Gold and Silver have been soaring over the last few months as investors are seeing the precious metals as the best way to play the massive monetary stimulus which is currently implemented by central banks. A related instrument to consider within the precious metals space is the Gold & Silver Mining equity sector. Here’s why.
Gold and Silver Mining stocks usually do well when precious metals prices are going up (as it implies higher revenues), Oil prices is low (i.e lower extraction costs) and Emerging Markets currencies weak (as labor costs decrease).
All of the above is now taking place and this might explain why the sector has been soaring over the last few months. Indeed, since the Federal reserve balance sheet began to increase (September 2019), the Gold & Silver mining stocks have been the best performing asset class with a +72% again (as of end of July) ahead of Silver +45%, Gold +34%, Nasdaq +34%, Bitcoin +11% and the S&P 500 +10% (see chart below courtesy of Crescat Capital).
Invest in Gold
Chart: Selected asset classes performance since September 2019 (source: Crescat Capital)
Still, despite the rally, Gold & Silver Miners stocks trade at a lower level than in the ‘80s, i.e they haven’t done anything over the last 40 years. Some hedge funds continue to accumulate the group.
Their positive fundamental thesis is based on the following. In the age of COVID-19, stocks with balance sheets as strong as their income statements should arguably deserve to trade at a premium to the market. The gold & Silver miners have debt to EBITDA about 75% lower than the overall market (1.16 vs 4.69). Still, they have been lagging massively Gold and the S&P 500. Based on the price to EBITDA ratio (and about all the other valuation ratios), gold miners are actually cheaper than the overall market. From 2005-2016 gold miners pretty much always traded at a premium to the S&P 500, but now the miners are trading at a 15% discount.
Besides fundamentals, it is worth highlighting that Silver miners have been out of favor for a very long-time. But some rotation seems to be taking place as Silver miners to Nasdaq ratio just broke out from a near decade old resistance.
Chart: Silver Miners to Nasdaq (source: Crescat Capital)
The Risks of metals
Gold and Silver mining are highly volatile stocks. Any reversal of the price of Gold and Silver can lead to a sharp correction as recent rise has been very steep. this is why investing in gold must be done carefully with knowledge of the metals market
How to invest in Gold
Gold mining stocks
Newmont Corporation (NEM)
Barrick Gold (GOLD)
Franco-Nevada Corporation (FNV)
Wheaton Precious (WPM)
Polymetal (POLY LN)
Pan American Silver Corp (PAAS)
VanEck Vectors Gold Miners ETF (GDX)
VanEck Vectors Gold Junior Miners ETF (GDXJ)
iShares MSCI Global Gold Miners ETF (RING)
Sprott Gold Miners ETF (SGM)
Sprott Junior Gold Miners ETF (SGMJ)
Global X Silver Miners ETF (SIL)
ETFMG Prime Junior Silver Miners ETF (SILJ)
iShares MSCI Global Silver Miners ETF (SLVP)
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