'Tremendous discount' in the mining sector, gold price vs. GDX explained

NEW YORK (February 26) The mining sector presents a significant opportunity for investors right now as miners are trading at a "tremendous discount," according to Garrett Goggin, founder of Golden Portfolio.

Goggin emphasized the importance of free cash flow per share as the primary driver of gold stock prices. "The only thing that drives gold stocks is increasing free cashflow on a per share basis," he told Kitco Mining.

He noted that average large-cap miners are undervalued by 25% versus free cash flow per share since 2015, marking "the biggest opportunity since 2020 and before that 2015."

Newmont's recent earnings report exemplifies this trend, with lowered all-in sustaining costs and increased production, generating $1.6 billion per quarter. Goggin believes this could kick off a new cycle, drawing in generalist investors.

Gold vs. GDX

Goggin pointed out that the GDX (VanEck Gold Miners ETF) often underperforms compared to gold because gold is an independent asset without expenses, whereas mining companies face various costs. He stated, "The GDX is never going to catch up to gold," explaining that comparing gold to gold stocks is like comparing "apples and oranges."

Despite the rising gold prices, the broader investor community has not yet fully embraced gold and gold stocks. Goggin tracks shares outstanding of the GDX and GLD, noting that GDX shares outstanding dropped significantly as gold prices rose. "Investors are leaving the sector," he observed, attributing this to investor apathy. He suggested that miners need to "show investors the money" to reverse this trend.

Goggin also discussed potential catalysts for this year's gold rally, including the U.S. Treasury marking its gold reserves to market and the possibility of a new gold standard. He mentioned Elon Musk's call to audit the gold held at Fort Knox, suggesting that while the gold might be present, it could be "loaned out many times over."

Regarding a gold standard, Goggin noted that countries like China and Russia are buying gold, moving away from treasuries. He proposed that the U.S. might tie gold to GDP rather than directly to money, allowing for continued spending as long as gold prices increase.

Silver's volatility

Turning to silver, Goggin cautioned about its volatility compared to gold. He mentioned that silver miners' profitability is highly sensitive to price fluctuations. 
While silver has industrial uses, such as in solar panels, and the market has been in a deficit, its price volatility makes it a riskier investment.

For both gold and silver companies, Goggin emphasized the importance of grade. He referenced Archie's Rule for silver mining, stating that the average silver grade needs to be two times operating costs to make a profitable mine. He said, "It's all about grade for me with silver companies."

By focusing on companies that can drive free cash flow on a per-share basis and prioritizing high-grade projects, Goggin believes investors can find significant value in the current mining sector.

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