Georgia runoff spike could start a 'laggard trade' in gold mining stocks

Early signs are that gold mining stocks continue to attract interest from investors in 2021 with hopes for a possible 'laggard trade' to chase the high price of gold.

Must know

  • Gold mining stocks soared nearly 7% in the first day of 2021 trading
  • Scope for higher fiscal spending if Democrats win the Georgia run-off elections is a near-term bullish catalyst
  • The Van Eck Gold miners ETF maybe breaking out of a 6-month pullback
  • The outlook for gold remains positive while real rates are negative
  • Gold miners have very low capex and debt levels relative to the high gold price
  • 11 ETFs to play a possible a rise in gold mining stocks

What’s happening?

On the first day back for trading in 2021, the broader US stock indices took an unexpected turn for the worse, while gold mining stocks bucked the trend. The Van Eck Gold Miners (GDX) ETF moved higher by 6.9% yesterday, while the S&P 500 sunk -1.5%.


The Story

The principal reason for the gain in gold miners and losses in broader markets on Monday can be attributed to the rising probabilities of a ‘Democratic Sweep’ after the Georgia run-off elections on Tuesday. Were Democrats to run all houses of the US government, the chance of much larger fiscal support would increase greatly. Higher US twin deficits are generally a drag on the dollar and positive for gold.

Near term risk and reward for holding gold mining stocks hang on the Georgia run-off elections. If at least one of the two Republican candidates are elected, then that’s a headwind for gold and gold mining stocks short term. What about for the rest of the year?

About GDX

Before we delve in the sector more deeply, let’s quickly review what kind of stocks we are talking about. The GDX ETF seeks to replicate the price and yield performance of the NYSE Arca Gold Miners Index (GDMNTR), which aims to track the performance of companies in the gold mining industry. There are 53 holdings with $17.7 billion in net assets. The biggest five holdings makeup just under 40% of the fund and are:

  1. Newmont Corp (NEM)
  2. Barrick Gold Corp (GOLD)
  3. Franco-Nevada Corp (FNV)
  4. Wheaton Precious Metals Corp
  5. Agnico Eagle Mines Ltd


More details on the GDX ETF can be found on the VanEck website.

Big 2020 performance

Gold mining stocks surged out of the blocks in March when gold was bid as a haven asset and continued to rally through the summer when gold hit a new record and broke $2000 per oz for the first time. The stocks have been laggards since August as wider economic optimism returned amid the covid-19 vaccine rollout and central banks kept their unprecedented money printing policies unchanged.

The reported Net Asset Value (NAV) of GDX grew 28% y/y as of 11/30/20


Why gold miners?

We’ve identified three possible growth drivers for gold mining stocks. The price of gold, low levels of industry CapEx relative to the gold price and very clean balance sheets

  1. Gold price

We regularly discuss the outlook for gold but very quickly. Gold is a store of value but it has an opportunity cost because there is no yield. This is why gold tends to correlate negatively with real interest rates. While the Fed promises to hold interest rates at zero and inflation expectations grow, then gold will likely be a desirable asset for investors to include in their portfolios. Should interest rates start to move higher and above the rate of inflation, other safe assets like government bonds will become relatively more appealing.


  1. CapEx

Gold miners seem to have collectively learned hard lessons from the previous boom and bust cycles in the gold price. Miners would typically load up with new mining investments when the price of gold gained to take full advantage of the higher profit potential. However, when the gold price turned south, they would be left over indebted with lower returns in which to pay it off. So this time around, gold miners have been very conservative. However, should the price of gold continue to rise, it would be remiss of management not to try to expand output through new capital spending to some degree.



  1. Debt

The precious metals miners now have some of the lowest debt to asset ratios of any major industry. Even without going overboard and simply issuing more debt to catch up with other industries could easily fuel some debt-fuelled growth that can take the profitability of these companies much higher.



Historical returns

One of the most compelling arguments for gold miners in that returns from investing in gold mining stocks over the past decade have drastically undershot the performance of the underlying asset (gold!) which is sitting at a record high. GDX is at about breakeven since its inception in 2006.


GDX growthSource:

The returns for the fund in the last five years have been more favourable, with big gains in the calendar years of 2016 and 2019. A word of caution is worthwhile here because gold miners have a high beta relative to the price of gold, which makes the sector and this makes the GDX ETF particularly volatile, meaning high potential risk as well as reward. Put another way, gold miners can often be a leveraged bet on the gold price.


GDX calendar year returnsSource:

How to play it


Symbol ETF Name Total Assets ($MM) Previous Closing Price 1-Day Change (Jan 4)
GDX VanEck Vectors Gold Miners ETF $16,747.10 $38.51 6.91%
GDXJ VanEck Vectors Junior Gold Miners ETF $6,373.36 $58.05 7.02%
NUGT Direxion Daily Gold Miners Bull 2X Shares $1,183.64 $79.12 14.01%
JNUG Direxion Daily Junior Gold Miners Index Bull 2x Shares $793.30 $137.13 13.74%
RING iShares MSCI Global Gold Miners ETF $493.54 $32.10 7.65%



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