Gold Miners Are Cheap. (?)

I have a confession to make:  I am not the guy you want to talk to about valuing gold miners.   The purpose of this post is not to bash gold or gold miners, or to try to convince you to buy or sell gold or miners.  My purpose in this post is to just share my simple anecdotal experience with “valuations” of the gold miners over the past several years.

Back in September 2011 I wrote a post about how I was trying out a long GDX vs short GLD trade:  long the miners vs short gold.   In that post I wrote about how GDX had underperformed the metal recently, and how several “smart” people were telling you that gold miners were cheap relative to the metal.  I love a good mean reversion trade.

I also included charts with a few different time horizons to illustrate that what looks cheap on a 6 month chart may not look cheap on a multi-year chart and I  acknowledged that there may be permanent tailwinds to ever getting back to what precious metals investors considered “normal” ratios of miners to metals: the creation of easy and cheap ways to trade/invest on the price of bullion without messing with the miners meant they were no longer needed as a proxy for the metal.   Barry Ritholtz wrote about that topic today, in fact.

Anyway, when I’m in a trade where I have little expertise, I usually have a very short leash, and I took my GDX/GLD ratio trade off shortly after I put it on, sustaining losses in the process.  Taking the trade off, of course, was probably the best trade I ever made: here’s an updated chart of that ratio, which starts right around the time of my 2011 post which pondered if the miners were due for a bounce vs the underlying metal:



So what’s the point of this post?  Simply:  I hear a lot of talk from supposed experts in the metals about how cheap the gold miners currently are.   What I know for certain – despite already admitting to lacking the expertise to declare gold miners cheap –  is that the same people who are telling you that gold miners are cheap have been touting that story for at least the past four years, as the miners have gotten absolutely obliterated.

If I Could Teach You Two Things

Ritholtz: Good Luck Bargain Hunting Among Gold Miners


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