the last peak in 2010-2012, and so who can blame generalists for leaving to chase other shiny objects the last dozen years like cannabis stocks, cryptocurrencies, NFTs, stay-at-home stocks, reopening stocks, SPACs, meme stonks, and now the megacap tech stocks and AI stocks. There are many other sectors that have had fantastic moves higher, and there is little fear or trepidation in the general US equity markets that have only known “buy the dip” since 2009 through present. Investors taking that stance in overvalued US equities have also been handsomely rewarded for it. Can’t blame em’…
Until there is that kind of sustained momentum in the gold and silver stocks, we will not see the generalists come back into PM stocks. Having said that, if we do start seeing more sustainable moves higher in the mining stocks, on the back of higher commodities prices, then we will see generalists come back into the precious metals equities. This isn’t wishful thinking either, because we just saw the perfect case studies for these kinds of moves in the lithium stocks, uranium stocks and senior copper stocks the last few years. Those same kinds of moves have happened in the gold and silver stocks in the past, and they will once again, once the sector can show some sustained gains over time with higher gold and silver prices underlying the move. Then the PM stocks can go from very undervalued, to fairly valued, to overvalued, just like so many other sectors have done before. Patience is required.
In the interim, it is important to spend time doing due diligence on the kinds of companies that are building value and can have value creation “alpha” or ounces-in-the-ground optionality “beta” to outperform the herd. There are companies like that have which have outperformed in the past and will likely do so again. Identifying companies like that will remain a key focus of this Substack channel.
As a closing thought, I think the disconnect presenting itself in the silver stocks is pretty interesting as well. When viewed through the lens of the ETF (SILJ), it is very curious that back in 2016 that the move up in the mid-tier silver companies held in this ETF caused it to get valued at $18.97, even while silver prices only got up to around $20. Then in 2020 SILJ got up to $16.89 when silver got north of $26, and then during the #SilverSqueeze of early 2021 it shot up to $18.76, when silver briefly shot up to $30. Well look at how it has diverged from and dramatically underperformed the silver price over the last few years, since that intermediate bottom in September 2022. Case in point, look at the recent pop up to $32+ silver prices (the highest level since 2013), where SILJ only made it back up to $13.12. It’s curious why SILJ didn’t make it up to $19+ on this move, and represents another potential area of opportunity for a future rerating in the silver stocks.
Thanks for reading and may you have prosperity in your trading and in life!