Is Now The Time To Own Underperforming Gold Mining Stocks? One Trend Is 'Likely To Reverse'

The price of gold has remained above the $2,000 per ounce level since November and is currently making a run at its record high set on Dec. 12. Gold miners, however, have largely underperformed.

There has been some good news for miners in the past couple of sessions, however. World Gold Council data showed that total gold demand in 2023 climbed to record highs, driven by a surge in buying from central banks as they looked for assets to offset high-interest rates.

Gold Stocks On Thursday

• Newmont Goldcorp NEM rose 3%
• Kinross Gold KGC was up 5%
• Barrick Gold GOLD gained 3%
• Harmony Gold Mining HMY jumped 9%.
• The VanEck Gold Miners ETF GDX gained 4.1%.

Also Read: Oil From Russia Hits US Shores Under Sanction-Busting Loophole

Historically Poor Performance

The above exchange-traded fund tracks the performance of gold mining groups listed in the U.S. GDX lost 8% last year. Although it’s up in the past week or so, it has lost a further 3.3% in January.

Compare this to the spot gold price — the shiny metal gained 13.4% in 2023. So far this year, it’s flat.

Compare the two back from 2011; gold was at a previous record level of around $1,900. The GDX was at its pinnacle. Gold has moved on to peak above $2,150, while the GDX has more than halved in value.

The main answer as to why this has happened is the sharp rise in costs for miners. Oliver Gross, a mining investor and consultant, said in a post on X there had been a “massive increase in the cost of mining of the last 15 years.”

“Whether it is energy raw materials, lubricants, mining machinery, wages for miners and skilled workers, economic feasibility studies, permitting, exploration costs, etc. Most cost factors have increased tremendously.”

In percentage terms, the cost of producing gold has risen more than the price of gold in the past decade, putting pressure on profit margins.

Gross also points to “dilution” as the “creeping death” of many gold mining stocks in recent years as companies — striving to achieve growth — embarked on acquisitions, mergers and capital raises.

Dilution

Dilution is the creeping death of many junior gold mining stocks. But we have also seen significant dilution among mid- and large-cap gold producers over the past 15 years as a result of acquisitions, mergers and capital raises.

For example, just look at the history… pic.twitter.com/i8u8VOjG5u

— Oliver Groß (@minenergybiz) December 4, 2023

Au Ag, a precious metals investment group, believes that miners now have a better handle on costs, they’ve reduced their debt levels and have achieved sustained cash flows.

It added: “Gold miners are historically undervalued relative to gold, a trend likely to reverse and overshoot during the forthcoming secular gold bull market.”

Other reasons for owning miners include, increasing merger and acquisition activity, share buybacks and increased dividends returning cash to shareholders.

Now Read: Mortgage Rates Soar, Cash Buyers Score: The New Homebuying Playbook

Image: Pixabay