As Gold Hits High, Miners Remain an Opportunity
18 September 2024
Read Time 5 MIN
Marketing Communication
Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits.
Here comes the volatility
August 2024 was a month of significant volatility in global financial markets. On 5 August, a sharp sell-off in equities spread across the globe. The primary trigger appears to have been a surprise rate hike from Japan's central bank after decades of near-zero rates, which led to a sudden unwinding of carry trades and a dramatic sell-off in global equities. TOPIX (Tokyo Stock Price Index)1 saw its largest one-day drop since 1987, falling by 12%. In the United States, the S&P 5002 and Nasdaq Composite3 indices also experienced significant declines. The turbulence was exacerbated by fears that the U.S. economic expansion may be coming to an end (following a weaker than expected July jobs report), while the rest of the world’s economies are struggling.
Not immune, but resilient…
Gold and gold equities were not immune to the turmoil, but like the rest of the markets, managed to bounce back after the panic subsided. Supported by expectations of lower interest rates, financial markets stabilized towards month end. During his Jackson Hole speech*, U.S. Federal Reserve Chairman Jerome Powell said, “the time has come for policy to adjust”, reaffirming expectations for a rate cut in September. Gold set new records once again in August, trading above the $2,500 per ounce level by mid-month, and reaching an all-time high of $2,524.64 at the close on 27 August. Gold was up $55.79 (2.28%) during the month of August, closing at $2,503.39 per ounce on 30 August. As a reminder, gold is up $1,363.50 (111%) over the last 10 years.4
Gold stocks also bounced back after the early August “everything” sell-off, although the larger caps fared much better than the smaller companies. NYSE Arca Gold Miners Index (GDMNTR)5 was up 2.44% during the month6, while the MVIS Global Juniors Gold Miners Index (MVGDXJTR)7 was up only 0.42%.8
Where’s the leverage?
Gold stocks didn’t outperform gold bullion in August. This is surprising considering that gold reached new highs, and that the cash flow generation and the valuations of these companies have most certainly improved. We estimate that, on average for the sector, margins expanded by about 8% in August compared to July. This is based on average all-in sustaining costs for the sector of around $1,400 per ounce and average gold spot prices for July and August of $2,392 and $2,470, respectively. Similarly, for those companies not yet in production (smaller caps), the value of their estimated gold in the ground has increased with the higher spot price, yet their valuations were practically unchanged during the month.
This suggests that the market is not yet valuing in these record gold prices. In their most recent Gold Monthly Statistics, Scotiabank estimates that the gold price reflected in the gold mining equities is on average about a 23% discount to current spot gold price9. Scotiabank’s report also contains historical data for a variety of valuation metrics for the sector which show that current valuations are at historical lows. Today, the adjusted market capitalization of Scotiabank’s universe per ounce of reserves in the ground is at the lowest multiple to the gold price as it has ever been.
Replacing gold reserves is getting harder
Yet, replacing these reserves is harder today than it has ever been before, which, in theory, should render each ounce more valuable. BofA Global Research (via S&P Global Market Intelligence data), estimates a sharp decline in the number of new gold discoveries, from an average of about 18 discoveries annually from 1990-1999, to 12 annual discoveries in the 2000s, to just 4 in the 2010s.† They estimate there have been only 5 major gold discoveries from 2020 to 2023. Finding large, economic gold deposits is becoming increasingly harder.
Global Gold Discoveries & Exploration Budgets
Source: BofA Global Research (via S&P Global Market Intelligence). Data as of August 2024.
The gold price may stay around current levels and could potentially rise if there is increased interest from western investors seeking the traditional benefits of gold. This could result in greater attention to gold stocks and possibly a re-assessment of the sector's valuation multiples, aligning them more closely with those seen in previous periods of strong gold performance.
Adjusted Market Cap per Ounce of Reserve (Divided by Gold Price)
Source: Scotiabank. Data as of August 2024. Figures represent the average of Scotiabank’s North American coverage.
Will we see a rebound in Western investment demand?
Western investors have not yet jumped into the gold markets in full force. However, over the last couple of months, the World Gold Council reported estimated positive fund flows into the North American gold bullion ETF products during July and August and into the European products since May.‡ This is an important reversal in the persistent trend of outflows global gold bullion ETFs have experienced since mid-2022. Is this the initial stages of returning investment demand?
The early August (and early September) equity markets’ weakness is signaling increasing concern about the health of the U.S. economy and the risk of a recession. Investors looking for more defensive, recession proof opportunities or simply a place to hide during periods of heightened uncertainty and volatility, may finally turn to the gold sector. The historically cheap, financially strong gold mining equities should stand out as an attractive play to gain gold exposure.
Gold ETF Flows by Region (Tonnes)
Source: World Gold Council. Data as of August 2024.
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Important Disclosures
* Speech by Chair Powell on the economic outlook - Federal Reserve Board.
† Gold from major discoveries grows 3%, although recent discoveries remain scarce.
‡ Gold ETFs, holdings and flows.
1 Tokyo Stock Price Index (TOPIX) is a capitalization-weighted index that tracks the largest companies in Japan by market capitalization.
2 S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples.
3 NASDAQ Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange.
4 Source: gold.org. https://www.gold.org/goldhub/data/gold-prices
5 NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck UCITS ETF plc. (the “Fund”) in connection with VanEck Gold Miners UCITS ETF (the “Sub-Fund”). Neither the Fund nor the Sub-Fund is sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding the Fund or the Sub-Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance. ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE ARCA GOLD MINERS INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The Fund have not been passed on as to its legality or suitability, and is not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data.
6 Source: FT. https://markets.ft.com/data/indices/tearsheet/summary?s=GDMNTR:PSE
7 MVIS®️ Global Junior Gold Miners Index is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MarketVector Indexes GmbH (“MarketVector”), Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Junior Gold Miners UCITS ETF is not sponsored, endorsed, sold or promoted by MarketVector and MarketVector makes no representation regarding the advisability of investing in the Fund.
8 Source: MVIS. https://www.marketvector.com/indexes/hard-asset/mvis-global-junior-gold-miners
9 Source: Scotiabank
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© VanEck Switzerland AG
Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck Switzerland AG which has been appointed as distributor of VanEck products in Switzerland by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck Switzerland AG’s registered address is at Genferstrasse 21, 8002 Zürich, Switzerland.
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck Switzerland AG and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply. A copy of the latest prospectus, the Articles, the Key Information Document, the annual report and semi-annual report can be found on our website www.vaneck.com or can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd, Feldeggstrasse 12, 8008 Zurich, Switzerland. Swiss paying agent: Helvetische Bank AG, Seefeldstrasse 215, CH-8008 Zürich.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck Switzerland AG
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