Gold Miners ETF (GDX)

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Gold Stocks’ Lost Year
By: Adam Hamilton | December 22, 2023

The gold miners’ stocks have suffered something of a lost year, with this small contrarian sector largely overlooked. Investor apathy remains high despite miners’ soaring earnings fueled by much-higher gold prices. But 2023’s unusually-subdued gold-stock price action was driven by several major anomalies that have run their courses. As markets normalize in 2024, gold miners have lots of mean-reversion rallying to do.

Christmas is a time of reflection, looking back on the challenges, blessings, and triumphs experienced over a long year. Like pretty much everyone, my family and I have had plenty of all three. 2023’s gold-stock performance is definitely in that challenges category. With this year winding down, the leading GDX gold-stock ETF has merely rallied 7.3% year-to-date. That’s really-poor performance compared to gold itself.

Despite spending the middle half of 2023 grinding sideways to lower, gold has enjoyed a solid year with 11.4% gains. Typically the major gold miners dominating GDX see their stock prices amplify material gold moves by 2x to 3x. So GDX should be up about 23% to 34% YTD, not just a third to fifth of that at terrible 0.6x upside leverage! To be worthwhile investments, gold miners need to outperform their metal.

They bear many additional risks beyond gold price trends, which traders need to be compensated for. Gold stocks’ vexing lagging is newer, they were quite strong in the first third of 2023. By mid-April, GDX had surged 25.0% YTD outpacing gold’s parallel 11.8% rally by a normal 2.1x. Those were parts of larger uplegs born in late September 2022, which clocked in at 63.9% and 26.3% gains respectively for 2.4x leverage.

Gold stocks really started decoupling from gold mid-year, and haven’t yet regained normal levels relative to the metal that drives their profits. Several anomalous market conditions contributed, including general stock markets’ artificial-intelligence bubble, elevated Fed-rate-hike fears, and a resulting monster bear rally in the US Dollar Index. All three weighed on gold demand, forcing the metal to consolidate for five months.

Gold has always been the leading alternative investment, the ultimate portfolio diversifier. Investors are most interested in prudently diversifying their stock-heavy portfolios with counter-moving gold when stock markets are struggling. But when they are soaring to lofty levels fueling universal euphoria, diversification is forgotten. The AI bubble mostly ballooned from early January to late July, with the S&P 500 soaring 20.5%!

Remember your first experience with ChatGPT earlier this year? The AI hype for these large-language models was extreme. My wow moment was asking ChatGPT to write a short story for my kids, specifying a genre, hero, and backdrop. The result was so impressive I printed it out that day and read it to them at dinner. Some of my and my wife’s friends started using ChatGPT for work, greatly improving their writing.

Gold didn’t slouch during that AI bubble, rallying 7.2% in that span. But man the gains in market darlings led by NVIDIA were astounding. From early January to mid-July, that stock skyrocketed 233%! Demand for its repurposed graphics-processing chips that also excel in AI applications was off the charts. Gold and its miners’ stocks are largely forgotten during stock-market bubbles, they can’t compete for excitement.

While AI is here to stay, the extreme hype surrounding it has passed. The bloom is off the rose on AI actually improving corporate earnings. While LLMs like ChatGPT can do impressive things, they are ultimately bullshitting machines. Computers string together pleasing grammatically-perfect prose, but have no idea what they are writing! They can’t think, and often give factually-untrue answers on specific questions.

These so-called “hallucinations” are rampant, greatly limiting the real-world utility of AI responses. For humans, intelligence requires long experience, wisdom, and discernment enabling us to understand crucial context and relevant relationships. AI chatbots just stitch together seemingly-related information from their vast databases that might not be at all. It’ll be years before AI substantially boosts corporate profits.

Like all stock-market bubbles, this year’s AI one faces a mean-reversion reckoning. In late July when the S&P 500 originally crested, all its elite companies averaged 30.5x trailing-twelve-month price-to-earnings ratios. Entering December, those were still running 28.3x which remains in formal bubble territory over 28x! These still-lofty stock markets need to seriously sell off in 2024 to normalize dangerous overvaluations.

NVIDIA’s epic 229% YTD run is one reason the S&P 500 just surged to new higher highs well above its late-July AI-bubble peak. But NVDA faces mounting headwinds as other chipmakers ramp up competing AI processors. This past summer, NVIDIA was selling its H100 GPU accelerators which only cost about $3k to manufacture for $25k to $30k each! Those shocking profit margins will collapse in 2024, hitting this stock.

And again stock-market weakness is great for gold demand, helping investors remember the wisdom of diversifying their stock-heavy portfolios. As goes gold, so go the gold stocks typically with that 2x to 3x leverage. As this chart shows, both gold and GDX crested this past spring right around when the AI exuberance was shooting into overdrive. That distraction helped drive healthy rebalancing corrections in both.



The AI bubble wasn’t the only anomalous market condition that retarded gold demand in 2023, keeping gold miners out of favor. Another summer one was soaring expectations for more Fed rate hikes both this year and next. Both stronger-than-expected key US economic data and top Fed officials’ forecasts for their federal-funds rate drove that. My essay last week on Fed dots spurring gold analyzed all that in depth.

Back in mid-July leading into that AI-bubble peak, GDX was still holding its own up 13.8% YTD. The major gold stocks were doing much better then than this week’s +7.3%. Then in late July, an unusual huge upside surprise in US GDP data really ramped Fed-rate-hike odds. That accelerated a healthy US-dollar bear rally to massive proportions, unleashing withering extreme gold-futures short selling in August.

Gold dropped 1.3% that month, fairly resilient with the US Dollar Index blasting 1.7% higher. But the incessant more-Fed-rate-hikes-looming talk really scared gold-stock traders, who hammered GDX down an ugly 6.8% that month! That extreme 5.1x downside leverage highlights the magnitude of gold stocks’ decoupling from their metal. Then those anomalous market conditions actually accelerated in September.

The USDX’s mighty bear rally soared another 2.5%, slamming gold down 4.8% which GDX amplified to an 8.1% monthly loss! Traders were worried about top Fed officials’ higher-rates-for-longer jawboning, which was solidified in late September’s FOMC meeting. There these policymakers boosted their year-end-2024 FFR projections by 50 basis points to 5.13%. That really deepened the gold and gold-stock selling...

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