GDX: Back Up The Truck On Gold Miners For A Potential Gain Of 40% (NYSEARCA:GDX)

Many investors seem to be ignoring gold and the gold mining sector while they instead pursue “hot money” investments such as Bitcoin and AI stocks like NVIDIA (NVDA). However, gold has recently been hitting new highs, and the price of gold could have much further to run in the coming years. Gold mining stocks in general are not at new highs and this has created a disparity in values and a potentially strong buying opportunity. There are some very big looming global concerns that could lead to strong gains for gold and gold mining stocks in the coming years, and this could unleash a secular bull market for precious metals and miners.

The 5-Year Chart For Gold

As the 5-year chart for the SPDR Gold Shares ETF (GLD) shows, the price of gold just recently eclipsed prior record highs. This type of breakout move typically leads to more gains going forward, although there could be pullbacks along the way. It’s worth noting that the 50-day moving average has recently moved over the 200-day moving average, and this has created a bullish “Golden Cross” formation on the chart.

The 5-Year Chart For Gold Miners

As the 5-year chart for the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) shows, the record high price was hit back in 2020 at around $42. Even though it has jumped in recent days, it is only trading in the $29 range and a move back to the former high would represent a potential gain of around 40%. What’s notable here is that in contrast to the gold ETF, there is no “Golden Cross” formation on the chart yet. However, the current share price of this ETF is trading above the 50-day and 200-day moving averages, and if that continues to hold, it is just a matter of time before a potential breakout for gold mining stocks is signalled through a Golden Cross formation. If this occurs, I believe it will put into play the former $42 high for this ETF, and potentially generate a roughly 40% gain in the next year or so, with even larger gains possible in the coming years.

There are multiple reasons why investors could benefit from having exposure to gold and especially gold mining stocks, which appear to be undervalued at current levels and potentially poised to breakout. Let’s take a look at some of the reasons now:

#1 The U.S. National Debt

The debt in the United States is now at record levels and it is accelerating at an alarming rate. I am not a big fan of Bitcoin, but I can see why people all over the world are desperately seeking a “store of value”. So many third world countries have experienced massive currency depreciation and inflation and they are right to want some type of asset that can’t be printed by a central bank. With the U.S. debt level reaching record levels, the U.S. is looking more and more like a third world country when it comes to fiscal responsibility. The U.S. debt is now well over $34 trillion and that works out to a debt of more than $102,000 per citizen. Since many citizens don’t pay taxes, this debt load is equivalent to about $267,000 per taxpayer. That means if you are a taxpayer, your portion of the debt is at this sky-high level and growing. If you have never looked at the U.S. Debt Clock, please take a look here, and you can see how alarming and how quickly our debt load is growing, every minute of every day.

Another way to analyze the debt load in the United States, is to compare the Gross Domestic Product or “GDP” of our country to the debt load. Right now the U.S. Government Debt is equivalent to roughly 124% of the country’s nominal GDP. Just for comparison, back in 1974, the U.S. debt was only equivalent to 35% of the GDP. As recently as 2019, the debt was 105% of GDP, and this shows how much worse this has become, in just about four years.

Many countries are awash in debt. If you recall the huge concerns about the debt levels in Greece a few years ago, it is worth noting that their debt to GDP ratio is currently around 172%. Venezuela is currently right around 133%. As most investors know, Venezuela is not an economy we want to model after and yet in a year or two we could easily have the same debt to GDP ratios. As an investor, we need to be concerned about U.S. debt levels, but we also need to consider that global debt levels are out of control and this is a very bullish factor for gold and gold mining stocks. As you can see from the graph below, the global debt levels continue to rise. The International Monetary Fund or “IMF” is concerned about the sustainability of this growing debt load. In February 2024, the IMF announced that global debt hit a record high at $313 trillion. This shows the world is awash in debt and it continues to grow. Debt can lead to lower growth, and it can also lead to a debt and currency crisis. This is something investors can hedge against by owning gold and gold mining stocks.

#2 The Banking System

Even though the U.S. economy has been showing strength, we have seen a number of regional banks suddenly collapse. Banks are inherently extremely leveraged business models and for this reason, I no longer invest in banks. As most of us who use Seeking Alpha to improve our returns and expand our knowledge in terms of opportunities, I enjoy (and take seriously) reading what Avi Gilburt has to say, and for quite a while now, he has been warning us about potential risks in the U.S. banking system. He has made many prescient calls and it makes sense to take these warnings seriously. I think my biggest concern is that if we are seeing some very large regional banks collapse when the economy is strong, what would happen in the event of an actual recession to our banking system? Banks tend to fall like dominoes when times get tough.

Some of the bank failures that occurred in 2023, were at least in part due to issues with the large bond losses that were a result of the Federal Reserve raising interest rates so high. This remains an issue for some banks, but the other concern is the level of commercial real estate loans that many banks are starting to see losses on. If we experience a recession, this could add another big risk to the banking sector.

#3 Central Banks Are Buying Gold

According to Bloomberg, global gold demand hit a record in 2023, and sustained central bank purchases of gold were expected to continue into 2024. Some of this buying appears to be based on the idea that the Federal Reserve is going to start cutting rates in 2024, thereby making gold a more attractive asset. There are also a number of countries that are trying to end the dominance of the U.S. Dollar as a reserve currency, and gold is one of the options.

#4 A Drop In Rates Could Boost Gold And Mining Stocks

There’s about $6 trillion in money market funds right now, but the Federal Reserve is expected to lower rates in 2024, and probably beyond. As rates drop, it makes holding assets like gold more attractive. Right now, money market funds are yielding over 5%, but that could get cut in half in the next couple of years, which could cause many investors to look for more attractive investment alternatives. If we see a recession in the next couple of years and consumers are worried about the banking system, this could boost demand for gold and gold mining stocks will benefit.

What I don’t Like About Gold And Mining Stocks

Gold could drop in value, especially if rates stay higher for longer. Gold mining stocks tend to be volatile and that could be a bigger than expected downside risk for some investors. Gold mining companies are often located in countries that are unstable, and mining is inherently dangerous. For this reason, I never invest too much in a single gold mining stock. GDX offers diversification by investing in many gold stocks, and this reduces geopolitical risks as well as the risk of a major safety incident.

In Summary

Gold is now trading at new record highs and this breakout could eventually drive a similar breakout rally to new highs for gold mining stocks. Investors could become increasingly concerned about keeping so much of their net worth invested in the U.S. Dollar, and also in a U.S. bank. The U.S. Dollar and U.S. banking system and national debt levels could pose more of a risk than many of us currently recognize. The U.S. national debt is said to be rising by about $1 trillion, every 100 days. It seems the only path to deal with this debt is to either have a debt crisis, or to inflate the debt away by reducing the U.S. Dollar purchasing power over time. Both of these solutions are very bullish for gold and the mining sector. I think it is just a matter of time before gold makes even higher highs, and this should help fuel a rally in GDX, which could take it back to record highs (this would be a 40% gain) and beyond.

No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.