(Kitco News) - After a strong rally that drove gold prices to a gain of 28% in 2024, the yellow metal has encountered resistance at $2,700 an ounce. While the precious metal still has room to move higher, one portfolio manager stated that the market doesn't necessarily need to go higher to generate significant value for investors.
In a recent interview with Kitco News, Chris Mancini, Associate Portfolio Manager of The Gabelli Gold Fund (GOLDX), shared his bullish stance on gold. However, he noted that even if gold prices consolidate around $2,650 an ounce, gold miners will still reap solid benefits.
“The economy has started to weaken, and it'll continue to do so, which means interest rates are going to decline further. We are going to see more and more advisors discussing gold, which will support ETF demand and help keep gold prices elevated,” he said. “If anyone starts paying attention to the mining sector, they should do really well.”
Mancini’s comments come as generalist investors continue to largely ignore the mining sector, despite the significant cash flow companies are generating with current gold prices.
Mancini’s outlook was reinforced after attending the Annual Denver Gold Forum. Although the prestigious mining conference was well-attended, Mancini noted that there wasn’t much enthusiasm. He added that the sector continues to preach to the choir while showing itself incapable of attracting new generalist investors.
Mancini explained that it’s not surprising generalist investors have kept their distance from the mining sector, given companies’ poor history of rewarding shareholders.
During the last major bull run from 2008 to 2011, mining companies overextended their balance sheets, chasing production. They were subsequently forced to write down overvalued projects as prices dropped.
Even during the price surge in 2020, when governments and central banks flooded financial markets with liquidity and gold prices climbed toward $2,000, miners struggled to attract attention as margins were squeezed. Despite rising gold prices, higher input costs and wages heavily impacted miners' margins.
However, Mancini said that it's time for generalist investors to forgive past mistakes and focus on the future. He highlighted that, during this year-long rally, mining companies have shown significant fiscal discipline. With wages and input costs declining, margins are expected to grow in a higher price environment.
“It’s been difficult to be a mining investor,” Mancini said. “The sector has faced one storm after another, but finally, things are starting to stabilize. There are some calm seas ahead, and I think we’re going to see some pretty smooth sailing.”
While there has been a significant lack of FOMO (fear of missing out) in the mining sector, Mancini said he expects sentiment to change as the new year approaches.
He anticipates that senior producers will show significant cash flow growth from the third quarter, which he expects will be put to use before the start of 2025.
“As good as gold looks, I think this is a pretty opportunistic time to invest in miners,” Mancini advised. “First, mining companies will start to pay down their debt, and at these current prices, they'll likely hit their target net debt levels by the end of this year. Next year, they will be in a good position to start paying dividends, raise dividends, or pay special dividends. When that happens, the market will start to wake up. But I don’t think investors should wait.”
Looking ahead, Mancini said that according to his modeling, gold producers have 20% upside potential in the current environment.
He also warned that one major risk for mining companies is government intervention. As miners begin to report significant margins, governments may view this as a potential windfall and raise royalty fees.
