What Are the Real Reasons Behind the Underperformance of Gold Stocks?

Published on: Apr 1, 2024
Author: Caroline Kong

Reports of record high gold prices over the past month are no longer news at all. And just on the first trading day of April, gold prices once again hit a record high of $2,265. In addition to the latest U.S. inflation data cementing expectations of a Fed rate cut, the precious metal’s price has been supported by geopolitics and others.

Meanwhile, the price of large gold mining stocks, represented by the VanEck Gold Miners ETF (GDX), is still down 2% over the past year; the price of junior gold mining stocks, represented by the VanEck Junior Gold Miners ETF (GDXJ), is down 1.17% over the same period.

John Hathaway, senior portfolio manager at Sprott Asset Management, says this is the biggest disconnect he’s seen in nearly 25 years of tracking gold and gold stocks. The reason for this, he believes, is partly that cryptocurrencies have shifted investment in gold mining stocks, plus gold ETFs have cannibalised demand for gold mining stocks.

Niël Pretorius, CEO of DRDGold, pointed out that recent AI-focused tech stocks have gobbled up a significant amount of investment capital that was previously invested in gold equities. Despite being more attractive in terms of valuation, gold stocks have been dumped.

Michael Gray, a partner at Agentis Capital, says the lack of liquidity is a major issue facing the junior resource sector. In an interview at this year’s Vancouver Resource Investment Conference, he pointed out that 10 or 15 years ago, some of the major resource funds in Canada and the U.S. had roughly 80 positions, and now there are only 35, and that the lack of liquidity for junior companies is a big concern.

Some analysts have also pointed out that gold has far outperformed gold stocks over the past three years, which is actually good news for gold mining stocks. Because from historical experience, gold mining stocks have historically performed well after lagging significantly behind gold, and the trend divergence is only a short-term phenomenon.

Gold analyst Adam Hamilton said the spring rally in gold stocks has proved to be the strongest seasonal rally during the gold bull market. For example, the GDX index, while still down 2% from a year ago, is up 22% since 28 February, while the GDXJ is up 14.5%. So if you want to bet on gold in the coming weeks and months, gold mining stocks are actually the better choice. Combined with the fact that central banks are about to start cutting interest rates, it’s a great time to invest in gold stocks.

Jeff Clark, founder of TheGoldAdvisor.com, points out that looking back at the 11 easing cycles since the 1970s, gold prices have risen in nine of them. And during the last three rounds of Fed easing, gold stocks as a whole have climbed as much as 400%.

Morningstar recently quoted Purpose Investments chief market strategist as saying that investors may be better off buying gold stocks than physical bullion, and that gold stocks have a higher margin of safety and greater upside potential. When the Federal Reserve began to cut interest rates, gold stocks began to rise, and compared with steady income” ETFs, the higher return of gold stocks will naturally be more favoured by investors.

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