April 28, 2020
In the annual forecast that we issued back in January, we wrote that "out-sized gains" would likely be coming for the mining shares in 2020. Well...so far, so good.
Let's start as we often do, with a look back at some of the previous posts on this topic. First, here's a link to an interview on the TD Ameritrade Network that was recorded on December 18, 2019. Below that is a screenshot of our talking points that day:
Next, here's the link to our 2020 forecast that was posted at Sprott Money on January 7:
From that post, below is the key section regarding the mining shares:
So now here we are on April 28 and some of our goals for 2020 have already been met, with COMEX Digital Gold reaching an intraday high of $1788 a few weeks ago. Let's check the full "scorecard" of gains year-to-date:
- COMEX Digital Silver: -15.6%
- S&P 500: -10.9%
- COMEX Digital Gold: +13.1%
- Gold Miner ETF "GDX": +13.9%
However, the major unforeseen wildcard for 2020 has been the Covid-19 pandemic. As you know, this event has brought economic collapse and unprecedented liquidity programs from the global central banks. The U.S. Federal Reserve formally announced its aggressive "QE∞" program on Monday, March 23. The five weeks that have followed have been the first five weeks of the rest of your investing life. And what does that same scorecard show for gains since March 23?
- COMEX Digital Gold: +15.6%
- COMEX Digital Silver: +22.1%
- S&P 500: +24.7%
- Gold Miner ETF "GDX": +62.3%
I'd say the move in the mining shares since March 23 definitely qualifies as "out-sized gains".
That's all well and good, but where do we go from here? Will the gains in the mining shares continue? For me, that answer is a resounding YES.
Why? Two very simple reasons:
- Earnings growth. The major gold miners are due to report Q1 earnings next week. Average gold prices versus Q4 of last year are about 10% higher. Average gold prices on a year-over-year basis are about 30% higher.
- Dividend growth. Just last week, Newmont Mining announced a 79% increase to their quarterly dividend. This brings it to an annualized rate of about 1.5%...or nearly 3X the yield on a U.S. 10-year treasury note. Other mining companies are almost certain to follow.
In this current environment, what other equity sector has those two things going for it? Certainly not tech, and definitely not the financials. Not the energy sector, nor the retail sector. Only the mining sector can currently combine a forecast of higher earnings AND higher dividends.
Where this matters is institutionally. Hedge funds, pension funds, and other institutions need positive returns—"alpha" as the money managers like to say. Yes, TRILLIONS in free cash have helped to "lift all boats" since March 23, but going forward you're going to need earnings and dividend growth to sustain it. And again, only the mining sector has that promise at present.
Then throw on this next chart. As you can see, the GDX had been trapped below $32/share for OVER SEVEN YEARS. Until last week, when for the first time since April 12, 2013, the ETF managed a weekly close above this key level.
So let's see: with the mining shares, we have a sector with rising earnings and dividends and a chart showing a seven-year breakout. Do you think that these factors may combine to finally draw some serious institutional cash flow? And if, in the months ahead, total institutional asset allocation grows from 1% to just 2%, where do you suppose all of that money will go? Oh sure, some will go to unallocated accounts and price exposure vehicles like the GLD. But a lot— A LOT—of cash is going to be sloshing around the mining sector, chasing the small handful of investable opportunities.
This creates a situation you'll recall from Economics 101. Increasing demand chasing a fixed supply leads to higher prices for any good. And in this case, that "good" is the mining shares. Link: https://www.economicshelp.org/blog/1811/markets/di...
Of course in the precious metals, none of this will ever be just a straight up rocket ride. It never is. There will always be fits and starts, with two steps forward followed by one step back. But, for the reasons outlined in this post, further gains in the mining shares should be coming, and you need to consider if you are positioned properly to fully participate.
To that end, Sprott Money posts each Friday a weekly wrap-up podcast with legendary investor Eric Sprott. You should be sure to listen every week. You'll find it quite helpful. A patient investor who is willing to perform some research and construct a diversified portfolio is very likely to be rewarded handsomely with "out-sized" gains in the weeks and months ahead.