The disconnect between the price of gold and gold stocks continues to confuse investors as we enter 2024. Over the past year, gold price hit record highs towards the end of 2023, boosting precious metals investor sentiment, despite the Federal Reserve continuing to aggressively raise interest rates.
However, the stocks of many gold producers with consistently profitable mining projects were stuck.
John Hathaway, managing partner at Sprott (TSX:SII,NYSE:SII), recently shared his thoughts on the disconnect between the gold price and gold stocks, explaining why this happens and what factors will drive gold stocks to start moving.
Hathaway points to the rise of passive investing as one of the reasons why gold stocks are struggling, as this style of investing does not favour small sectors like precious metals.
Then there’s the popularity of exchange-traded funds (ETFs); prior to this, many investors invest gold by directly owning gold stocks, but things changed nowadays.
Despite the fact that gold prices are already at all-time highs, Hathway says there are still more momentum that could push gold stocks higher. At some point, a higher gold price is bound to generate outside interest in gold mining stocks, which are tied to the price of gold, and a higher gold price would create impressive cash flow and profitability for producers.
Hathaway emphasises that equity markets are also moving towards mean reversion, not just in the gold mining sector, but in the entire external market towards mean reversion.
We all know about the magnificent seven U.S. stocks that drive almost the entire stock market. And as a contrarian investor, one should just do what Stanley Druckenmiller did and sell those giant stocks and move on to the real bargains in the stock market, including the gold mining sector, as well as oil and gas, or some other cyclical sectors.
Another is the potential for problems in the banking system, possibly related to commercial real estate. Hathaway explains that the bursting of the internet bubble in the early 2000s and the global financial crisis of 2007 and 2008 could combine to upend the consensus on investing in the banking sector. This situation will lead investors to seek diversification, and gold represents that diversification. This is why gold mining and gold itself will come back into favor.
