This Is the Perfect Set-up for Gold Stocks
Contributed Opinion

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Agnico Eagle Mines Ltd.
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This is a most opportune time to be buying gold stocks. The gap between gold and gold stocks has never been wider. Incredibly, valuations remain low even as gold itself hits record highs.

This is so even as margins are expanding, with the major miners generating increasing cash flow. Gold is extremely under-owned, while sentiment remains poor. However, signs of a change are coming. So, this is the most opportune time to buy gold stocks, with tremendous opportunities ahead.

The East Has Been Leading While the West Has Lagged

For the past 2-plus years, the macro-economic environment — with high interest rates, low and declining inflation, a strong economy, and a reasonably strong dollar — has not been attractive for gold investments. However, gold moved up for other reasons: central banks buying to diversify their reserves in the face of dollar weaponization, and Chinese investors and consumers buying on concerns about their economy and the fragility of the banking system.

Meanwhile, Western investors have been selling. In the past couple of weeks, physical gold has been rushing into the U.S. in anticipation of tariffs; it is to meet demands from large banks to settle COMEX contracts. Otherwise, it is mostly traders and large institutions who have been buying. The buying has not reached the ordinary retail investor or small institution. Indeed, the GLD, the largest U.S. gold ETF, has shown only three days of positive inflows during all of January and only six since Thanksgiving.

Economic Conditions as Shifting in Gold's Favor as Fed Changes Policy

Now, the macroeconomic environment in North America is changing in gold's favor. Starting in September, the Federal Reserve has embarked on a rate-cutting cycle, albeit a cautious one. The first rate cut after a hiking cycle has long been the spark that causes Western investors to buy.

However, optimism about what a second Trump term would mean for the economy muted any impact on gold from the Fed's move. That optimism will fade as tariffs take hold and the underlying economic reality comes to the fore. Inflation remains stubborn and, importantly, above the Fed's own target.

The last six months of inflation data show a clear trend up. Many important indicators point to a slowing economy and a jobs market that is less healthy than the headlines suggest. For the Fed to cut rates before inflation has been conquered, as it has done, is the most attractive scenario for gold to do well.

It's not only the Fed that is cutting rates, but the same is happening in Europe, Britain, Canada, and most of the world, and they are all doing it before inflation has been quashed. The last two years have been but prologue; now the curtain is going up, and the play is about to begin as Western investors start buying.

Gold Stocks Have Performed Well, but Lagged Gold

Though gold has been strong for the past two years, the gold stocks have lagged. Neither central banks nor Chinese investors want to buy western gold stocks. And strong broad stock markets, led by tech stocks, meant that North American investors have not been looking at gold stocks.

In January, neither the GDX nor the GDXJ saw a single day of net inflows; indeed, the GDXJ saw no inflows for three months, with $495 million in net outflows over that period.

It must be noted the XAU index is up 37% in the last 12 months. That is
significantly more than the S&P for the same period (23%). Yet, you would never
know it from the financial media. At some point, someone will notice. (This one-year return for the XAU is identical to that of bullion, once again demonstrating
the lack of leverage the stocks have so far exhibited in this bull market.)

The S&P is now losing momentum as the erstwhile market leaders start to falter. Meanwhile, the gold miners have had the highest cash flow growth of any segment of the stock market over the past year. Soon, investors will start to notice, especially if the "Magnificent Seven" stocks stumble.

There Is Potential for Extreme Moves Due to Low Ownership

And despite record gold prices, when valuations usually get extended, gold stocks today are selling close to multi-decade lows. Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), the third-largest miner, for example, is trading at a multiple of less than 10 times its cash flow. This is in its lowest decile in its history.

The entire XAU is close to a multi-decade price-to-cash flow low. For most of the past year, gold stocks did indeed move up but never exhibited the traditional leverage we see at the beginning of a bull market. The fact that we did not see gold stocks dramatically outperform over the past two years as gold appreciated over 70% is simply due to who was buying and why.

Now that the Fed has embarked on a rate-cutting cycle and the S&P is faltering, we will see investors look to gold and gold stocks. With average gold exposure among U.S. investors under half a percent — compared with a 50-year average close to 2% — the potential for significant buying exists. And given that the entire gold equity market worldwide has a market cap of only about $500 billion, compared with over $15 trillion

The largest gold miner in the world, Newmont Corp. (NEM:NYSE), has a market cap of only $48 billion. The market cap of the 100 largest gold companies is just over $400 billion. The value of one year's gold production is $328, while all the gold ever mined in the history of the world is about $14 trillion. Meanwhile, just five U.S. tech stocks have a market cap over $15 trillion.

For just the top five U.S. tech stocks, it would not take much of a shift to see the gold stocks move up dramatically. We should see the kind of leverage that gold stocks have historically demonstrated at the onset of every gold bull market. This is a rare confluence of record gold prices and low gold stock valuations and an excellent time to step up investing in this space.