Investors can’t seem to get enough of gold. So far, they have mostly shrugged at mining stocks such as
and
but if the precious metal continues to rally, that is likely to change.
Earlier this month, front-month gold futures hit a record of $2,462, driven by uncertainty around the U.S. presidential election and buying by central banks. Since then, prices have fallen back a bit, although they rallied again Monday after President Joe Biden ended his re-election bid, gaining $6.60, or 0.3%, to $2,402.
But stocks of gold mining companies have been largely left behind. While the
has climbed 10% so far this month, benefiting from the market’s shift away from tech stocks, it is still far from matching gold’s gains.
Over the past three years, while the
ETF, a direct bet on the metal, has climbed more than 30%, the VanEck fund has returned just 11%, according to FactSet.
Gold mining stocks remain cheap. Newmont, the world’s largest gold mining concern with a $54 billion market value, is trading at around 14 times forward earnings. Barrick Gold, another major player, is at just 13 times. By contrast, the average forward earnings for
materials stocks is around 20.
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Despite the recent record high, the outlook for gold prices remains solid. Investors turn to gold in times of uncertainty, and the upcoming U.S. election promises plenty of that. From the assassination attempt against former President Donald Trump just over a week ago to Biden’s decision to drop out of the race last weekend, it seems likely the roller-coaster ride will only continue.
While the race remains wide open, gold has also benefited from Trump’s increasing chances. Trump currently leads Vice President Kamala Harris, who was endorsed by Biden, by about 1.7 percentage points in the Real Clear Politics poll average.
Wall Street sees Trump’s platform, with stiff tariffs and big proposed tax cuts, as far more inflationary than the Democrats’. Investors have been buying gold as protection.
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That brings us to gold miner stocks—which have largely failed to capitalize on what should be an advantageous climate. A key reason is that gold companies have struggled for years with higher costs, especially for labor, which have sometimes made it difficult to mine profitably.
Last year the global average all-in sustaining cost—a measure of the cost to mine an ounce of gold—hit more than $1,340, up from less than $1,000 as recently as 2016, according to the World Gold Council.
But mining costs don’t necessarily fluctuate with the price of gold, so when gold prices increase, revenue over and above those relatively fixed costs can go right to miners’ bottom lines.
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Looking ahead to soon-to-be-reported second-quarter earnings, TD Cowen forecast in a note last week a small bump in costs to be dwarfed by a big jump in gold prices. As a result, the brokerage expects margins to expand 46% over the first quarter.
“We are expecting a very strong Q2/24, given the significant increase in the gold price and relatively flat cost expectations,” wrote TD Cowen. “In our view, investors should finally sit up and take notice if the strong cash flows and margin expansion we are expecting materializes.”
Write to Ian Salisbury at ian.salisbury@barrons.com