This Is Probably the Decade's Biggest Opportunity in Gold Stocks

The Fed's Pivot and the Golden Value Gap (aka Gold's Rally vs. Miners' Slumber)

Yesterday happened what everyone with half a brain knew would eventually happen.

After over a year of pretending to fight their self-inflicted inflation disaster, the Federal Reserve finally threw in the towel. And it didn't just dip its toe in with a minor rate adjustment—instead, it opted for a fat 0.5% rate cut.

As a result, the key rate eased to 4.8%, dropping from a two-decade peak of 5.3%, where it had been for 14 months.

Fed officials also hinted at another 0.5% cut in their last two meetings of the year, in November and December. And they’re eyeing four more cuts in 2025 and two in 2026.

It’s official, folks—we’ve entered a new era of easy money.

And as I explained in Tuesday's essay, it’s not just the Fed slashing rates. From the European Union and the United Kingdom to Brazil and Pakistan, this is a global trend just getting underway. It’s set to be a major boon for those holding real, “unprintable” assets. And at the top of that list? You guessed it—gold, the timeless haven in a sea of paper promises.

Why Gold Miners Outshine Bullion

If you’ve been with us for a while, you likely know that Doug Casey always recommends holding gold as a long-term investment. Those who heeded his wisdom should be cheering, with gold recently vaulting over its historic peak.

But Doug also recommends investing in gold stocks for even more profits.

That’s because gold miners tend to do better than gold bullion when the price goes up because the cost of extracting gold becomes cheaper. In other words, they provide leverage to the underlying commodity.

Now, I know we're all intuitively familiar with the concept of leverage, but here's a quick example to show you how powerful it can be in mining stocks.

Imagine the price of gold rises from $1,800 to $2,500 per ounce (in fact, that's close to what happened between early 2023 and now). That’s a 39% gain. If you own physical gold, you're up 39%.

Now, let’s say it costs a mining company $1,600 per ounce to extract the gold. At a gold price of $1,800, the company makes a profit of $200 per ounce.

But if the price of gold increases by 39% to $2,500, the company’s profit per ounce jumps to $900 ($2,500 – $1,600), a 350% increase in profitability.

That could push the company’s stock higher by 80%, 100%, or more – all from a notable, but not extraordinary, move in gold prices.

It's hard to ignore the appeal of gold miners with this kind of upside.

Mining Stocks Are Undervalued—Biggly

But what's really interesting is that even with gold at an all-time high, shares of solid, profitable, dividend-paying gold miners are still unfathomably cheap. Just take a look at this chart of major gold mining stocks, measured by the NYSE Arca Gold BUGS Index (HUI).

As you can see, the HUI index is currently sitting at 320—about half of its record level from September 2011. In other words, it’s far from its peak, even though gold, the physical metal these companies are mining, has already surpassed its 2011 high.

It’s true the HUI has rallied this year along with gold’s price, which isn’t surprising. Right now, it’s up around 34%, compared to gold’s 25% return. But, as I mentioned earlier, you’d usually expect gold stocks to significantly outperform the metal thanks to leverage. Clearly, that hasn’t been the case.

What’s more, the HUI is weighted to give more value to the three companies with the highest market capitalization: Newmont (NEM), Barrick Gold (GOLD), and Kinross Gold (KGC). Aside from Kinross, these companies, like many others in the index, haven’t really outperformed gold prices. In fact, if you take Kinross out of the equation, the HUI has performed about the same as gold, if not worse. This is remarkable and shows just how undervalued gold stocks are compared to the underlying metal. Here’s Doug Casey:

I have always been a big believer in making the trend your friend... and the real money is in getting in ahead of the masses. I believe that gold mining is in such a spot right now.

Golden Value Gap

Now, I want to emphasize that we’re not discussing junior explorers here. We're talking senior gold stocks, including the big three I mentioned earlier.

But when you look at junior miners - known for their higher risk-reward profile and 10-bagger potential - they're even more undervalued. Just check out this chart of the S&P/TSX Venture Composite Index.

The index tracks the Canadian TSX Venture exchange, home to many small and mid-cap mining stocks, and it’s down more than 83% from its 2007 highs. Keep in mind, gold has surged an impressive 272% in that same time. The TSX-V is also down sharply from its 2011 peak, while gold is up roughly 71%.

What gives?

It’s pretty simple. Like I mentioned on Tuesday, central banks have been stockpiling gold at levels we haven’t seen in 50 years, which is a big reason gold’s hitting all-time highs. But central banks only buy physical bullion. They do not buy gold stocks. So there’s a lag between them getting gold, helping push its price up, and that showing up in gold equities.

The bottom line is that gold stocks are a screaming buy right now. There's a massive disconnect between these stocks and the yellow metal itself. I call it the "golden value gap."

Because of this mismatch, you still have heaps of these businesses selling for crazy bargains right now. As the bull market in gold gains momentum, we will see many of them turn into 5-baggers, 10-baggers, or even more. That’s exactly why a good chunk of our Crisis Investing portfolio is focused on these stocks, which Doug himself owns.

But a value gap this big won’t last long. Especially now that the Fed's slashing rates and gearing up to crank the money printer into overdrive again. So, if you’re considering getting into gold stocks, it’s important not to sit on the sidelines for too long.

Regards,

Lau Vegys