An employee places ingots of 99.99 per cent pure gold in a workroom at the Novosibirsk precious metals refining and manufacturing plant in the Siberian city of Novosibirsk, Russia, Sept. 15, 2023.ALEXANDER MANZYUK/Reuters
The price of gold is hitting fresh record highs, but the share prices of many gold producers are in the dumps. This underperformance looks like an opportunity.
Gold rallied above US$2,150 an ounce this week, for a gain of more than 17 per cent from its recent low in October.
The latest upward move follows war in the Middle East, increasing nervousness over the coming U.S. presidential election and simmering unease with China’s economy as its property downturn intensifies.
“Gold tends to become more attractive in times of instability, and demand has been surging over the past two years. We believe this is likely to continue this year amid geopolitical tensions and the current economic climate,” ING commodity strategists Ewa Manthey and Warren Patterson said in a note this week.
You wouldn’t notice these bullish underpinnings in the stock market, though.
The NYSE Arca Gold BUGS Index, a basket of gold producers, has slumped 15 per cent over the past three years, underperforming the price of gold by more than 38 percentage points over this period.
The index is down nearly 7 per cent this year, underperforming gold by more than 10 percentage points and suggesting that record-high prices for the commodity mean little to equity investors.
The reason?
John Ing, chief executive officer at Maison Placements Canada, believes that part of the explanation stems from high production costs for mining gold.
Rising fuel and labour costs, disrupted supply chains and onerous COVID-19 policies sent costs soaring 18 per cent in 2022, year-over-year, according to the World Gold Council. Costs have continued to move upward since then, to the point where the average sits at about US$1,400 an ounce, according to Mr. Ing.
At Barrick Gold Corp. ABX-T, for example, the total cost to mine each ounce of gold in 2023 increased to US$1,335, up 30 per cent from 2021.
Mr. Ing also suspects that gold stocks may be unpopular at the moment given the allure of rival investments.
Like gold, bitcoin is embraced by some investors as a safe asset that can survive global economic mayhem. More than the price of gold, the price of bitcoin has soared 70 per cent since mid-January, soon after the U.S. Securities and Exchange Commission approved exchange-traded funds that hold bitcoin – no doubt tempting investors with further gains.
Lastly, while commodity producers generally increase production to take advantage of higher commodity prices, gold producers are struggling with mature mines and political opposition to additional output. That’s limiting growth and it underscores the argument that we’ve reached peak gold, pushing some producers to make deals for others.
“Newmont Corp. NGT-T is trying to bump up its reserves, and they made this overpriced acquisition of Newcrest Mining Ltd. Not all acquisitions are accretive, as they say,” Mr. Ing said. Newmont’s share price has fallen about 30 per cent since announcing the deal in February, 2023.
It is not common for the price of bullion and the share prices of gold producers to diverge, which suggests one of two scenarios: Either gold prices subside or share prices catch up.
Citi analysts expect that the price of gold will move higher over the next six to 12 months, to US$2,300 an ounce.
They argued this week that a higher price is supported by sticky U.S. inflation and higher-for-longer interest rates that raise concerns about an economic downturn. A severe economic downturn or a correction in the Standard & Poor’s 500 Index could raise the appetite for gold even more.
Under these conditions, gold stocks could find greater favour among investors.
Analysts at Bank of Nova Scotia argued in a note this week that some stocks are far more sensitive to the price of gold than others. In a rising gold environment, companies with more debt, higher costs and lower-grade mines – contrary to what you might think – should do better.
“Each of these elements contributes to financial and operational leverage, which in turn makes each company’s intrinsic value more closely tied to the changing underlying price of gold,” Scotiabank analysts said.
Their number-crunching points to smaller producers such as Equinox Gold Corp. EQX-T, Argonaut Gold Inc. AR-T and Galiano Gold Inc. GAU-T as top prospects if gold continues to shine.
If gold prices wobble, then royalty companies such as Wheaton Precious Metals Corp. WPM-T or senior producers such as Barrick or Agnico Eagle Mines Ltd. AEM-T might offer a safer bet.
With record-high gold prices, it seems only a matter of time before gold stocks catch on.