Gold Soars to Fresh Highs as Regional Risks Rise
June 11, 2024
Read Time 6 MIN
Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits. An expanded PDF version of this commentary, including fund specific information can be downloaded here.
Gold Continues to Reach New Highs
Gold has been supported this year by strong central bank gold buying and robust demand from Asia, especially China. Rising geopolitical tensions in the Middle East have likely also contributed to gold’s strength. In May, gold continued to reach new highs, trading at an intraday record price of $2,450 and closing at $2,425.31 per ounce on May 20. Gold eased during the remainder of the month, likely influenced by a stronger dollar and higher bond yields towards month-end. Gold closed at $2,327.33 per ounce on May 31, registering a 1.8% ($41.08) monthly gain.
Miners Are Also Continuing To Outshine
Gold equities continued to significantly outperform gold bullion in May. NYSE Arca Gold Miners Index (GDMNTR)1 and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)2 were up 5.98% and 10.62%, respectively. We believe miners’ amplified leverage to the metal reflects both: 1) gold stocks playing catch up, coming from oversold levels relative to bullion; and 2) overall strong fundamentals for the sector as evidenced by Q1 2024 financial and operating results, where “in lines” and “beats” outnumbered “misses”.
We have repeatedly brought attention to the importance of companies meeting expectations with respect to their share price performance and May is a good example of that. All else being equal, a gold price forecast of $2,300 per ounce for Q2 2024 (in line with the average spot price so far for this quarter) should result in significantly higher earnings and cash flow generation for the industry in Q2 compared to Q1, when the spot gold price averaged about $2,070 per ounce. Another strong earnings season for the sector should support further increases in valuation multiples assigned to gold equities.
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In Focus: Regional And Country-Specific Risks
We have also highlighted the impact of jurisdiction risk on companies’ valuations. Gold mining companies face many risks related to the regions where they operate. Markets have a hard time differentiating between broader jurisdictional risk and risks to mining operations, specifically. Companies operating in a country or region with heightened political instability, for example, will typically trade at a discount even if their businesses have been operating normally and are unaffected by unrest or risk of turmoil.
Managing country exposure within a portfolio of gold equities is a challenging task. With more than 50 elections taking place around the globe in 2024, this task comes into sharper focus. Elections bring with them political, social, and economic uncertainty; they can be politically destabilizing, lead to social upheaval, or significantly change (for better or worse) the growth outlook of a country or region and, therefore, its general investment appeal. The outcome of an election can trigger impactful responses in the financial markets, as investors attempt to assess the potential ramifications of a new government.
Is Mexico Still In Its “Prime”?
The mining sector was closely watching the outcome of Mexico’s presidential election in early June. Mexico is the world’s largest producer of silver (accounting for about 25% of global silver production in 2023) and among the top 10 global gold producers (about 4% of global gold production in 2023). It also produced about 3% and 5% of the world’s copper and zinc, respectively in 2023.*
Despite many challenges, it is fair to say that Mexico, for a long time, ranked among the world’s most prime mining jurisdictions. However, this “prime” rating recently came into question when Andres Manuel Lopez Obrador (AMLO) was elected Mexico’s president in 2018. The market’s concerns were justified too. Under AMLO’s administration, no new mining concessions have been granted and a proposal to reform the country’s mining law was approved in 2023.
Some of the most significant changes in the new law (nicely summarized in a recent report by Scotiabank Global Equity Research) include:
- A 30-year limit on mining concessions (compared to a 50-year limit under the old mining law)
- Added grounds for cancelling current mining concessions as well as a more extensive list of requirements to maintain a valid mining concession
- Creation of additional environmental concessions for mining use (no new concessions will be granted in regions without availability of water, in natural protected areas or if there is a risk to the general population)
- Concession allowance on a per-mineral or per-substance basis (compared to previous mining concessions granted for the totality of the underlying resources)
At the end of his six-year presidential term, AMLO has also proposed a significant number of changes (20) to Mexico’s constitution, including two proposals that directly impact the mining industry. These include a proposal to no longer grant concessions for open-pit mines and to grant water concessions for domestic-use-only in regions with water scarcity.
Our discussions with the management of several mining companies with operations and/or projects in Mexico gave us reason to be cautiously optimistic, with most companies expecting that a new government (even if still a MORENA party government) would be a welcome change for the mining industry. President elect, Claudia Sheinbaum – a scientist, engineer and academic – was seen as a more pragmatic candidate and likely to have more moderate views compared to AMLO. However, a lot of the optimism also stems from the fact that approval of constitutional changes would require her party to have a super-majority in congress, and this was an outcome most market participants were not expecting. Her landslide victory came with the MORENA party achieving qualified majority in the lower chamber, and very close to also achieving super-majority in the senate. This took markets by surprise, with Mexican equities and the Mexican peso dropping to reflect a more negative outlook for the country.
As far as the mining industry is concerned, Sheinbaum has not specifically discussed her plans for the sector, but she has promised to continue to push forward AMLO’s agenda. It is still too early to predict what her approach will be towards mining, but her party’s position in congress gives her the power to make changes that could potentially adversely affect the industry. “More of the same” seems the most likely outcome for now, which is disappointing. Comments by the re-appointed Minister of Finance seem to have offered some reassurance to investors. The president elect’s acceptance speech appears to have also included promises for an autonomous central bank, adherence to legality and a commitment to boost private investment (both national and foreign). So, perhaps not all hope is lost. We continue to look forward to being able to upgrade Mexico in our rankings, making it a prime destination for mining investment once again.
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Important Disclosures
* U.S. Geological Survey, Mineral Commodity Summaries, January 2024.
All company, sector, and sub-industry weightings as of May 31, 2024, unless otherwise noted.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.
Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
Diversification does not assure a profit or protect against loss.
Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
1NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 2MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.
Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.
Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
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 Van Eck Associates Corporation (“VanEck”). VanEck products are not sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding VanEck products 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.
MVIS Global Junior Gold Miners Index (the “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, Solactive AG has no obligation to point out errors in the Index to third parties. VanEck products are not sponsored, endorsed, sold or promoted by MarketVector Indexes GmbH and MarketVector Indexes GmbH makes no representation regarding the advisability of investing in VanEck products.
The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
Gold investments are subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. Investments in gold may decline in value due to developments specific to the gold industry. Foreign gold security investments involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. Gold investments are subject to risks associated with investments in U.S. and non-U.S. issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© Van Eck Associates Corporation.
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Important Disclosures
* U.S. Geological Survey, Mineral Commodity Summaries, January 2024.
All company, sector, and sub-industry weightings as of May 31, 2024, unless otherwise noted.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.
Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
Diversification does not assure a profit or protect against loss.
Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
1NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 2MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.
Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.
Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.
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 Van Eck Associates Corporation (“VanEck”). VanEck products are not sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding VanEck products 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.
MVIS Global Junior Gold Miners Index (the “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, Solactive AG has no obligation to point out errors in the Index to third parties. VanEck products are not sponsored, endorsed, sold or promoted by MarketVector Indexes GmbH and MarketVector Indexes GmbH makes no representation regarding the advisability of investing in VanEck products.
The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
Gold investments are subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. Investments in gold may decline in value due to developments specific to the gold industry. Foreign gold security investments involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. Gold investments are subject to risks associated with investments in U.S. and non-U.S. issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© Van Eck Associates Corporation.