Gold and macro environment, page-15

I have undertaken a lot of research on the current macro environment and gold bull markets and these are my observations.

Gold producers have been undervalued for sometime ie well over 1 year and are now even more undervalued relative to the POG - this is my view and many market commentators.

Since POG gold rose significantly from beginning of March until recently (ie June) the price of gold producers has risen about double the increase in POG (30% vs 15%). However, the profits of gold producers has risen by 3-4 times the increase in POG ie gold producer stocks are even cheaper relative to the POG than they were in February.

Looking back to early October 2023 the POG fell to about $US1,825 and has risen to $US2,400 an increase of about 31% to 32% while the GDX has risen in the same time by about 35% to 40%. The profits of gold miners, assuming costs were similar is about 100% greater but GDX has risen by less than 40%.

Many market commentators have noted the increasing undervaluation of gold producers and those same commentators have been expecting gold shares to catch up in the second half of 2024 - the basic reasoning is that the share market in general (ie excluding those funds that specialised in mining and gold stocks) have not realised how much gold producers profits will increase since a year ago and since February 24 BUT will start to take notice once the June quarter gold mining results are released and ditto for the September quarter - once they realise the major increase in gold miners profits they will start buying very undervalued gold stocks - this will push up the price of gold producers and probably significantly by the end of 2024 (assuming POG does not fall).

I agree with their view. Gold producers are selling on low forward PE's - yes there are exceptions like CMM and EMR but those stocks are in the process of developing more mines and increasing their production by at least double over the next few years which is probably great timing if we are in the start of a gold bull market.

I took particular notice of the change in the GDXJ in July 2024 to date of 13.5% vs the 3.6% increase in the POG (same has been true of GDX but the increase is less) - ie the upward revaluation of gold producers seems to have started already but has quite a way to go. This breakout in the SP of gold producers relative to the POG change in July 2024 could be very significant.

Past gold bull markets have seen a clear trend - early on in a gold bull market gold producers are re-rated up significantly - if gold has now started a major bull market then producers re-rating has hardly started and has a long way to go.

In a gold bull market after a substantial re-rating of gold producers comes a substantial re-rating of developers and with a lag, explorers. Developers have been and still are even more undervalued than producers and explorers have been thrown out with the rubbish.

I will comment more on SPR in another post as I see SPR as I view it as an outlier.

If the gold bull market is sustained into next year and subsequent years we will see many developers and explorers achieve SP gains of 500% and 1,000% over a few years - the SP gains of developers and explorers in a gold bull market will be much better than producers. In this environment some retail investors will make a fortune but they will need to be very selective in the stocks they select as there will be a lot of rubbish gold stocks just like the recent bull market in lithium stocks. In addition junior producers (eg 200k Oz pa) will see SP gains over the major producers.

In the past the more significant POG rises were not leading up to interest rate changes but rather from the time interest rates were cut - if this past trend plays out we may see even more significant gains in the the POG and gold producers when the Fed cuts rates perhaps later this year and into 2025.

One can probably guess what my gold stock strategy is given I only won producers and SPR.

These are my views and always happy to read alternative views with reasons that stack up.