For much of the year, gold mining stocks have been lagging the price of the precious metal they produce. But the tables have turned, and shares are outperforming the yellow metal as mining costs have stabilized and gold prices have seen a period of profit-taking among traders.

Now, heightened expectations of a Federal Reserve rate cut after softer-than-forecast inflation data Thursday seem set to boost gold and the companies that produce it in tandem.

Gold prices broke above the psychologically important $2,400-per-ounce mark Thursday and continued into Friday after consumer price data slowed more than expected. The popular VanEck Gold Miners ETF GDX jumped Friday morning but is now trending down (as of publication). The fund was up approximately 25% this year as of Thursday afternoon, while gold prices were up 17%, a reversal of an earlier trend when shares were lagging.

"Gold has broken out of its recent trading range to the upside after … CPI data confirmed U.S. inflation is easing," Chris Gaffney, president of world markets at EverBank, told Benzinga.

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Both headline consumer price data and numbers that strip out volatile food and energy prices came in softer than expected. 

"Given that the next Federal Reserve meeting is less than three weeks away, the market is currently pricing in that the Federal Reserve will skip that meeting and make their first cut in September," John Kerschner, head of U.S. securitized products at Janus Henderson Investors, said in a note. "Maybe more importantly, the market is now expecting three cuts by the end of January 2025."

When interest rates decrease, non-interest-bearing gold becomes more competitive with government bonds. Both investments are considered safe-haven assets, and gold in particular has been supported by conflicts in the Middle East and Ukraine. 

Gold Vs. Gold Miners

Gold prices can rise much faster than mining costs, which are often relatively fixed. That means that mining share generally outperform the price of the metal when it rises. Some mining companies also have the option of increasing production to capture more of the higher gold prices.

But earlier in the year, mining company share prices were lagging the metal's price as they reported fourth quarter costs that had risen, and the price of gold was relatively stagnant. 

As gold prices began to rise markedly in March, this dynamic changed. 

"As the price of gold rose, the operating leverage inherent in gold mining companies manifested itself in higher stock prices," Chris Mancini, associate portfolio manager of the Gabelli Gold Fund mutual fund told Benzinga. "This happened as costs stabilized in the first quarter and the market became more confident that increased profits from a higher gold price wouldn't be eroded by higher costs."

Higher interest rates were also weighing on mining shares as investors worried about company debt levels and higher corporate borrowing costs, both issues that don't affect the spot price of the metal.

Over the last three months or so, gold prices have been range bound as investors took profits, allowing mining shares to catch up.

And with Thursday's consumer price news, expectations of lowered interest rates have helped both gold and stocks of the companies that mine it, Gaffney said.

Gold Seen Near $2,500

"Until we actually see a cut by the Fed we're going to be limited on the upside," said Gaffney.

But once that happens, even if it's just a quarter of a percentage point cut, gold could have another rally, he said.

Gains will probably be limited, however.

"I believe gold's price will end the year near $2,500," Warwick Smith, CEO of precious and base metals company American Pacific Mining Corp. USGDF, told Benzinga. "Significant moves already should cap it at this level."

Hitting $2,500 would be a roughly 3% gain from the gold spot price of about $2,412 Friday morning.

"If the Fed begins to cut, I think gold will rally as more investors buy the physical gold-backed ETFs," Mancini said. "Lower inflation also translates into mining costs, so if costs stay constant, then the higher gold price will translate into higher profits, and the prices of gold stocks will rise."

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