Gold vs. Gold Equities: The Disconnect Won’t Last

Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits.

Gold and Gold Equities: Post-Election Insights and Investment Opportunities

Following the U.S. presidential election on November 5, 2024, gold faced significant pressure, closing as low as $2,563.25 on November 15. However, it demonstrated resilience, briefly closing above $2,700 for one trading session later in the month. Despite this recovery, November marked its worst monthly performance in over a year. The metal closed on November 29 at $2,643.15, reflecting a $100.83 drop per ounce or 3.67% decline for the month¹. Gold prices are typically determined by factors like supply and demand, inflation expectations, currency strength (especially the U.S. dollar), and geopolitical stability. Understanding these drivers can help investors interpret price movements.*

Looking ahead, we believe gold remains supported by both the U.S. and global macroeconomic factors. Expectations of inflationary policies under the new U.S. administration, heightened global geopolitical risks, strong central bank net buying, and anticipated rate cuts by the Federal Reserve suggest potential upward momentum for gold in the longer term. However, investors should remain cautious about potential risks, such as unexpected shifts in central bank policies, geopolitical events that defy predictions, or inflation failing to materialize as anticipated. These factors could limit gold’s upside or result in increased volatility.

Gold Equities Under Pressure: Sentiment, Leverage, and Market Dislocations

A weaker gold price led to gold equities underperforming the metal in November. The NYSE Arca Gold Miners Index (GDMNTR)⁵ was down 7.09%⁶, and the Small-/Mid-Cap Index, the MVIS Global Juniors Gold Miners Index (MVGDXJTR)⁷, was down 7.79% during the month⁸. Gold equities are now lagging gold this year, which is surprising. We believe this is the compounding result of market dislocations in valuing the gold equities over the past several years. For transparency, note that as of December 17, 2024, over the past 5 years, GDMNTR was up 43.45%⁹ and MVGDXJTR was up 31.58%⁸.

While gold spot prices have risen 28% year to date¹, gold stocks (GDMNTR) were up only 21%⁶. This disparity highlights poor sentiment toward the gold mining sector and the lack of investor interest.

The trading patterns of gold stocks during periods of rising versus declining gold prices further underscore this sentiment. Leverage works both ways, and we consistently emphasize this when discussing the benefits of investing in gold stocks. It’s important to remember that the same leverage amplifying potential gains during gold price increases can significantly magnify losses when prices decline, making gold equities particularly volatile and risky in unfavorable market conditions. A movement in the gold price typically results in a significantly more meaningful move on miners’ cash margins, resulting in operating leverage to gold prices.

However, in recent years, the market’s implied leverage of gold stocks to rising gold prices appears to be significantly lower than during periods of declining gold prices. We have been anecdotally making this observation, frustrated by the overly punitive impact this continues to have on the already oversold gold shares.

Understanding the Market Shifts of Gold Stocks vs. Gold Prices

Consider this year as an example: From the end of 2023 to the end of February, gold declined by 0.9%, while gold stocks were down 15.3%—a 17x multiple of gold’s move. In contrast, between the end of February and October 22, gold gained 34.5%, while gold stocks rose 67.7%, representing a much smaller 1.96x to the metal’s gains. Then, from October 22 to the end of November, gold fell by 3.9%, and gold miners as a group decreased by 14.8%—a 3.8x multiple of gold’s decline.¹

These time periods correspond with the highs and lows of the GDMNTR this year⁶. Furthering our analysis, we reviewed the quarterly ratios of GDMNTR moves relative to changes in the gold price over the past few years. The results confirmed our observations: on average, gold’s upward trading was not nearly as beneficial to gold stocks, and decline in the metal’s price disproportionally punished the sector.

Observe the comparisons of gold stocks versus gold in both “up” and “down” markets:

On average, gold’s upward trading was not nearly as beneficial to gold stocks.

A decline in gold’s price disproportionally punished gold stocks.

Since 2020, positive quarterly moves in the gold price have, on average, translated to outperformance by gold equities with a 1.96x multiple. We excluded the first and last quarters of 2020 from this calculation, as gold prices rose during those periods while gold stocks traded lower. Meanwhile, negative quarterly moves in the gold price led to underperformance of the gold equities by an average factor of 5.04x. We conducted the same analysis on a monthly basis and observed similar results.

Gold Equities as a Compelling Opportunity Amidst Post-Election Weakness

Over the past year, the significant gap between gold and gold equities had been narrowing. However, the post-election weakness in the gold sector has widened it again. With gold producers enjoying record margins and generating substantial free cash flow, we believe this disconnect might not last forever. Currently, the GDMNTR is trading approximately 35% below its September 2011 highs⁶, despite the gold price being higher by 41% since that time.

Investors looking to hedge broader market risks through gold exposure, might look at allocating to the gold mining sector alongside gold bullion.

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Investors should also consider risks like operational challenges in gold mining, regulatory changes impacting mining companies, or shifts in global demand for gold, which could all affect the long-term performance of gold equities.