The Soaring Price of Gold: A Promising Outlook for Gold Miners

The price of gold has reached unprecedented heights, driven by a decline in bond yields and a weaker U.S. dollar, along with heightened geopolitical risks. This surge in gold prices is finally bringing relief to gold miners and other stocks linked to the precious metal. Historical trends indicate that this rally has the potential for further growth.

On Thursday, gold surpassed its previous record high of $2,051.50 per ounce, trading above $2,060. This marks a remarkable 13% increase in 2023, with the bulk of the gains achieved in the past two months. Since early October, gold has risen by 12% from its trading price of around $1,830 per ounce.

With the eruption of conflicts in the Middle East and a reversal in bond yields, investors have begun pricing in a lower Federal Reserve interest-rate target for the coming year. During times of global turbulence, investors tend to flock to gold as a safe haven. Furthermore, the decrease in yields has made gold more attractive due to its lack of interest or dividend payments. Notably, silver has also seen an upward trend following nearly eight months of decline.

Despite the impressive surge in gold prices, shares of gold miners have not kept pace with the value of the precious metal they produce. However, there are signs of renewed activity within this sector. The widely monitored VanEck Gold Miners exchange-traded fund has experienced a year-to-date increase of almost 9%, with a 16% surge since the beginning of October. In contrast, Newmont stock has seen a decline of 14% in 2023.

The significant divergence between the price of gold and gold-mining stocks, along with related technical indicators, suggests that there is room for a continued catch-up rally in this sector.

This divergence is particularly notable: "For only the seventh time in more than five decades, gold futures have closed higher than 91% of all other prices over the trailing three years, while a gold mining index remains in the bottom half of its range, currently at a reading of 36%. This stark contrast creates a substantial divergence," explained Dean Christians, a senior research analyst at SentimenTrader, on Wednesday.

The Relationship Between Gold Price and Miners

When examining the relationship between the gold price and miners, it becomes apparent that in the past, when the gold price was at the upper end of its three-year range and miners were at the bottom end, the latter group experienced higher returns six months later, as evidenced by data from Christians. In fact, the NYSE Arca Gold BUGS index, which tracks gold-mining companies that don't hedge their production, boasts an impressive median return of 22.5% over such periods.

While the gold price itself hasn't historically shown the same strength in subsequent returns, it is important to acknowledge that flight-to-safety trades do not continue indefinitely. Furthermore, a significant portion of the recent rally in gold is based on expectations of a forthcoming Fed pivot and a decline in interest rates. Should these events occur, there is a high probability of a "sell-the-news" reaction in the gold market. Investors are likely to shift their focus towards other non-yield-producing investments, such as growth stocks.

Christians writes, "Commodity-based assets, like gold mining stocks, often face challenges in sustaining long-term upward trends due to the mean-reverting nature of commodities. This characteristic makes adopting a buy-and-hold strategy challenging. Nonetheless, during cyclical upswings, returns can be spectacular over a short period."

Given the divergence between the gold price and miners' stocks this year, along with the recent momentum seen in the latter group, it appears that one of these periodic upswings is currently underway. However, it is important to remember that marrying the gold-miner trade may not be advisable. Instead, it is recommended to approach it as a short-term opportunity.