As Gold Hits High, Miners Remain An Opportunity

Spot Gold Hits Record Highs in August, but Gold Stocks Lag – Are Equities Ready for a Turnaround?

Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits.

Here comes the volatility

August 2024 was a month of significant volatility in global financial markets. On August 5, a sharp sell-off in equities spread across the globe. The primary trigger appears to have been a surprise rate hike from Japan’s central bank after decades of near-zero rates, which led to a sudden unwinding of carry trades and a dramatic sell-off in global equities. TOPIX (Tokyo Stock Price Index)¹ saw its largest one-day drop since 1987, falling by 12%. In the United States, the S&P 500² and Nasdaq Composite³ indices also experienced significant declines. The turbulence was exacerbated by fears that the U.S. economic expansion may be coming to an end (following a weaker than expected July jobs report), while the rest of the world’s economies are struggling.

Not immune, but resilient…

Gold and gold equities were not immune to the turmoil, but like the rest of the markets, managed to bounce back after the panic subsided. Supported by expectations of lower interest rates, financial markets stabilized towards month end. During his Jackson Hole speech^*, U.S. Federal Reserve Chairman Jerome Powell said, “the time has come for policy to adjust”, reaffirming expectations for a rate cut in September. Gold set new records once again in August, trading above the $2,500 per ounce level by mid-month, and reaching an all-time high of $2,524.64 at the close on August 27. Gold was up $55.79 (2.28%) during the month of August, closing at $2,503.39 per ounce on August 30.

Gold stocks also bounced back after the early August “everything” sell-off, although the larger caps fared much better than the smaller companies. NYSE Arca Gold Miners Index (GDMNTR)⁴ was up 2.44% during the month, while the MVIS Global Juniors Gold Miners Index (MVGDXJTR)⁵ was up only 0.42%.

Where’s the leverage?

Gold stocks didn’t outperform gold bullion in August. This is surprising considering that gold reached new highs, and that the cash flow generation and the valuations of these companies have most certainly improved. We estimate that, on average for the sector, margins expanded by about 8% in August compared to July. This is based on average all-in sustaining costs for the sector of around $1,400 per ounce and average gold spot prices for July and August of $2,392 and $2,470, respectively. Similarly, for those companies not yet in production (smaller caps), the value of their estimated gold in the ground has increased with the higher spot price, yet their valuations were practically unchanged during the month.

This suggests that the market is not yet valuing in these record gold prices. In their most recent Gold Monthly Statistics, Scotiabank estimates that the gold price reflected in the gold mining equities is on average about a 23% discount to current spot gold price. Scotiabank’s report also contains historical data for a variety of valuation metrics for the sector which show that current valuations are at historical lows. Today, the adjusted market capitalization of Scotiabank’s universe per ounce of reserves in the ground is at the lowest multiple to the gold price as it has ever been.

Replacing gold reserves is getting harder

Yet, replacing these reserves is harder today than it has ever been before, which, in theory, should render each ounce more valuable. BofA Global Research (via S&P Global Market Intelligence data), estimates a sharp decline in the number of new gold discoveries, from an average of about 18 discoveries annually from 1990-1999, to 12 annual discoveries in the 2000s, to just 4 in the 2010s.^† They estimate there have been only 5 major gold discoveries from 2020 to 2023. Finding large, economic gold deposits is becoming increasingly harder.

Global Gold Discoveries & Exploration Budgets

We expect the gold price to remain supported around current levels with potential to go even higher when western investors decide it is time to search for the benefits gold has historically offered. This should eventually lead to more appetite for gold stocks and a re-rating of the sector to reflect valuation multiples more in-line with those observed in previous gold bull markets.

Adjusted Market Cap per Ounce of Reserve (Divided by Gold Price)

Will we see a rebound in Western investment demand?

Western investors have not yet jumped into the gold markets in full force. However, over the last couple of months, the World Gold Council reported estimated positive fund flows into the North American gold bullion ETF products during July and August and into the European products since May.^‡ This is an important reversal in the persistent trend of outflows global gold bullion ETFs have experienced since mid-2022. Is this the initial stages of returning investment demand?

The early August (and early September) equity markets’ weakness is signaling increasing concern about the health of the U.S. economy and the risk of a recession. Investors looking for more defensive, recession proof opportunities or simply a place to hide during periods of heightened uncertainty and volatility, may finally turn to the gold sector. The historically cheap, financially strong gold mining equities should stand out as an attractive play to gain gold exposure.

Gold ETF Flows by Region (Tonnes)

Important Disclosures

^* Speech by Chair Powell on the economic outlook – Federal Reserve Board.

^† Gold from major discoveries grows 3%, although recent discoveries remain scarce.

^‡ Gold ETFs, holdings and flows.

All company, sector, and sub-industry weightings as of August 31, 2024, unless otherwise noted.

Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

Diversification does not assure a profit or protect against loss.

Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

¹Tokyo Stock Price Index (TOPIX) is a capitalization-weighted index that tracks the largest companies in Japan by market capitalization. ²S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples. ³NASDAQ Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. ⁴NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. ⁵MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.

Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.

NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by Van Eck Associates Corporation (“VanEck”). VanEck products are not sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding VanEck products or the ability of the NYSE Arca Gold Miners Index to track general stock market performance.

ICE data makes no express or implied warranties, and hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the nyse arca gold miners index or any data included therein. In no event shall ice data have any liability for any special, punitive, indirect, or consequential damages (including lost profits), even if notified of the possibility of such damages.

MVIS Global Junior Gold Miners Index (the “Index”) is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MarketVector Indexes GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. VanEck products are not sponsored, endorsed, sold or promoted by MarketVector Indexes GmbH and MarketVector Indexes GmbH makes no representation regarding the advisability of investing in VanEck products.

The S&P 500^® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P^® is a registered trademark of S&P Global and Dow Jones^® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

Gold investments are subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. Investments in gold may decline in value due to developments specific to the gold industry. Foreign gold security investments involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. Gold investments are subject to risks associated with investments in U.S. and non-U.S. issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

© Van Eck Associates Corporation.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.