The gold sector is facing post-election weakness, widening the gap between the yellow metal and gold stocks.
Following the US presidential election on November 5, 2024, gold came under strong pressure, closing at $2,563.25 on November 15. However, it showed resilience, briefly closing above $2,700 for a day later in the month. Despite this recovery, the month of November recorded its worst monthly performance in more than a year. The metal closed on November 29 at $2,643.15, down $100.83 per ounce or 3.67% for the month. The price of gold is generally determined by factors such as supply and demand, inflation expectations, currency strength (especially the US dollar), and geopolitical stability. Understanding these factors can help investors interpret price movements.
Looking ahead, we believe gold remains supported by US and global macroeconomic factors. Expectations of inflationary policies under the new US administration, increased global geopolitical risks, significant net purchases by central banks and anticipated rate cuts by the Federal Reserve suggest potential upside momentum for gold over the longer term. However, investors should remain cautious of potential risks, such as unexpected changes in central bank policies, geopolitical events that defy predictions, or inflation that does not materialize as expected. These factors could limit gold’s rise or lead to increased volatility.
Gold Stocks Under Pressure: Sentiment, Leverage and Market Disruption
The fall in the price of gold led gold stocks to perform worse than the metal in November. The NYSE Arca Gold Miners Index (GDMNTR) was down 7.09%, and the small/mid cap index, MVIS Global Juniors Gold Miners Index (MVGDXJTR), was down 7.79% for the month. Gold stocks are now lagging gold this year, which is surprising. We believe this is a cumulative result of market dislocations in the valuation of gold stocks over the past several years. For greater transparency, note that as of December 17, 2024, over the last 5 years, GDMNTR has increased by 43.45% and MVGDXJTR has increased by 31.58%.
While the price of spot gold is up 28% year to date, gold stocks (GDMNTR) are up just 21%. This disparity highlights the lack of confidence in the gold mining sector and the lack of interest from investors.
Trading patterns in gold stocks during periods of rising or falling gold prices further underline this sentiment. Leverage works both ways, and we constantly emphasize this point when discussing the benefits of investing in gold stocks. It is important to remember that the leverage that amplifies potential gains if the price of gold rises can also significantly magnify losses if prices fall, making gold stocks particularly volatile and risky. in unfavorable market conditions. A change in the price of gold generally results in a much larger change in miners’ cash flow margins, which results in operational leverage on gold prices.
However, in recent years, the implied leverage of the gold stock market relative to rising gold prices appears to be significantly lower than during periods of falling gold prices. We made this observation anecdotally, in the face of the unduly severe impact this continues to have on already potentially oversold gold stocks.
Understanding how the gold stock market is moving in relation to the price of gold
Take this year as an example: from the end of 2023 to the end of February, gold fell 0.9%, while gold stocks fell 15.3%, or 17 times the fall of gold. In contrast, between the end of February and October 22, gold gained 34.5%, while gold stocks rose 67.7%, just 1.96 times the metal’s rise. Then, from October 22 to the end of November, gold fell 3.9% and gold miners as a group fell 14.8%, a 3.8 multiple of the decline gold.
These periods correspond to the highs and lows of the GDMNTR this year. To further our analysis, we looked at quarterly ratios of GDMNTR movements versus gold price changes over the past few years. The results confirmed our observations: On average, gold’s rise has not been as beneficial for gold stocks, and the metal’s falling price has disproportionately hurt the sector.
Observe the comparisons between gold stocks and gold in rising and falling markets:
On average, gold’s rise hasn’t been as beneficial for gold stocks.
Gold Stocks and Gold – Gold Bull Markets
Source: Bloomberg. Data as of September 2024. Past performance does not guarantee future results.
The fall in the price of gold has disproportionately hurt gold stocks.
Gold Stocks and Gold – Gold Bear Markets
Source: Bloomberg. Data as of September 2024. Past performance does not guarantee future results.
Since 2020, positive quarterly variations in the price of gold have resulted, on average, in the outperformance of gold stocks with a multiple of 1.96. We excluded the first and last quarters of 2020 from this calculation because gold prices rose during these periods while gold stocks fell. At the same time, negative quarterly movements in the gold price caused gold stocks to underperform by an average factor of 5.04. We performed the same analysis on a monthly basis and observed similar results.
Gold stocks: a compelling opportunity amid post-election weakness
Over the past year, the large gap between gold and gold stocks has narrowed. However, post-election weakness in the gold sector has deepened it again. With gold producers enjoying record margins and generating strong free cash flow, we believe this disconnect may not last forever. Currently, GDMNTR is trading approximately 35% below its September 2011 high, although the price of gold has increased by 41% since that date.
Investors looking to hedge market risks through exposure to gold may consider investing in the gold mining sector in addition to gold bullion. Investors should also consider risks such as operational challenges in gold mining, regulatory changes impacting mining companies, or changes in global demand for gold, all of which could affect performance long term of gold sector stocks.
