GDXJ And The Gold Mining Majors - Where To Now?

by: Lawrence Williams


Since recommending GDXJ as a good investment option back in mid-December, it has risen around 40%.

The gold mining majors though have done even better - ABX is up 90% over the same period for example.

So what is the best option in a rising gold and silver price environment and which less risky in a pullback?

Back in mid-December I published an article here on Seeking Alpha recommending investors might look at the GDXJ junior gold miners ETF as an investment that would do well in a positive gold price environment, while its diversity in terms of its holdings gave it a relatively low downside risk - See: GDXJ: Limited downside and great potential upside in a rising gold and silver price scenario. Well those who took this advice will have seen their investment rise over 40% since then, despite the recent gold price downturn over the past few days.

But, could investors have done better elsewhere? Undoubtedly there have been individual stocks in the junior gold space which have recorded bigger gains and, in retrospect, even the gold mining majors have performed far better over the same period in most cases. The majors might also be seen as having a relatively limited downside given the overall strength of their balance sheets, even though for most of them their financials have been hit hard by impairments and dividend cuts.

Let's take some examples here and look at price rises over the same period - from December 15th 2015 , when my GDXJ article was published, to date. As noted above GDXJ has risen around 40% - rather more before the latest pullback. By comparison, among the biggest North American headquartered major gold miners, No. 1 Barrick Gold (NYSE:ABX) has risen a massive 90%, No. 2 Newmont (NYSE:NEM) up 38%, No. 3 Goldcorp (NYSE:GG) up 42%, No. 4 Kinross (NYSE:KGC) up 60%, No.5 Agnico Eagle (NYSE:AEM) up 37% and No. 6 Yamana (NYSE:AUY) up 58%. The non-North American gold mining company which has arguably been the outright best performer financially in terms of profitability maintenance and increasing dividends - Randgold (NASDAQ:GOLD) is up 49% (See: Randgold Is Bucking The Falling Dividend Trend. A good rise but in comparison with Barrick is something of a laggard despite the latter's big write downs and reduced dividend. Incidentally over the same period the biggest gold ETF, GLD, has risen only 14.5% and the gold price itself by a broadly similar amount.

So, investors who followed my advice and had invested in GDXJ would have done pretty well - but if they'd gone for a basket of the gold majors would have overall seen their investments rise far more. This is somewhat contrary to investment theory that suggests in a rising metals price environment that a good junior will comfortably outperform the majors, but does bear out the maxim that gold stocks will easily outperform the metal price and its proxies (the ETFs).

So what lessons can we learn from the above? Gold majors obviously have performed particularly well in the recent rising metal price environment, in part because they had been so depressed. This looks to be very much a function of institutional fund money coming back into the equation. Most institutions and hedge funds prepared to invest in gold mining stocks will only buy the majors and ignore the juniors if they buy mining stocks at all. They had been ditching their gold stocks as the price continued to decline from Q4 2011 to December last year. Their expert advisers - the major bank analysts - had all been telling them to divest of anything they had left in terms of gold equities - gold was going down to $1,000 after all! But when gold turned around at the beginning of the year, confounding the 'experts', and suddenly became the best performing asset class - and looked to be continuing to rise - there was suddenly a huge move to add it back into their portfolios. Hence the massive price rises affecting the majors, and particularly biggest gold mining stock of all, Barrick. The funds all wanted a piece of it, even though in comparative financial performance terms it has arguably been one of the worst performers of all the majors.

So where too from here? With stakes in the majors perhaps having been at least partly rebuilt there may well be less positive pressure on their stock prices, while if gold gets back on the winning trail then we would anticipate junior-oriented funds, like GDXJ, continuing to do well and perhaps begin to outperform the major gold miners who are still taking balance sheet impairments and offering reduced dividend levels. But now the majors may prove to be the safer bets offering less downside in the case of a falling gold price than a more volatile junior related counter, but their upside potential now is also probably lower.

Thus it all depends on a view as to where the gold price is headed now. If you believe gold has yet more legs and will consolidate and then run higher, then GDXJ remains a pretty good investment option. Junior stocks have the overall potential to gain more than the majors in percentage terms under a rising gold and silver price scenario. That's not to say that the major gold miners would not also prove to be a good investment under these circumstances too but we suspect junior gold miners would do better. If you feel gold has run its course for now, but you wish to retain some gold exposure, then the majors may be the best bets but perhaps one should look at those which haven't risen quite as fast as their peers - notably NEM, GG, AEM and GOLD. You will at least pick up some dividend income as well as upside potential should the gold price rise and they may start to play catch-up in percentage terms with ABX, KGC and AUY.

If you think gold may yet suffer another major correction still and the run-up this year is just another false dawn, now would be a good time to take some profits and come back into the market at lower prices if your analysis of medium term gold price performance proves to be correct.

But looking ahead there does seem to be a confluence of factors which appears to be gold supportive, at least in the medium to long term. Interest rates are in negative territory and, apart from in the U.S. there seems to be no call to put an end to this in the immediate future; global debt is continuing to build and is comfortably above levels that can ever be repaid under the current global financial system; gold continues to flow from West to East creating potential physical metal supply shortages ahead; some central banks remain gold buyers; the Shanghai Gold Exchange is believed to be close to launching its own gold price benchmarking system; terrorist attacks are becoming more deadly and the West is being targeted; ISIS (or ISIL or Daesh or whatever you want to call Islamic State) may be being pushed back in Syria and Iraq but with its back to the wall may well become even more desperate and increase its terror tactics and, like the Hydra of legend, if you cut off one head, another grows in its place; the Chinese yuan will take its place in the SDR basket in Q4 this year - who knows what the longer term implications of this are; global equities markets are beginning to stutter These and many more would all look to be positive for gold as a safe haven investment. For more of my views on gold's likely performance see: LAWRIE WILLIAMS: The gold correction is in - will it last?

On the other hand there are still plenty out there who are saying that the recent gold price pick-up is an early year blip and gold is headed downwards as the global economy improves - if indeed that is what it is doing. Gold has few friends amongst central bankers and government politicians as they feel it has run its course and any move to tie currencies to gold is just too restrictive and they may take measures, as in India, to try and reduce its appeal as a safe haven investment. Yet many of the biggest economies of all still officially retain massive gold reserves (USA, Germany, France, Italy) or are continuing to build them up (China and Russia) so there is a degree of double-think in their actions. As always gold is something of an enigma but it still probably makes sense to keep at least a proportion of it in any diversified investment portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.