Gold ended 2023 well above the coveted US$2,000 per ounce mark and has stayed near that level so far in 2024.
While this rise has excited market watchers, some are disappointed gold stocks haven’t followed suit. Gold equities are generally expected to provide outsized gains compared to the metal, and investors are waiting for a breakout.
Why aren’t gold stocks rising?
Gold investors and gold companies are understandably frustrated that gold stocks are still lagging.
“We’ve had a huge disconnect between gold and the gold stocks really for the last 11 years, but particularly for the last two years it’s been extreme and people don’t understand it,” said Adrian Day of Adrian Day Asset Management.
In his view, it’s important to understand who has been buying gold during this time and why. For the most part, the ‘who’ is central banks, and the ‘why’ is that they want to build long-term defensive positions.
“I would argue that up until a few months ago it was gold that was out of kilter with the economic reality and not the gold stocks,” Day said. “The gold stocks were where they should have been. Gold should have been lower, but it was this central bank buying that pushed it up.” He pointed to flat premiums for gold coins and steady outflows from gold exchange-traded funds as further proof that the gold price has been propped up mostly by central banks.
Willem Middelkoop of the Commodity Discovery Fund also shared his thoughts about the disconnect at VRIC.
Day echoed this idea: “Let’s not forget, we’ve been through this so many times in the past. Gold stocks can languish for a long time, but when they take off, first of all they take off suddenly, and secondly their returns are dramatic.”
This optimism brings us to the next question on investors’ minds.
Is now a good time to invest in gold stocks?
If the economy is headed into a recession, do investors really want to own gold stocks? According to Day, gold stocks have gained in the majority of the recessions since the 1960s. What he finds most noteworthy is that in the three recessions in which gold stocks were down, they were down by 2 to 5 percent; however, during the recessions in which gold stocks were up, they were up by much wider margins, ranging from 30 percent to upwards of 187 percent.
“The other thing that I find very interesting is that the gold stocks outperform the S&P 500 (INDEXSP:.INX) in every recession,” added Day. “If you expect a recession coming, particularly if you expect a stagflationary period, then you definitely want to have gold, you definitely don’t want to be in the S&P and you probably want to be in gold stocks.”
Gwen Preston of Resource Maven is looking to the second half of 2024 to really see things start to happen in the gold market, as that’s the point when the US Federal Reserve is expected to pivot toward interest rate cuts.
Jeff Clark of TheGoldAdvisor.com and Paydirt Prospector agreed that rate cuts from the Fed will be the catalyst to send gold stocks up. Citing the chart work of Sprott’s (TSX:SII,NYSE:SII) John Hathaway, Clark said that in the last three easing cycles, lower interest rates led gold stocks to double, triple or quadruple in value.
The missing puzzle piece for gold stocks
So what has to happen to bring the generalist investor back into gold stocks?
Preston weighed in on which gold stocks will be the first to move in that scenario.
‘When gold breaks through and starts to attract some generalist interest, the stocks that will move first and most will be producers, high-margin or high-grade producers, or producers of scale, because that’s where the big money goes,” she noted. “The big, advanced assets, such as the mines that are either under construction or reasonably close to construction, those are the stocks that I think will move first when gold breaks up through that range.”
Investor takeaway
While gold stocks haven’t experienced the same upward movement as gold itself, experts remain optimistic about the sector, with many believing that current gold company valuations present good entry points for investors.
However, market participants should continue to do their own research before jumping into the sector, and should keep in mind that it may be difficult for gold stocks to gain momentum without interest from generalist investors.
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
