By Michael Brush
Either gold shares rise from here or gold prices take a dive
Something's gotta give in the world of gold investing. The yellow metal is up more than 10% since Valentine's Day and more than 20% since last October to trade near all-time highs. But the shares of gold mining companies haven't kept up.
This makes no sense. Either gold-mining stocks have to rise or the price of gold (GC00) has to fall.
I'm going with the first option, because that's the outlook of two top-performing gold fund managers.
Says Christopher Mancini, who co-manages Gabelli Gold Fund GOLDX: "If gold prices persist, gold stocks will have a good move, because they are not pricing in the increase in the price of gold."
Mancini and fund co-manager Caesar Bryan are worth listening to, because their fund outperforms the Morningstar Direct's global precious metals index. It beats the index by seven percentage points annualized over the past five years. The fund also has outperformed nicely over 10 years.
Gold stocks have lagged in part because production costs have gone up 35% since early 2020, mainly due to higher labor costs. This is one reason why gold stocks are unlikely to hit their old highs unless gold moves a lot higher. But if the gold price rally simply continues, the miners will join in and rally.
Some consolidation is always possible in any asset or stock after a big move. Mancini and Bryan cite several reasons why gold prices can hold steady and move higher - after a possible near-term consolidation.
One factor is the sheer momentum. "Once gold breaks out and moves to new highs, it generally runs for a while," Bryan says. The current rally, he adds, "is an important breakout and gold will work its way higher maybe from a slightly lower level if it retraces this big move."
Here are three other reasons why gold will stay firm and move higher.
1. Central banks will keep buying: Gold has moved up a lot because central banks are buying - particularly the central bank in China. It's a big buyer because Chinese political leaders noticed that Russian government financial assets including bonds and reserves got confiscated by Western governments after Russia invaded Ukraine.
"The Chinese central bank saw that happened and said 'We don't want that to happen to us,'" says Mancini. "It would make sense for them to want to significantly retire their [U.S.] dollar (DX00) reserves. With gold, they don't have to worry about being repaid. We know they have been buying a consistent amount of gold every day."
Given the geopolitical tensions around Taiwan, trade issues with the U.S., and the strength of Republican presidential candidate Donald Trump in the polls, it makes sense that China will continue play defense by buying gold. The Russian central bank has been a big gold buyer, too, for similar reasons.
2. Chinese investors will keep buying: I'm bullish on China as an attractive contrarian investment since investor sentiment is so low, even as the government takes steps to boost growth.
But I'll also admit it may take some time for the Chinese economy to see a rebound in growth. So, the gold buying by individuals in China will likely persist. "Individual investors are buying gold because the great savings vehicle of past decades, real estate, is under pressure. And the Chinese stock market has been under pressure. So, gold is more attractive. It is partly a fear trade," says Bryan.
3. U.S. macroeconomic factors favor gold: Several potential changes ahead in the U.S. economy could favor gold. First off, the Fed will be trimming the Fed funds rate, but inflation may persist around current levels for awhile. This reduces real interest rates and favors gold because when the return on cash and bonds declines, it reduces the opportunity cost of being in gold, which pays no interest. Next, the U.S. dollar may decline because of the fall in U.S. real interest rates. Because gold is priced in dollars around the globe, a decline in the value of the dollar makes gold more attractive.
Third, a wild card. Before the current Fed rate-hiking campaign, money was so cheap for so long, it's possible that some risky, overleveraged investments were made which still might blow up because refinancing costs have gone up. "We have just come out of era of zero interest rates. It is hard for anyone to really have a firm grip on what the consequences will be. What mal-investments took place," says Bryan. A financial crisis would have investors running to the perceived safety of gold.
Going with gold stocks
When considering gold stock investments, Mancini likes to look for three factors: The quality of the ore deposits, management skill, and valuations. The top seven positions in his fund at the end of 2023 were: Newmont (NEM); Agnico Eagle Mines (AEM); Northern Star Resources (AU:NST)); Wheaton Precious Metals (WPM); Barrick Gold (CA:ABX); Franco-Nevada (FNV), and Endeavour Mining (CA:EDV). The fund holds fairly concentrated positions in these names, indicating conviction.
Here are five stocks from their holdings that Mancini and Bryan singled out in a recent conversation.
1. Newmont
Newmont was already a huge gold mining company after its purchase of Goldcorp in 2019. Last November it bulked up even more when it bought Newcrest Mining. The stock still trades below where it was when Newmont announced this deal last November 6.
But that should change as the company integrates Newcrest. "It will be the go-to gold mining investment because it will be one of the biggest and most liquid names and it will be able to maintain production levels for a long time," says Mancini. Newmont pays a 2.7% dividend yield.
2. Agnico Eagle Mines
The world's third-largest gold producer, Agnico Eagle Mines has increased its reserve base three years in a row by developing early-stage projects it purchased over the past several years. It has assets with high-grade ore in parts of the world with low geopolitical risk. Most of its production is in Canada, but it also has operations in Finland, Australia and Mexico. It is a relatively low-cost producer, at $853 an ounce. Agnico pays a 2.6% dividend yield.
3. Wheaton Precious Metals
Wheaton is a precious metals "streaming" company. This means it purchases precious metals production for an upfront payment and an additional payment on delivery. It focuses on buying production from quality, low-cost, long-life assets, like Newmont's Peasquito mine in Mexico. The arrangement shields Wheaton from inflation and rising production costs. Wheaton pays a 1.2% yield.
4. Lundin Gold
Based in Canada, Lundin Gold's (LUGDF) Fruta del Norte gold mine in Ecuador has some of the highest-grade ore in the world. It is also one of the lowest-cost producers, at $860 an ounce. The company plans to grow production by further developing this property. Meanwhile it is using cash to pay down debt, and support a 2.9% dividend yield.
5. Osisko Mining
A riskier investment because it is such an early-stage mining company, Osisko Mining (OBNNF) has a joint-venture with Gold Fields (GFI) to develop a high-grade asset called Windfall, in the Abitibi region of Qubec, Canada. Osisko will also develop assets in the surrounding Urban Barry and Quevillon area. Because Gold Fields contributed about $500 million for the project and will cover half the development costs, Osisko won't have to raise capital to make it happen, reducing the odds that investors will see dilution. "It will be a world class asset," says Mancini, "and there is exploration potential."
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush publishes the stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
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-Michael Brush