The gold miners’ stocks have huge upside potential in 2018, likely the best among stock-market sectors. They really lagged gold last year, so a major mean-reversion catch-up rally is coming. The gold miners are universally ignored and deeply undervalued relative to the metal which drives their profits. And gold itself is likely to power dramatically higher this year as euphoric record-high stock markets inevitably start to falter.

Gold has always been the leading contrarian investment, tending to move counter to stock markets. So not surprisingly investment demand stalled last year as the extreme taxphoria-fueled stock surge blasted relentlessly higher. When stock markets apparently do nothing but rally indefinitely, investors feel no need to prudently diversify their portfolios with the anti-stock trade gold. So they ignored the yellow metal in 2017.

That was certainly evident in the leading proxy for gold investment demand, the flagship American GLD SPDR Gold Shares gold ETF. Its physical gold bullion held in trust for shareholders merely grew 1.9% or 15.3 metric tons in 2017. That was a colossal slowdown from 2016’s massive 28.0% or 179.8t growth! Given the weak gold investment demand last year, it’s rather impressive how well gold managed to perform.

Big up-years in the stock markets sometimes drive big down-years in gold, and 2013 was a key case in point. That year extreme Fed easing catapulted the benchmark S&P 500 broad-market stock index (SPX) an amazing 29.6% higher. Exuberant investors wanted nothing to do with gold, and dumped it in droves. So the gold price plummeted 27.9% in 2013, leaving deep psychological damage that persists to this day.

In 2017 the SPX soared 19.4% on hopes for big tax cuts soon from the newly-Republican-controlled US government. Extreme complacency, greed, euphoria, and even hubris ran rampant among investors. It was a perfect scenario to see gold crushed again on a mass exodus of investor capital. Yet despite the stock markets enjoying their best year since 2013, gold was still able to achieve a strong 13.2% gain in 2017!

Nevertheless, the wildly-optimistic stock-market sentiment drowned out everything else so psychology in precious metals remained exceptionally weak. The leading indicators for gold sentiment are this metal’s peripheral leveraged plays of silver and gold miners’ stocks. Both typically amplify gold’s upside by 2x to 3x. But oddly in 2017 despite gold’s big rally, silver and the main gold-stock index only climbed 6.4% and 5.5%.

That index is of course the NYSE Arca Gold BUGS Index, better known by its symbol HUI. It is closely mirrored by the dominant gold-stock ETF, the GDX VanEck Vectors Gold Miners ETF. The composition of these gold-stock trackers is very similar by necessity, as the universe of major gold miners to pick from when building indexes is small. Without scales, it’s impossible to tell the difference between HUI and GDX charts.

In a 13.2% gold up-year like 2017, the HUI really should’ve leveraged that by 2x to 3x to enjoy solid annual gains of 26.4% to 39.7%. Yet because investors weren’t interested in either gold or its miners’ stocks, the HUI languished with that miserable 5.5% gain last year. That made for terrible 0.4x leverage to gold, which is wildly unacceptable. Gold miners must generate greater returns than gold to be viable investments.

Owning gold miners is much riskier than simply owning gold itself. On top of all the price risks that gold faces, the miners heap many additional operational, geological, and geopolitical challenges. They must compensate investors for these considerable added risks relative to owning gold outright, or there is truly no point in owning them at all. 2017 was a rare anomaly where they dramatically lagged gold’s solid rally.

That’s very unlikely to persist into 2018, as we’re already seeing. Since the Fed’s 5th rate hike of this cycle in mid-December, gold and the HUI have rallied 5.5% and 12.8% as of the middle of this week. That makes for solid 2.3x upside leverage, already a vast improvement over last year’s 0.4x. Thus investors are already returning to gold stocks in a meaningful way, and this young trend should accelerate.

The gold miners’ stocks are radically undervalued fundamentally after so horribly underperforming gold last year. Gold mining is a simple business from a profits standpoint. Miners painstakingly wrest gold from the bowels of the Earth, then sell it at prevailing market prices. So their earnings are the differences between current gold prices and mining costs. Gold-mining profitability was actually fairly strong in 2017.