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Gold Falls Victim to Market Dislocation

October 10, 2023

Read Time 6 MIN

Gold succumbed to the pressures of rising yields and a strong U.S. dollar in September, but is positioned to benefit when market dislocation reverses.

Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits. An expanded PDF version of this commentary, including fund specific information can be downloaded here.

Gold finally gives way to dollar strength

Gold fell below $1,900 per ounce in the final week of September. Gold tested the $1,900 level at the end of June, and again in August, but found support and bounced above it. However, this time, it failed to find support, dropping to $1,849 per ounce on September 29, a $92 loss (-4.7%) for the month. Most of gold’s gains for 2023 have now evaporated. After resilient performance in the first half of the year, gold finally succumbed to the pressure of rising yields and an ever-so-strong U.S. dollar in the third quarter of the year.

U.S. 10-year and 30-year treasury yields are just shy of 5% at present and the U.S. dollar (as measured by the U.S. Dollar Index, or DXY1) managed to climb a whopping 6.4% from its mid-July lows to the end of September. The historically-strong, inverse correlation between gold and the U.S. dollar was on full display, with gold dropping 5.7% during the same period. What was expected to be a U.S. Federal Reserve (Fed) pause at its September 20 meeting instead turned into a skip and hold; this, after the Fed chairman (and, subsequently, other members) made it clear to markets that they were prepared to hike again if needed and hold policy rates at a restrictive level to continue their fight against inflation. Gold and gold equities sold off along with the rest of the U.S. equity markets and bonds. The NYSE Arca Gold Miners Index (GDMNTR)2 and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)3 were down 8.1% and 10.3%, respectively, during the month.

Demand from the East lends support to the West

The gold price in China also dropped, reducing what had been a record $120 per ounce premium over the international spot price to just around $10. Demand out of China has so far been very strong in 2023, with Bloomberg reporting a year-on-year increase of 30% in the domestic sales of gold bars and coins as of last week.* This pickup in demand from China, as well as from Turkey – together, representing two of the largest gold consumers in the East – has helped filled the gap left by declining western investment demand, as reflected by persistent outflows from gold-bullion-backed ETFs. Strong central bank gold buying has also supported gold prices.

Investors in China and Turkey are using gold to hedge against economic risks and weakening currencies. Turkey has been experiencing hyperinflation due to unconventional monetary policies. Since the presidential elections in May, the government has taken steps to restore confidence; however, there remains a high level of uncertainty. In China, the slowing economy, along with fallout from its real estate bust and government crackdown on the tech sector, has also created financial uncertainty. Central banks are buying gold to diversify away from the U.S. dollar and as a hedge against market volatility. Its performance during times of crisis, its role as a long-term store of value, and its high liquidity make it an asset of choice.

Well-positioned vs. “consensus” with gold?

In contrast, Western investors have yet to find a reason to seek shelter in what has been a very robust year for equity markets and, in particular, tech stocks. A “soft landing” now appears more within reach, and with inflation decreasing, markets seem to think there isn’t a need for gold. However, equity valuations are very rich, and the prospect of sustained, elevated interest rates poses a significant risk to most sectors and the entire economic and financial system. British pension funds, Credit Suisse, Silicon Valley Bank and Signature Bank were all victims of rising rates. Who is next? Is there another crisis looming?

The weakness in gold markets in these past couple of weeks comes precisely at a time when these risks appear to be front and center for investors, which, to us, creates a notable market dislocation. If or when tides turn – i.e., when markets are hit with a drop in corporate earnings, a deep correction in equity markets, a weaker jobs market or significantly higher unemployment, along with sustained, high interest rates under the stress of above-target inflation – we think gold is well positioned to benefit. In our view, gold equities should benefit to an even greater extent as victims of their own market dislocation. Currently trading at historically low valuation multiples, and significantly lagging gold bullion, the gold mining sector’s balance sheets, cash flow generation and capital allocation strategies are as strong as they have ever been.

Stepping out: gold conference recap

Last month, we attended two of the sector’s major conferences, both in Colorado: Precious Metals Summit, in Beaver Creek, focused on explorers, developers and emerging producers; and Gold Forum Americas, in Colorado Springs, which showcases seven-eighths of the world’s publicly traded gold and silver companies when measured by production or reserves. We held meetings with the management teams of more than 50 companies during the two conferences.

The mood at Gold Forum Americas was quiet and reflective—perhaps not surprisingly given the recent lack of investor appetite for gold equities and the resulting poor share price performance of many of the companies. However, the message continues to be generally upbeat, with a focus on portfolio optimization, disciplined growth, cost control and delivering against expectations. The companies understand that to achieve a rerating and attract a broad investor base they need to consistently demonstrate to the markets that this sector is investable throughout the metal price cycles, with a strategy that focuses on value creation by reducing costs, increasing mine lives and finding and developing new deposits all while maximizing returns for stakeholders. Build it, and they will come. Markets are efficient; if there is indeed a dislocation between equity prices and the implied value of the gold mining sector based on its sustainable profitability (as we believe), then it shouldn’t last too long.

At Precious Metals Summit, one CEO commented that this market feels like the bottom of the bear market in 2015 when gold fell to $1,050. However, the gold price is now in a bull market trend, with gold recently near record highs, and internal rates of return on many projects ranging between 20% and 50% or more. Talk about dislocation! As a result of the strong gold market and weak gold equity market, we are seeing development stage companies fall into one of three categories:

  1. Those with strong financial backing willing to raise capital to develop their projects at depressed equity valuations;
  2. Those who are bootstrapping their developments – starting smaller projects with less capital and using operating cash flow to expand production in years two or three; and
  3. Those with little access to capital who are either going dormant or looking for a buyer with better funding.

Our Strategy carries all three types of developers. We look at the quality and scale of projects along with geopolitical risks and management capabilities. Value and performance will ultimately be realized in high-quality, well-run companies. However, it seems that current conditions will certainly require some extra patience!

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Important Disclosures

* China Gold Premium Narrows After Prices Plunge Most Since 2020 - Bloomberg.

All company, sector, and sub-industry weightings as of September 30, 2023, unless otherwise noted.

Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.

Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

1The U.S. Dollar Index (DXY) measures the value of the U.S. dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. 2NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 3MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.

Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.

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 Van Eck Associates Corporation (“VanEck”). VanEck products are not sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding VanEck products 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.

MVIS Global Junior Gold Miners Index (the “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, Solactive AG has no obligation to point out errors in the Index to third parties. VanEck products are not sponsored, endorsed, sold or promoted by MarketVector Indexes GmbH and MarketVector Indexes GmbH makes no representation regarding the advisability of investing in VanEck products.

The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2023 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.

The Gold Strategy is subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. The strategy’s overall portfolio may decline in value due to developments specific to the gold industry. The strategy investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. The strategy is subject to risks associated with investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

Diversification does not assure a profit or protect against loss.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
666 Third Avenue | New York, NY 10017

Important Disclosures

* China Gold Premium Narrows After Prices Plunge Most Since 2020 - Bloomberg.

All company, sector, and sub-industry weightings as of September 30, 2023, unless otherwise noted.

Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.

Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

1The U.S. Dollar Index (DXY) measures the value of the U.S. dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. 2NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 3MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.

Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.

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 Van Eck Associates Corporation (“VanEck”). VanEck products are not sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding VanEck products 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.

MVIS Global Junior Gold Miners Index (the “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, Solactive AG has no obligation to point out errors in the Index to third parties. VanEck products are not sponsored, endorsed, sold or promoted by MarketVector Indexes GmbH and MarketVector Indexes GmbH makes no representation regarding the advisability of investing in VanEck products.

The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2023 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.

The Gold Strategy is subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. The strategy’s overall portfolio may decline in value due to developments specific to the gold industry. The strategy investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. The strategy is subject to risks associated with investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

Diversification does not assure a profit or protect against loss.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
666 Third Avenue | New York, NY 10017