There’s a reason gold stocks move so much in a bull market: the market is tiny. The global gold market has a combined capitalization of about U$225 billion – the entire gold business is smaller than a single company in the S&P’s top 30.
That means when generalist capital rotates in, there aren’t a lot of places for it to go. And so a lot of dollars pile into a few places.
Where are those places?
To start, generalist capital interested in gold goes to gold-backed ETFs and the biggest of the major miners.
That’s clearly underway already. Recently, the SPDR Gold Shares (NYSE:GLD) ETF, which is the biggest of the gold-backed funds, saw $1.6 billion in inflows, including the biggest one-day haul since the fund started in 2004.
Miners are also moving. In the last month the NYSE Arca Gold Miners Index is up 25%; half of those gains happened since the Fed meeting on June 19.
Gold-backed ETFs and major gold miners remain preferred destinations throughout a gold bull market. But other kinds of companies soon get attention, too.
Next in line are mid-tier miners, single asset operators, developers, and optionality plays. Those are all self explanatory aside from the last category.
Optionality plays are companies with large assets that would not make a lot of sense to mine at low gold prices but that make tonnes of sense once gold rises. That move – from not economic to economic – is a game changer for the asset and therefore for the company.
As such these stocks outperform in a rising gold market. They’re called ‘optionality’ plays because they are like buying options – they are a call on a higher gold price.