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Ahead of the Q1/2023 Earnings, the Physical Gold to GDX Spread is Nearing its Highest Level Ever

DISCLAIMER: Any written content contained herein should be viewed strictly as analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

With gold advancing another +1.7% WTD and setting sights on the $2,060 per ounce level, the precious metal is nearing the previous August 2020 high of $2,075 per ounce. Note that at +12.7% YTD, gold has outperformed all other liquid commodities such as silver +8.3%, copper +8.4%, WTI +2.6%, Brent Crude +1.6% and Natural Gas (NYM) -53.4%.

Gold’s recent performance has been aided by the perception for forward cuts to US interest rates in an attempt to manage the tightening of banks’ lending standards which may prompt a quicker than anticipated slowdown in activity. Coupled with the increasing thought that real US interest rates have peaked, gold has accordingly performed well. Fundamentally, note that this past March was the first month of net inflows into ETF over the last 12 months as the backdrop of central bank demand remains strong. Over the near term, gold will remain sensitive to changes in short term interest rate expectations and US Dollar strength. Over the longer term, extending the analysis period to begin in 2010 is more telling. Gold’s relative outperformance of +81% can be seen in relation to silver, copper, WTI, Brent Crude and natural gas.

More interestingly has been the disconnect between physical gold and the gold equities as displayed by both the GDX Gold Miners ETF (GDX) and the GDXJ Junior Gold Miners ETF (GDXJ). This particular disconnect has been prevalent since 2012 and is now very close to the highest recorded spread (Physical gold versus the GDX Gold Miners ETF). As can be seen in the lower graph below, the spread has been negligible up until 2012. It is now near its widest ever level.

Recall that gold mine production remained flat y/y at ~3,600 metric tons despite Chinese output increasing +13% y/y (largely from Shandong Province) rebounding from the lengthy shutdowns prompted by numerous mine accidents. On the global recycling front, gold supply only increased by +2% y/y. In light of the anemic production numbers and given the near widest ever Gold to GDX spread, the gold miners are worth revisiting. The miners have just started to report their Q1/2023 operating performance, note that their corresponding financial performance will be disclosed in the weeks ahead. Bellwethers such as Newmont Mining (NEM) and Agnico Eagle Mines (AEM) will be reporting their quarterly financials on April 27, Barrick Gold (GOLD) will be reporting on May 4.

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