We are currently seeing a gap of more than 30 per cent in the share price of the major gold miners relative to the bullion price alone for the past 10 years. This gap has historically almost always been closed. However, is there a basis for this divergence and was it better to invest in gold miners or in bullion itself?
Table of contetns:
- Central banks slow down with gold purchases
- Mining prices are rising along with the price of gold
- Is it worth investing in gold mining companies?
- What might be a better investment: gold or miners?
Central banks slow down with gold purchases
According to the World Gold Council (WGC), the largest buyer of gold in May was the National Bank of Poland (NBP), which purchased around 10 tonnes of gold bullion. Turkey came second (6 tonnes) and India third (4 tonnes). Overall bullion purchases, however, fell to their lowest levels in months.
Source: WGC
A similar situation is happening with the largest physical gold ETF, the SPDR Gold Trust ETF (GLD), where we have seen a divergence between gold holdings and price since April 2022. This means that investors are withdrawing their capital from the fund, even though the strong uptrend continues.
Source: MacroMicro
Mining prices are rising along with the price of gold
Gold prices are near their historic highs, yet the price of the VanEck Gold Miners ETF (GDX) has noticeably diverged from the bullion price since 2020.
Source: Tradingview
The all-in sustaining costs of gold mining (AISC) in Q1 of this year for the top 25 companies in the VanEck Gold Miners ETF (GDX) averaged US$1,365 per ounce and has regularly increased year-on-year. Through this increase, the average margin on gold ounce sales has been increasing slightly in recent quarters, which explains why gold mining company stocks have not performed, all that well during this time.
Source: Metals Focus Gold Mines Cost Service
In the past, the rise in gold prices caused miners' share prices to rise faster than gold itself, but in 2023 this relationship has disconnected. Elevated inflation seems to have severely hampered the miners' dynamic profitability growth.
Is it worth investing in gold mining companies?
There is no denying that when investing in mining companies, investors have to consider many factors. High mining costs, inflation and fluctuating gold prices are just some of the challenges. However, it is worth noting that these companies have the potential for significant gains if gold prices continue to rise, especially if they manage to keep costs under control and improve operational efficiency. Another advantage for the miners is the increase in mining in Q1 this year, which was the largest ever, increasing by 4 per cent year-on-year. With margins currently high, this means that the miners' situation could improve significantly in the coming months.
Source: WGC
What might be a better investment: gold or miners?
Investing in gold, both in physical form and through ETFs such as the iShares Gold Trust (CHGLD), can be an attractive option in the face of economic uncertainty and inflation. Considered a safe haven, gold has historically protected investors' capital well against inflation and financial market volatility, rising at an average annual rate of 7.5 per cent since 1972. It has therefore achieved a similar return to the nominally major US S&P 500 index.
Investments in industrial companies, which in theory should provide a kind of leverage to the gold price, which depends on the extraction costs (AISC) per ounce, can be more volatile. While the volatility of mining stocks has indeed been higher than the gold price, the total return since 2014, when the VanEck Gold Miners ETF (GDX) was created, has been worse than gold at 44 per cent (including dividends), compared to a 77 per cent increase in the gold price. In the coming quarters, however, mining companies may surprise positively with results, which may allow the gap to close.
Source: Conotoxia MT5, GDX, Daily
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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