(Kitco News) – Gold has been on a non-stop tear higher of late, hitting new record highs for five straight days to the excitement of long-time gold bulls. Although some analysts are warning the yellow metal may be approaching overbought territory, one portfolio manager says there are lots of upside opportunities in the miners.
“August 2024 was a month of significant volatility in global financial markets,” noted Imaru Casanova, a portfolio manager at VanEck. “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 Composite indices also experienced significant declines,” she added. “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.”
Casanova noted that while gold and related equities were “not immune to the turmoil,” similar to the rest of the markets, they “managed to bounce back after the panic subsided.”
“Supported by expectations of lower interest rates, financial markets stabilized towards month end,” she said. After setting a new record high of $2,524.64 at the close on August 27, Casanova noted that at that point, the precious metal had increased by $1,363.50, or 11%, over the past 10 years.
“Gold stocks also bounced back after the early August ‘everything’ sell-off, although the larger caps fared much better than the smaller companies,” she noted. “NYSE Arca Gold Miners Index (GDMNTR) was up 2.44% during the month, while the MVIS Global Juniors Gold Miners Index (MVGDXJTR) was up only 0.42%.”
Highlighting the obvious, Casanova said, “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,” she emphasized. “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,” she added.
Casanova said this development “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 price,” she highlighted. “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.”
“Yet, replacing these reserves is harder today than it has ever been before, which, in theory, should render each ounce more valuable,” she said. “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.”
While gold has continued to trek higher deep into September, she said there’s a possibility “gold price may stay around current levels,” unless there is a notable increase in “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,” Casanova said.
“Western investors have not yet jumped into the gold markets in full force,” she noted. “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?” she questioned.
“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,” Casanova concluded. “The historically cheap, financially strong gold mining equities should stand out as an attractive play to gain gold exposure.”
