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Owning gold, mining equities are still compelling despite a hawkish Fed - VanEck

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Welcome to Kitco News' 2022 outlook series. The new year will be filled with uncertainty as the Federal Reserve looks to pivot and tighten its monetary policies. At the same time, the inflation threat continues to grow, which means real rates will remain in low to negative territory. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2022.

(Kitco News) - As the Federal Reserve prepares to tighten its monetary policy in 2022 and the gold market continues to struggle below $1,800, one financial firm said that precious metals and the mining sector will still be next year's attractive investments.

In their latest monthly gold report, VanEck's Iamru Casanova and Joe Foster, Portfolio Manager and Strategist, said that gold is still a vital inflation hedge even as the Federal Reserve looks to take a more rigid stance on inflation next year.

The report was published as the Federal Reserve announced that it would double the pace of reducing its monthly bond purchases. At the same time, the U.S. central bank also signaled that it could raise interest rates three times next year.

However, the two gold analysts noted that the hawkish expectations come with some significant risks.

"We believe the Fed's tools to fight inflation could become a substantial risk to the economy and to the stability of the financial system. In a worst-case scenario, exposure to gold should help weather the storm. Even in the best case, exposure to gold, especially through the gold mining equities, could prove beneficial," the analysts said.


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Although the gold market has seen lackluster demand through most of 2021, the analysts noted that relatively elevated prices have been a boon to the mining sector. They added that higher gold prices will continue to support precious metal equities.

"We estimate that a 10% or so increase in the gold price translates into about 30% more cash flow for gold producers, which is why equities' price moves can be a multiple of the gold price move in any given period," the analysts said. "Gold has averaged around $1,800 per ounce so far this year. At these gold prices, companies are generating a significant amount of free cash flow. Margins are very healthy and companies have excess cash to invest in their operations and give back to shareholders, even if the gold price stays right where it is today."

VanEck notes that gold equities are extremely undervalued compared to historical norms. During the last gold bull market between 2006 and 2011, mining equities traded at 15x their price-to-cash-flow (P/CF) multiple. Currently, miners are trading at 8x their multiples.

"We believe that even in a scenario of sustained (rather than increasing) gold prices, miners' performance so far justifies a re-rating that brings valuations more in line with historical averages and reflects the significantly improved position of the gold mining sector. However, it may take the resumption of the gold bull market to achieve substantially higher valuation multiples for the gold mining equities," the analysts said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.