Over the past month, gold miner stocks rose strongly, rekindling investors' enthusiasm.
The Zhitong Finance App learned that geopolitical turmoil and financial uncertainty drove gold mining stocks to record their best August performance since at least 1994, despite severe shocks at the end of the month due to Federal Reserve Chairman Kevin Walsh's vow to curb inflation. The NYSE Arca Gold Miners Index rose 33% cumulatively in August, and rebounded strongly after falling 39% from a record high in March. The Vaneck Gold Miner ETF (GDX) recorded the largest monthly capital inflow since February this year. Gold prices, on the other hand, rose only 10% in August.
Depreciation transactions have been revived, and gold stocks have regained financial popularity
The US Treasury is trying to reduce long-term borrowing costs and induce investors to return to gold and alternative assets. Since the cost of miners is relatively fixed, their stock price is equivalent to a leveraged bet on a further increase in the price of gold. Some investors believe that mining stocks are expected to return to an epic market.
Craig Bassinger, chief market strategist at Purpose Investments, is the practitioner of this logic. He added miner Eagle Mining (AEM.US) to the company's dividend fund in mid-July. The stock surged 40% in August. Bassinger said, “The previous stage of washing dishes is over, and now people are starting to rekindle their passion for gold.”
Factors driving this wave of dips buying include investors' concerns that AI-related companies are overvalued, and that major central banks continue to increase their gold holdings. Meanwhile, the US Treasury's unexpectedly interfered with the bond market and lowered yields, rekindled investors' interest in so-called “devaluation transactions,” and this was a key driver of the sharp rise in gold prices last year.
Technical strategists saw positive signals in the chart pattern. Jeff Hirsch, editor of the Stock Trader's Yearbook, said, “Judging from historical rules, gold often stabilizes in mid-July, then enters a period of continuous seasonal strength from fall to the end of the year.” This bodes well for gold stocks.
US Treasury measures push gold stocks to record in August
Brompton Funds Chief Investment Officer Laura Liu said that the company began gradually resuming investment in gold-related stocks in August, having previously reduced positions during the sell-off. The company expects the price of gold to hit $5,000 per ounce again, just like in March, so it plans to further increase the share of gold stocks.
Liu pointed out, “Obviously, as trade pressure intensifies and geopolitical risks also rise, the situation in Iran seems to last longer than expected. Furthermore, the US midterm elections are near.”
Risks still exist under the carnival, and institutions are debating future market space
Not everyone is betting on gold rising. The trend of gold prices largely depends on the next steps taken by the Federal Reserve and the US Treasury. Gold generally performs better in a low interest rate environment because it does not generate interest on its own.
Fiera Capital portfolio manager Candace Bonsund believes that after “rising too much too fast,” the price of gold may fall back to $4,000 per ounce. The company expects the Federal Reserve to keep interest rates unchanged in September, but there is an upward risk of inflation, which may put pressure on gold prices and mining stocks. Bonsund said, “The sector may experience a brief resurgence. This obviously depends on monetary policy trends, US Treasury bond market dynamics, and developments in the Middle East.”
Derivatives traders showed a more cautious attitude than when they rebounded in January, using exotic options and spread strategies to control costs.
The implied volatility of GDX options jumped sharply in early August, but then declined, as traders were unwilling to bet on higher costs. Market sentiment towards gold miner ETFs remains optimistic, with call options trading at a higher price than put options. However, the ratio of open put options to call options has been rising, reaching its highest level since late January last week, which may indicate that investors are hedging.
Analysts also expect subsequent gains to slow. Newman Mining (NEM.US) shares surged 35% in August, while analysts' average price targets suggest an upward margin of about 7% over the next 12 months. After Agnico's US stock surged 40%, there is implied room for an increase of about 10%.
Canaccord Genuity Corp. analyst Carey McCrury said that although the pace of recent gains is unsustainable, such a sharp jump is not surprising. “Newman Mining is the only major gold mining company in the S&P 500, so if US investors want to increase their exposure to gold, it can get excess demand.” As for Agnico, the company was the worst performing large gold producer in the second quarter, so “it's a bit like it fell too hard before, but now it's rebounding back.”
Although the price of gold was below $5,000 per ounce for most of the second quarter, Newman Mining, Barrick Mining, and Agnico's earnings per share for the quarter increased at least 47% year over year. Free cash flow increased at the same time, while capital expenditure declined.
Ninepoint Partners' portfolio manager Navojka Wahowiak believes that the current valuation is not too high. Ninepoint believes that the price of gold is in the early stages of a multi-year cycle, so it will consider investing more money in gold-linked stocks.
Hoviak said, “Currently, it is indeed entirely dominated by macroeconomic factors. Macro factors may no longer be the main driving force in the future, but there is great uncertainty about the current policy direction.”