by Craig Hemke, Sprott Money:
The price of COMEX gold is now a full 10% above its breakout level of $2100. However, the prices of most mining shares are not even at one-year highs, let alone all-time highs. What gives?
If you’re regular reader of these weekly columns, then you likely already know the answer to that question. However, since I know you’re busy and since the internet is a wide expanse of information, I figured we should probably discuss this again today.
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Why might some of you already know the answer of why the miners lag the price of gold? Well, here are just a few links where we’ve discussed this in the past:
- https://www.sprottmoney.com/blog/precious-metals-in-2024
- https://www.sprottmoney.com/blog/comex-silver-gdx-June-20-2023
- https://www.sprottmoney.com/blog/gold-and-silver-in-2023
In short, the mining shares are more closely correlated with the silver price than the gold price. This may sound odd and a bit counter-intuitive but the correlations are undeniable.
For the sake of simplicity, let’s use the large gold mining ETF…the GDX…as our reference point and as a proxy for the mining shares. Below is a list of the ETF’s twenty largest holdings. You might notice that PanAmerican Silver checks in at #12 and Hecla is #20 but pretty much all the rest focus their mining activities on gold.
So, since the ETF holds gold miners as its primary assets, you might expect the share price to track the price of gold, right? Right? Ummm….nope. Below, you see COMEX gold in candlesticks but the share price of the GDX displayed as a blue line.
Now you might say that it’s not just the price of gold that drives mining share prices. Costs have risen over time and taken their toll on earnings and cash flow. That’s undoubtedly true. But does that alone explain why the GDX appears to be about 50% undervalued versus what you might expect given the long-term appreciation of the gold price?
For answers, let’s consider the next set of charts. What if I told you that the GDX doesn’t closely follow the gold price over time? What if you were to learn that the GDX tracks the silver price, instead.
Below is the same 17-year chart as above but with COMEX silver in candlesticks:
But let’s look closer. Here’s the last ten years:
Here’s the last five years:
And here’s the last six months:
Now you can look at those charts and question why the correlation exists and maybe we’ll write about that someday again soon. However, you can’t question the reality of the correlation between COMEX silver and the GDX. The evidence above stares you in the face.
