Gold miners ETFs – Are they outperforming the broad market?

In today’s video presentation I had two objectives:

1) Determine if the Gold mining stocks are outperforming the overall Stock market.

2) Determine if there is a better proxy for Gold mining stocks than GDXJ.

Before looking at the price charts I shared some random thoughts:

Warren Buffett’s company, Berkshire Hathaway, has been selling a significant amount of its stock holdings including Apple and Bank of America. Some analysts are speculating that he is selling NYSE: BAC stock because the bank is believed to be short 800 million ounces of Silver via COMEX futures contracts. Given what appears to be a major rally in the price of Gold and the price of Silver, Bank of America’s short position could cause the bank to suffer significant losses. At $32 US Dollars per ounce, it would cost BAC $25.6 billion to cover these contracts. This amount is equivalent to about one full year’s profit for the bank.
The current rally in the price of Gold is occurring for several reasons:
a) Because of interest rate cuts by the Fed and other countries. On top of the recent 50 bps cut, the markets are pricing in additional 50 bps cuts at each of the next FOMC meetings. If this occurs, it will be an extremely aggressive pace for taking rates lower (i.e., 150 bps in three FOMC meetings).
b) The geopolitical situation in the World is heating up rapidly, with hotspots in at least three locations. Heightened geopolitical tension tends to drive the price of Gold higher like we saw in January 2020 when Iranian general Qasem Soleimani was assassinated.
c) China is attempting to stimulate their economy with interest cuts and other monetary measures. Markets analysts are describing these moves as a ‘monetary bazooka.’ Of particular interest is that, for the first time ever, China is publicly intervening in the country’s Stock markets and making money available for institutional investors to buy stocks.
Gold price gains that occur for geopolitical reasons tend to fade away when tensions decline. If peace were to break out around the World, the price of Gold might decline. I also pointed out that pigs may learn to fly.
Big money moves into the large cap Gold mining stocks first. Momentum and speculators then take the mid cap and small cap miners higher. At some point money starts to move into the junior Gold mining stocks where the percentage gains can be impressive.

“Jr Miner” ETFs

I finished up my random thoughts by pointing out that the “junior” Gold miners ETFs do not hold junior Gold mining stocks. In most cases, these ETFs hold stocks of mining companies with market caps well above $1 billion.

I’ve been giving this fact some thought recently because I have received criticism for using GDXJ as my proxy for the 2,000 mining stocks that exist in the Precious metals sector.

Obviously, no one analyst can monitor 2,000 individual stocks, much less perform in-depth Technical analysis on their price charts – there simply isn’t enough time in the day. Because of this time constraint, it is necessary to pick a proxy (or a few proxies) that represent the entire sector.

The criticism I received was based on the idea that GDXJ doesn’t represent the broad mining stock sector because the ETF only holds junior mining stocks. My response to this criticism is the exact point I am making: none of the Gold miners ETFs hold junior mining stocks so it does not matter which ETF is chosen as a proxy for the sector.

Let’s define junior miners so we have context for this discussion.

In my analysis of the mining stock sector I use this simple definition: A junior mining stock has a market cap well under $1 billion US Dollars and produces less than 300,000 troy ounces of Gold (or Gold equivalent) per year.

As I demonstrate in the video, the Gold miners ETFs hold stocks of mining companies with market caps starting around $1 billion USD and higher. There are a few exceptions to this generalization but, as I show in the video, the weighting on these junior mining stocks is so low that they provide zero impact on the overall performance of the ETFs.

I believe there are several reasons that explain why the “junior” Gold miners ETFs do not hold actual junior Gold mining stocks:

Volatility

The junior mining stocks are very volatile. They can easily move 7% or more on any given day – and this movement can be in either direction. If a junior miner publishes particularly exciting news, their price may jump 15% or more.

Obviously, this kind of volatility is not desirable from the Wall Street perspective of attracting investors with money.

Too many stocks to pick from

Let’s say you and I want to start a junior Gold miners ETF. Which mining stocks are we going to pick? There are 2,000 to choose from and most of these companies will never produce any Gold or Silver. In fact, most of them will ultimately fail or fade away into irrelevance (i.e., they will be ignored by investors and their price will dwindle towards zero).

In this environment we have to start picking junior miners based on some criteria. In other words, we have to become stock-pickers and hope we are correct. At that point, are we actually creating an ETF or have we become money managers with a Portfolio of high-risk junior mining stocks?

Risk of failure / delisting

As I stated above, most of the 2,000 mining stocks will never produce any Gold or Silver. Many will fail outright – many more will fade into irrelevance. There are numerous examples of junior mining companies that traded at $2.50 or $3.50 per share in recent years and today they are literally penny stocks.

As a company’s stock declines in price it runs the risk of being delisted by the exchange(s) where it trades. The delisting may occur because the stock’s price falls below a certain threshold, or because the company can no longer afford to comply with the regulatory requirements of remaining listed (i.e., filing required reports, performing audits, etc.).

One of the ETFs examined in today’s video is holding the stock of a company that was delisted on July 1^st, 2024. In this particular case, the company chose to be delisted because of the cost of maintaining their listing.

Technical analysis of the Gold miners ETFs

These are the charts I covered today. Watch the video for details.

Pay particular attention to the discussion of HUI vs SPX and the 3 Fans technique applied to the monthly chart of GDXJ. These charts answer the question, “Are the mining stocks outperforming the broad Stock market?”

Gold - daily

Silver - daily

HUI vs SPX

NYSE Arca: HUI – Gold Bugs Index – weekly & monthly

NYSE Arca: GDX – VanEck Gold Miners ETF

NYSE Arca: GDXJ – VanEck Junior Gold Miners ETF – weekly & monthly

Monthly – 3 Fans technique

NYSE Arca: SGDM – Sprott Gold Miners ETF – weekly

NYSE Arca: SGDJ – Sprott Junior Gold Miners ETF – weekly

NYSE Arca: GOAU – US Global GO Gold and Precious Metal Miners ETF – weekly

NYSE Arca: GOEX – Global X Gold Explorers ETF – daily

GOEX components by market cap

NASDAQ: AUMI – Themes Gold Miners ETF – daily

TSX-V: WRLG – West Red Lake Gold Mines Ltd – daily

OTC: WRLGF – West Red Lake Gold Mines Ltd – daily

TSX-V: SIG – Sitka Gold Corp. – daily

NYSE: IAG – Iamgold Corp – weekly

NASDAQ: RGLD – Royal Gold, Inc. – monthly

NYSE: WPM – Wheaton Precious Metals Corp. – monthly & quarterly

Wrapup – did I accomplish my objectives?

Are Gold mining stocks are outperforming the overall stock market?

No. There are some green shoots poking through the ground but they haven’t spread their leaves fully.

IMO we are still in a mining stock environment where only two strategies make sense:

Invest in the large-cap, well-established royalty companies like Wheaton Precius Metals Corp. (NYSE: WPM). With this strategy you have exposure to the mining stock sector while minimizing your risk and, you get paid for taking risk.
Pick individual mining stocks based on the belief that the company has sound fundamentals. In other words, a stock-picking strategy where the investor believes they can identify the stocks that will outperform. (While avoiding the many, many mining stocks that will underperform or go out of business for one reason or another.)

Is there a better proxy for Gold mining stocks than GDXJ?

No. All of the Gold miners ETFs are essentially the same based on the component stocks they hold.

They also look the same from the perspective of performing Technical analysis on a financial chart. The differences between the ETFs are trivial. For example, one ETF might hold Lundin Gold while the others do not. But if that difference is significant to an investor, they should invest in Lundin Gold directly in lieu of the ETFs or as a supplement to the ETFs.