By Jacob Sonenshine

The price of gold has soared, but gold stocks haven't kept up. And that's an opportunity for investors to play the catch-up trade in the precious metal's miners.

Gold has been unstoppable this year -- and even longer. The metal traded at its eighth record high of the year on Tuesday, before pulling back to finish the day lower. Still, gold futures have gained 11% in 2025 after rising 27% in 2024, its biggest one-year rise on record.

Gold's rise hasn't been driven by the usual U.S. suspects -- uncertainty and inflation among them -- though they have helped. You have to look beyond America's borders to find the real reasons. Central banks have been buying gold as they look for ways to diversify out of the dollar after the U.S. and its allies froze Russia's central bank assets following the invasion of Ukraine. The People's Bank of China has been a big buyer of the precious metal, as have Turkey, Russia, and Poland. China has even allowed its insurance companies to allocate more of their investments to gold.

Investors, too, have been putting more money into gold. Global investment demand increased 25% in 2024, according to the World Gold Council, with exchange-traded funds dedicated to the precious metal ending the year with two consecutive quarters of inflows. Demand for the physical metal was particularly strong in India and China, which helped offset declines in the U.S. and Europe.

Gold miners haven't done poorly, but compared with the metal itself, they've underperformed. Over the past three years, the VanEck Gold Miners ETF (ticker: GDX), which owns large global producers like Newmont and Barrick Gold, returned just 10% in 2023 and 10.6% in 2024, compared with 12.7% and 26.7% for the SPDR Gold Shares ETF $(GLD)$, which holds physical gold. That has started to change in 2025 -- Gold Miners has returned 24% to the Gold ETF's 11% -- but there's still room for the stocks to run.

When the price of gold rises, the stocks should theoretically rise even faster, as earnings expectations rise faster than commodity prices if costs stay relatively unchanged. That means profit margins go up and more money flows to the bottom line. That's why analysts covering companies in the VanEck ETF have increased their 2025 earnings forecasts by 77% in the past two years, according to FactSet.

The stocks haven't kept up with earnings, leaving room for a catch-up trade. If the stocks were simply to rise in line with profits, the ETF would trade for around $51, about 23% above a recent $41.47.

"Gold miners remain a significantly underappreciated equity opportunity as price returns have barely kept up with earnings upgrades," writes Bhawana Chhabra, senior market strategist at Rosenberg Research. "Underpinned by strong fundamentals and comfortable valuations, this group offers a strong risk-reward profile."

Gold stocks, despite their gains, really do look like bargains. The VanEck ETF trades at just over 12 times 12-month forward earnings, a 44% discount to the S&P 500's 22 times, a much wider gap than the 10-year average of 20%. Narrowing the price/earnings gap to that average discount would bring the ETF up to just over 16 times, landing it, once again, at $51.

All the mining stocks need now is for investors to feel confident that gold prices will remain near current levels or trade higher. The market is nearing that point as gold closes in on $3,000 an ounce. And now that the stocks have started moving, it's likely investors will be willing to pay higher multiples to own them.

Gold is great, but it's now time for gold-mining stocks to shine.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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(END) Dow Jones Newswires

February 14, 2025 21:30 ET (02:30 GMT)

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