Gold mining has had a surprising rebound in the past year, with gold spot prices meeting and making new all-time highs on a relatively consistent basis.
The price of gold reached USD$2516 per ounce on Thursday, driven by numerous factors. For example, strong financial results and operational performance from major gold miners such as Newmont Corporation (TSE: NGT) (NYSE: NEM), are working to drive the rally in gold mining stocks.
Also, positive earnings, cost reductions, and expansion plans independently boost stock prices. Analysts, responding to the surge in prices, revise their price targets for gold mining stocks upwards, basing these revisions on higher price forecasts and improved company fundamentals, which often increases investor interest and pushes stock prices higher.
Additionally, with expectations of more quantitative easing or similar monetary policies, investors shift towards gold and related equities as a hedge against potential currency debasement, further fuelling the rally.
Furthermore, according to the World Gold Council, central banks outside of western markets have increased their gold purchases. This drives prices higher with a positive impact on mining stocks. The downstream effects go beyond mining to include market sentiment, with hedge funds and investors increasing their positions in gold, fuelling speculative demand that is driving up both gold prices and mining stocks.
Historically, gold mining stocks tend to outperform the metal itself during bull markets. If gold has rallied but mining stocks haven’t kept pace, there’s an expectation for these stocks to catch up, driven by the leverage effect where a small increase in gold price can lead to a larger increase in mining stock prices due to operational gearing.
The downstream effects are noteworthy.
Largest ETFs have shown high percentage gains
Although the USD$69.1 billion SPDR Gold Shares exchange-traded fund (NYSEARCA: GLD) for bullion has risen 21 per cent this year, the USD$14.7 billion VanEck Gold Miners ETF (NYSEARCA: GDX) has posted an even more impressive 26 per cent gain.
Despite these increases, funds in Morningstar’s Equity Precious Metals category have experienced USD$1.7 billion in outflows, with the VanEck ETF, the largest in the group, losing $1.3 billion. Meanwhile, SPDR Gold Shares, in Morningstar’s Commodities Focused category, has recorded a $1.8 billion loss.
During the 2022 stock bear market, miner stocks lagged behind bullion, as the SPDR bullion ETF dropped 0.8 per cent while the VanEck miner ETF pulled back by 8.8 per cent. In the 2023 bull market, the bullion fund rose 13.3 per cent, again outperforming the mining fund, which gained 10.2 per cent.
Gold is typically thought of as a safe haven asset, especially in times of high inflation. But inflation has had its effects on gold through wages, which rose worldwide in 2022-2023, but has since moderated.
During the 2022 stock bear market, miner stocks lagged behind bullion, as the SPDR bullion ETF dropped 0.8 per cent while the VanEck miner ETF pulled back by 8.8 per cent. In the 2023 bull market, the bullion fund rose 13.3 per cent, again outperforming the mining fund, which gained 10.2 per cent.
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Capital costs rates dive with inflation
Thomas Kertsos, manager of the top-performing First Eagle Gold fund, says miners’ capital expenditure inflation rates have dropped from double digits last year to single digits in most cases this year.
“Most companies have said that across the board their cost inflation is going down,” Kertsos said.
“It’s not just labour inflation, but everything is more or less increasing at a smaller rate than before. It’s very good news.”
Wheaton Precious Metals (TSX: WPM) (NYSE: WPM) remains First Eagle’s largest holding. Wheaton is a mining royalty company that finances mines and earns royalties on its production. It has thrived due to strong, low-cost gold production at its Salobo mine in Brazil and its solid balance sheet.
Morningstar reports that newer holdings include riskier, smaller companies like Canada’s G Mining Ventures Corp (TSE: GMIN) (OTCMRKTS: GMINF), as well as larger, more established ones like Kinross Gold (TSE: K) (NYSE: KGC).
The VanEck Gold Miners ETF (NYSEARCA: CDXJ) or the VanEck International Investors gold mutual fund are also available for exposure options.
However, poor management has been a significant issue for smaller “junior” miners, particularly those in the VanEck Junior Gold Miners ETF (GDXJ). This has led to the ETF underperforming compared to the larger VanEck and iShares miner ETFs.
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Imaru Casanova, manager of VanEck International Investors Gold, invests in both large senior and small junior miners for the fund. As of July 31, she had increased junior miners to 28 per cent of the fund’s portfolio, up from 21 per cent at the start of 2024.
Casanova raised her junior miner holdings to give the portfolio more “torque” in a bull market for bullion, as these stocks typically respond most to gold prices. However, the stock market has not reflected this strategy. Despite the fund’s 23.6 per cent gain this year, it trails behind her VanEck ETF competition in 2024.
“The small developers haven’t provided the leverage we’d expect in a year like this,” she says. “These stocks should be thriving.”
G Mining Ventures, which Casanova has held for years, is her largest junior miner position at 4 per cent of the fund, boosted by a recent acquisition that increased its capitalization. New positions added this year include Artemis Gold (CVE: ARTG) and Calibre Mining Corp (TSE: CXB) (OTCMKTS: CXBMF), both based in Canada.
“We had been avoiding Calibre for a long time because they were producing in Nicaragua, which was too risky for us,” Casanova said.
“But they completed the acquisition of Marathon Gold recently in January, which added a mining asset in Canada that will be in production soon. That really just transformed the company, de-risked it.”
Calibre Mining is a sponsor of Mugglehead news coverage
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