Miners’ Margins Grow as Gold Soars to Fresh Highs
12 August 2024
Read Time 4 MIN
Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits.
Another month, another high!
Gold reached intra-day highs of $2,431 in April; $2,450 in May; and $2,483 per ounce in July. Gold’s rally this year has been impressive. The sideways price action that we were expecting, following such a strong start to the year, has occurred at a much higher level than we would have predicted.
Gold has averaged around $2,358 per ounce since its April peak
Source: Bloomberg. Data as of 31 July 2024.
Key drivers: heightened geopolitical risk and market rotation
In July, gold continued to be supported by heightened global geopolitical risk as the U.S. elections took an unexpected turn, and tensions worsened in the Middle East. Gold's strength in July coincided with a 1.60% decline in the Nasdaq 100 Index1, reflecting a broader pullback in equity markets driven by powerful technology stocks. “Rotation” was a hot word in financial markets in July – one could fairly assume that gold would benefit from such a rotation into safer, cheaper, or more defensive assets. Investment demand, as gauged by the holdings of gold bullion backed ETFs, picked up in July, with net inflows resulting in a 1.8% increase in holdings during the month.
Also…rate cuts
Last, but not least, lower-than-expected June U.S. Consumer Price Index readings seem to have convinced markets that the U.S. Federal Reserve (Fed) will soon cut rates, supporting gold. At the end of July, three 25 basis point cuts were priced in for 2024, compared to two cuts priced in at the end of June. While past performance is not indicative of future results, lower real interest rates have historically been positive for gold. The performance of gold in the year or so following the start of the last three rate cutting cycles supports this view (chart below). Gold closed on 31 July at $2,447.60 per ounce, up $120.85 or 5.19% during the month.
Historically, gold has performed well following the Fed’s first rate cuts
Source: JPMorgan, VanEck. Data as of 31 July 2024.
Miners are starting to shine
Gold stocks showed their gold price leverage in July. The NYSE Arca Gold Miners Index (GDMNTR)3 and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)4 were up 10.91% and 8.38%, respectively, amply outperforming bullion. For the gold miners, these record gold prices mean record margins. With costs contained, their free cash flow generation expanded significantly in Q2 (see table below).
Healthy margins for miners these days—despite higher costs
| AISC ($) | Gold Price (Avg., $/oz) | Implied Margin ($) | |
| 10-Year Average (thru Q4 2023) | 1,053 | 1,497 | 444 |
| 5-Year Average (thru Q4 2023) | 1,156 | 1,747 | 591 |
| Q1 2024 | 1,429 | 2,072 | 643 |
| Q2 2024 | 1,428 | 2,338 | 910 |
Source: Scotiabank, VanEck. Data as of 30 June 2024.
Gold companies have been reporting their financial and operating results for Q2 2024. We track a universe of companies during the earnings season to assess how they deliver against expectations, and thus far, the updates appear to be a net positive for the sector with about 80% of results beating or meeting consensus estimates. This is encouraging, and we continue to stress how critical it is that these companies consistently meet their targets. Achieving this should lead to higher valuations that are supported not only by high free cash flow yields during periods of record gold prices, but also by the markets’ conviction that these companies are solid, sustainable and profitable businesses, able to offer positive returns throughout the commodity cycles.
Demand could still be a major catalyst
As of end-July, gold and gold stocks were among the top performing assets so far this year. While gold has reached new highs, gold stocks remain well below their historic peaks. Even a slight increase in global capital allocations to gold and gold mining stocks could have a material impact on the price of gold and gold equities, given that the sector represents a very small percentage (approximately 1%*) of global financial assets. Similarly, despite very robust purchasing of gold in recent years, as a group, central banks of emerging economies remain relatively underinvested in gold, with indications that they could be looking to increase their percentage of total reserves held in gold. If both investors and central banks’ sentiment towards gold and gold equities continues to improve from here, the additional demand could have a significant positive impact on the gold price and the valuations of gold stocks.
China/EM central banks have been big buyers…but could be bigger…
Source: Goldman Sachs, World Gold Council. Data as of 30 June 2024.
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Important Disclosures
* Gold Market Primer: Market size and structure - World Gold Council.
1 Nasdaq 100 Index is a stock market index made up of equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
2 Consumer Price Index (CPI) is a measure of the average change overtime in the prices paid by urban consumers for a market basket of consumer goods and services.
3 NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck UCITS ETF plc. (the “Fund”) in connection with VanEck Gold Miners UCITS ETF (the “Sub-Fund”). Neither the Fund nor the Sub-Fund is sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding the Fund or the Sub-Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance. ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE ARCA GOLD MINERS INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The Fund have not been passed on as to its legality or suitability, and is not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data.
4 MVIS®️ Global Junior Gold Miners Index is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MarketVector Indexes GmbH (“MarketVector”), Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Junior Gold Miners UCITS ETF is not sponsored, endorsed, sold or promoted by MarketVector and MarketVector makes no representation regarding the advisability of investing in the Fund.
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This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions. This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
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© VanEck (Europe) GmbH
Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH / VanEck Asset Management B.V.
