Are late-miner stocks as cheap as the gold rally?

Logical correlation feels good. The differences can make investors uncomfortable. But with gold prices moving one way and gold mining stocks moving the other, there may be attractive opportunities for those who can tolerate short-term discomfort.

Loyal gold holders, sometimes known as “gold bugs,” may argue that physical gold is the best investment. However, it is not always convenient or possible to have tangible gold in your portfolio.

That’s why mine owners can provide good representation. They follow the spot gold price closely, or at least they usually do. But recently that correlation has broken down. Understanding why this can happen is a solid first step toward assessing the likelihood that high-conviction gold producer stocks will catch up in 2024.

Gold finally breaks out

Before you get serious about buying gold mining stocks, you’ll want to have a firm belief in the rising price of gold. Ultimately, falling gold prices will undoubtedly make it difficult for producers to generate solid profits.

From 2020 to 2023, gold could not get above $2,000 and stay there. It was a frustrating time that made even the most courageous gold bugs lose patience.

In the process, the annual inflation growth rate in the United States peaked at 9.1% in June 2022. One might assume that high inflation would trigger a massive rally in gold prices, like in the 1970s.

But that didn’t happen this time. The attractive yields of government bonds were a major contributing factor. After all, it’s very tempting to secure a 5% yield on government bonds when they are risk-free and easily fit into most portfolios compared to gold, which has its associated risks.

But the rush for gold was delayed rather than completely eliminated. Gold recently surpassed $2,000 and even touched $2,350. What exactly is happening?

With no earnings reports or conference calls for gold, investors will have to figure out why the yellow metal is hot right now. Perhaps it’s the prospect of bond yields falling as financial traders expect three interest rate cuts this year.

And then there is the almighty dollar, which has shown incredible strength over the aforementioned period from 2020 to 2023. As George Milling-Stanley, chief gold strategist at State Street Global Advisors, explains, traders expect the dollar to fall due to falling interest rates.

“If interest rates go down (as Jerome Powell keeps telling us) the dollar will weaken, and when the dollar weakens, gold tends to do better.”

In fact, gold is already performing “better” than it has been during the past few years of stagnation. If this happens, one might conclude that gold-related stocks should rise further. Bill Baruch, President of Blue Line Futures, succinctly explains the reasons for this correlation assumption.

“When gold prices rise, gold stocks are expected to outperform metal stocks. Their influence on gold justifies their outstanding performance. For any given movement in the price of gold, the operating cash flow these companies generate increases (or decreases) by a much larger percentage.”

That makes sense. However, price movements in financial markets are not always meaningful. Yes?

Diversity and Opportunity

It’s not hard to find commentators pointing out the difference between gold rising and mining stocks not rising. This increases the chances that gold producing stocks will catch up with gold.

If anyone knows why gold stocks have yet to catch up with metal prices, it’s Barrick Gold’s (NYSE:GOLD) Chief Financial Officer Graham Shuttleworth. As he points out, gold prices may rise, but the process of mining gold is not cheap.

There are still some inflationary pressures in sectors such as cement, lime, explosives and steel, and efforts are being made to reduce them.

So there is a problem. Almost every step of the gold production supply chain, from equipment and labor costs to processing costs, has been touched by brutal inflation.

Shuttleworth can assure investors that Barrick is “working” to alleviate inflation problems but cannot control prices for products such as cement and steel. As a result, enthusiastic investors should not expect gold stocks to rise further next week or even next month.

Unfortunately, catching up will be a process, not an event. Still, if we expect U.S. inflation rates to decline in the coming months, gold stocks like Barrick, Newmont (NYSE:NEM), and Kinross Gold (NYSE:KGC) may finally have their moment to shine.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.