Gold’s bull case remains intact; creating solid value for senior producers - Gabelli Gold Fund’s Chris Mancini

(Kitco News) - The gold market continues to struggle as hotter-than-expected inflation causes investors to push back their expectations for a rate cut; however, one fund manager said his bullish outlook for gold remains in place through 2024.

In a recent interview with Kitco News, Chris Mancini, Associate Portfolio Manager of The Gabelli Gold Fund (GOLDX), said that despite the current challenges, the gold market remains well supported. He added that although the timing of the Federal Reserve’s easing cycle remains in doubt, inevitable rate cuts this year mean that it’s only a matter of time before gold prices start to move higher.

“As interest rates come down, money market rates become less attractive, and I think that will attract some investor attention again,” he said. “At the very least, it will stop the outflows; that could be enough to support higher prices.”

Although investment demand remains an important factor in prices, it continues to be overshadowed by unprecedented central bank demand, which Mancini said is a trend he expects will continue through the new year.

“The gold market has been able to withstand significant headwinds in the market because of central bank buying and it won’t take much renewed investor demand to push prices back to record highs,” he said. “In the current environment, record highs aren’t actually a very big bar to climb over.”

Although gold is struggling as markets pare back their aggressive Federal Reserve rate cut expectations, Mancini said that lower prices could represent solid buying opportunities. He added that although the economy has withstood the Federal Reserve's aggressive monetary policy tightening, recession fears have not entirely disappeared. He noted that the longer the Fed maintains its current policy stance, the greater the risk that the economy will be pushed into a recession.

“It can take anywhere between six to 12 months from the peak of a tightening cycle for the economy to fall into a recession. We are not quite at the end of that timeframe, so notwithstanding the current data, there is still time within this framework for higher interest rates to impact the economy,” he said. “I continue to think we could see a recession. I think a recession coupled with central bank buying gold is going to do very well this year.”

Along with gold, investors need to pay attention to the mining sector

As bullish as Mancini is on gold, he added that there is even more investment potential in the mining sector.

He added that not only do higher gold prices make miners more attractive, but a potential recession could have a significant positive impact on balance sheets.

“If there is a recession and the price of energy, the price of oil declines, along with the price of some other inputs, like labor costs, then that really sets up a bull case for gold and the mining sector,” he said. “I think right now, given where prices are, the mining sector is a great hedge against a potential recession. And now might be the best time to buy.”

Mancini’s bullish comments on mining equities come as negative sentiment causes broad-based weakness in the sector.

Following in gold’s footsteps Tuesday, The VanEcK Gold Miners ETF (NYSE: GDX) has dropped below $26 a share, last trading at $25.95, a four-month low. The senior mining ETF has fallen more than 13% so far this year.

Meanwhile, Newmont Mining (NYSE: NEW), the world’s largest gold producer, is currently trading at $32.06 a share, its lowest level since April 2020. Newmont has seen its share price decline more than 22%, underperforming gold and the broader market this year.

Gold prices, as it holds support around $2,000 an ounce, are down 3% year-to-date.

As for what sector has the most potential, Mancini said that his fund is focused on the top senior producers, and he recommends this is the segment of the market that generalists pay attention to.

“Right now, the mining sector needs to attract more generalists, and that's going to be easier with the bigger guys,” he said.

While there are a lot of great junior companies out there developing great projects, Mancini said there is a lot of uncertainty over how many of these projects will become producing mines. He noted that the cost of building a mine continues to rise, and project financing remains difficult, adding to the challenges.

“It's just really hard to be involved in that part of the market right now. It will be the producers and the royalty companies who will eventually benefit from this big dislocation,” he said. “Some of these bigger guys are in a really solid position to get some of these projects on the cheap, regardless of where gold prices are.”

Included in GOLDX’s top holdings are Newmont, Wheaton Precious Metals, Barrick Gold, Franco-Nevada and Agnico Eagle Mines.