2 Fundamental Reasons Why Gold Miners Are Undervalued

Gold shouldered past $1,800 this week, and miners are flexing their muscles, too. Many are up 40% … 50% … 60%… or more since the recent March lows.

This is giving many investors pause. They’re afraid to buy because miners are so “expensive.”

Well today, I’m going to prove to you that miners are CHEAP!

Why is gold going up? Because the coronavirus pandemic is hammering economies in country after country. As a result, we’ve seen central banks around the world kick their electronic printing presses into high gear.

You can print lots of fiat money — you can’t print gold.

In addition to the overworked printing presses, there’s nearly $14 trillion in negative-yielding government debt around the world … and real yields (real yields account for inflation) of U.S. Treasuries have gone negative all along the curve.

As a result, investors are stacking up gold, as I showed you Thursday.

And then there’s geopolitics. The autocrats in Beijing are putting the ham-fisted squeeze on Hong Kong’s democracy. That gives the 7.4 million people in Hong Kong plenty of reason to convert their wealth to gold and get the heck out of town.

So, yeah. You can see why gold hit $1,800. And you can see why it’s going higher.

Big banks are lining up to raise their targets on gold. Would you rather buy gold and miners when the yellow metal is at $1,800, or at $1,900 or $2,000?!

But let’s put that aside for now. I can’t predict the price of gold — though I have an awfully strong hunch, and I’ve been proven right a lot lately — so let’s deal with the here and now. And let me tell you, here and now, that gold miners are undervalued.

I’m going to prove that to you fundamentally. Let’s start with a chart of the NYSE Arca Gold Bugs Index (NYSE Index: ˆHUI).

It’s a basket of leading gold miners, similar to the better-known VanEck Vectors Gold Miners ETF (NYSE: GDX, Rated “B-”). But the HUI has been around a lot longer than the GDX, so it gives us historical charts.


 

Gold is the orange line on this chart. The black line is the HUI divided by the S&P 500, to show relative value.

The HUI was more expensive compared to the S&P 500 — and gold — back in the last bull market, in 2011. Then the bear market roared in, and the HUI melted down. Even when gold itself started to rally in 2018, miners still lagged.

Here’s a fun fact: Gold bottomed in August 2018 and has rallied about 130% since then. Miners began rallying later, in September — basically because no one believed the rally in gold. Since then, gold miners are up 109%.

That’s right. So far, over the entire length of this rally, miners have underperformed gold. In the past six months, miners have played catch-up. But they still have a long way to go. Heck, miners would have to quadruple in value just to catch up with gold in this cycle.

But that’s not all.

I have another chart of the HUI for you. This one shows its price action, along with the price-to-earnings ratio of the index.


 

The Gold Bugs Index recently traded at a price-to-earnings ratio of 21.5. Back in the heyday of the 2011 bull market, that ratio was as high as 35. In fact, at other times, it has spiked even higher.

So yeah, gold miners can get more expensive. Even if nothing changes.

But things will change. Gold will go to $1,900, $2,000 and higher. As gold surges, the profit margins of these miners will widen like the Grand Canyon. Their earnings will go higher … and higher. And just to keep up, and make up lost ground, the share prices of select miners will probably go ballistic!

So, to sum up: Gold miners are fundamentally undervalued now. They’re likely to get much more expensive. The smart money is already moving. I see the buy orders come in every afternoon.

You can sit on the sidelines if you want. But you also might want to get your shopping list ready.

The gold bulls are already running. You either want to run with those bulls … or get out of the way.

All the best,

Sean

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Comments 2

  1. Maggie Smiley July 21, 2020

    Are you recommending buying options on the gold miners where we would be tied in to a time frame or buying the actual stock where we can hold until we are ready to sell?

    How can I exchange my fairly recent Stock Options Hotline membership for your Gold & Silver Trader?

    Reply

  2. john henry July 14, 2020

    Gold up 130% since 2018? ? ? I don’t think so. But your the boss.

    Reply