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Gold has been on a tear since Treasury Secretary Janet Yellen announced the United States would issue more short-term bonds as part of its debt issuance in response to investors being unwilling to buy long-term government debt. The Fed signaled that rate hikes were over, and officials issued dovish comments.

As a result, all risk assets took off, but gold’s performance has been a standout. SPDR Gold (GLD) climbed 24.85 percent through September 15, while Invesco QQQ (QQQ) has risen 16.41 percent. Gold has been accelerating in its rally though. Over the past three months, it is up 12.07 percent versus QQQ being down 0.13 percent.

How high could gold run? The long-term uptrend from the 1980 high through the 2011 high points to around $2,700 per ounce, or about 5 percent more from here. After the Federal Reserve started cutting rates with a surprise move back in 2007, gold started a rally that eventually reached 60 percent before it dipped during the financial crisis. With more than 40 percent in the bag since the market started expecting cuts in November 2023, a rate-driven rally could be largely over at this point.

Even if the rally ends, gold mining stocks still have a lot of catching up to do. Mining is a highly cyclical industry. Companies expend large amounts of time and capital to develop mines. If they make mistakes during the boom phase, such as taking on too much debt or making poorly timed or poorly valued acquisitions, the stocks suffer in the cyclical downturns. The opposite is generally true in bull markets. Companies that have languished for years are suddenly benefiting from a higher price for their product. Often, the highest-cost companies can have the best-performing stocks during this phase because small changes in the underlying commodity translate into large earnings increases.

In the 1970s, gold mining shares vastly outperformed the stock market, with gold moving from $35 per ounce to briefly more than $800 per ounce at its peak. Financial assets were devalued by high inflation. However, while gold displays what some might term “safe haven” behavior at times, the past few years have been a great example of how the metal itself can outstrip mining shares.

If costs such as energy and wages soar, the cost for raw materials will climb. The performance of metals such as copper, gold and nickel, for example, might exceed that of companies mining them because the cost of these metals could rise faster than the cost of the products in which they are used. In these situations, direct ownership of commodities will deliver the better return.

With gold up nearly 50 percent in the past three years but oil down 5 percent, the macroeconomic environment is becoming favorable for gold miners.

Gold Mining ETFs

GDX is the oldest gold mining ETF. It has sizable allocations in the largest miners, such as more than 15 percent in Newmont (NEM) and more than 10 percent in Agnico Eagle (AEM). GDX has an expense ratio of 0.52 percent.

GDXJ has smaller major and mid-tier producers in its top holdings. Kinross (KGC) and Alamos (AGI) are both over 7 percent of assets. GDXJ has an expense ratio of 0.51 percent.

These two are by far the largest funds, with $15 billion and $5 billion in assets for GDX and GDXJ, respectively. The next-largest fund is iShares MSCI Global Gold Miners (RING), with $500 million in assets, or about one-tenth the size of GDXJ. The fund is even more overweight the major companies, with 21 percent in Newmont and 13 percent in Agnico Eagle. RING is cheaper though, at 0.39 percent.

Sprott Junior Gold Miners (SGDJ) has a portfolio similar to that of GDXJ, but it has more of an exploration tilt in its holdings. It charges 0.50 percent.

How Much Exposure?

GDX is the default for gold mining exposure. Conservative investors seeking exposure have their best option here. RING and Sprott Gold Miner (SGDM) don’t offer enough to entice investors away from GDX.

A small amount of exposure to precious metals miners can go a long way. As a hedge, a 2 percent position could make a substantial dent in overall portfolio performance. In a situation such as the 1970s, when gold mining shares rallied as the broader stock market stagnated, a 1 percent to 2 percent allocation could see the allocation grow toward 5 percent or even 10 percent. For conservative investors, this is a suitable exposure.

For more aggressive investors and those who are making entries and exits along the way, an allocation of up to 4 percent can make sense, but this is a highly aggressive positioning given the volatility involved. It is suitable for younger investors who can add money and buy during what are often substantial declines along the way, but not for retired investors who are looking to preserve capital.

Outlook

Gold mining is highly cyclical, like other natural resource sectors. Buy low and sell high isn’t merely common wisdom for these stocks; it determines success or failure.

Gold the metal has run to new all-time highs. Gold mining shares, measured by GDX, have recovered to early-2013 levels, when gold was $1,800 an ounce, or more than 40 percent below the current gold price. Oil was about 35 percent more expensive then, at $95 per barrel. In March 2024, gold was only $2,000 an ounce and oil hovered around $85 per barrel.

In short, conditions have changed significantly over the past six months. Most investors haven’t adjusted yet; moreover, many investors have been repeatedly burned by the recurrent bear market and have sworn off the sector. Larger miners are rising because the higher gold price translates into higher profits immediately, but the junior miners are priced as if the market doesn’t believe the current gold price can be sustained.

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