Gold price rallies but miners need to catch up

In early March, the gold price hit a record high, exceeding $2,200 per ounce. Forecasts suggest that this could reach $2,300 in the second half of 2024.

The potential reasons for this are manifold. On the one hand, there has been a surge in demand for gold from investors in China, who may be looking to hedge against the country’s economic instability.

The People’s Bank of China was the largest buyer of gold in 2023, and given the ongoing challenges faced by China’s real estate sector, the traditional “safe haven” asset is continuing to see considerable interest.

On the other hand, the worsening geopolitical turmoil fuelled by conflict between Israel and Hamas, and Russia and Ukraine, may be pushing investors to seek out the traditional “safe haven” provided by gold.

Source: World Gold Council. For illustrative purposes only.

As noted by the World Gold Council, geopolitical risk has a significant impact on gold prices, as a source of stability in times of instability.

Typically, we expect gold miners to be relatively correlated with the price of gold. But it seems that the miners have been unable to keep pace with the surging gold spot price. According to VettaFi, the correlation between gold prices and gold miners stood at 0.6 in 2023, down from a historical level of 0.8.

Source: LSEG via Financial Times. For illustrative purposes only.

But this may not be the case for long. A higher gold price makes mining more profitable – that’s the bottom line. If gold miners are going to make up ground, it figures that this would happen during a period of higher prices.

It also provides incentives for mine expansions, as well as greenfield projects – smaller miners have likely been waiting on higher prices to start, or expand, projects. Given that many of these more junior gold miners have lower operating costs than their larger counterparts, they may be more sensitive to a rising gold price and poised for profitability.

Miners have also been stabilising their costs, reducing debt, and becoming more cautious with project investments – a “wiser” industry is emerging, one that has learned from past mistakes.

The gold mining sector is seeing consolidation. Acquisitions and other deals continue to materialise, with many larger miners targeting mid-sized and smaller firms – a more attractive prospect compared with expensive exploration.

It’s also worth mentioning that some miners are already seeing better results – Harmony Gold Mining Co. and Anglogold Ashanti have both risen around 20% this year.

So, despite miners being a little behind, they may well be undervalued. If the gold price holds, or increases further, gold miners could be well placed to close the gap.

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