Fed rate cut sparks record gold price amid global uncertainty

Positive sentiments in the gold sector

With gold reaching fresh highs almost every month so far this year, it is not surprising that the mood at the well-attended Gold Forum Americas and Precious Metals Summit, both hosted each September in Colorado, was positive and upbeat.

There are reasons for gold mining companies and gold equity investors to be excited:

• Record gold prices are translating to record margins and free-cash-flow generation for gold producers
• Supporting continuing debt reductions
• Increasing dividends and share buybacks
• Increasing exploration activities
• Improved ability to fund growth projects

Strong financial performance

We think the gold mining sector has been laying the foundation for success for several years. The recent inflationary cost pressures had a negative impact, primarily due to companies not anticipating it so many miners missed their cost targets and disappointed markets. This is what played out in 2022. However, the sector remained focused on internal cost reduction and optimisation initiatives to help offset the external cost increases. Subsequently, as inflationary pressures subsided, operating costs appeared to be under control.

As the gold price rises, so do margins. Gold averaged a new record quarterly price in Q3 2024 of US$2,474 per ounce. This compares with a Q3 2023 average of $US1,927 per ounce and represents approximately a 100% margin expansion relative to Q3 2023. It is reason for gold equity market participants to be enthusiastic.

Strategic focus and confidence

We met and attended presentations with over 50 companies at the Gold Forum Americas, and another 35 companies at the Precious Metals Summit. The message from the producers has not changed over the last couple of years:

• Focus on value creation through cost control
• Operational efficiencies
• Disciplined deployment of growth capital
• Commitment to shareholder returns

The key distinction this time around was that the management teams appeared more confident in their abilities to carry out their strategies and more comfortable discussing growth plans. All of this was afforded by the benefits of a much higher gold price. Companies continue to emphasise their focus on quality over quantity and on value over volumes, which to us is a positive signal.

Response lacking despite strong performance

The number one question at these conferences seemed to be: “Why haven’t we seen a stronger response from gold stocks this year?” For example, in September, in Australian dollar terms, gold was up 2.38%, while the NYSE Arca Gold Miners Index was up only 0.80% during the month. Gold and gold stocks are among the best-performing assets in 2024. Gold stocks are up 28% year to date, which is in line with the metal, but below our expectations, given their strong leverage to the gold price.

Is there still room for gains in gold equities?

With most investors still on the gold market sidelines, the number one question they are currently asking after such strong performance this year: “Is there still room for more gains for the gold equities from here? Did we miss it?” Gold equities, as represented by the the NYSE Arca Gold Miners Index, are trading at the same level as they were in 2020. Back then the gold price was US$600 lower, and well below the historical highs reached in 2011. We reiterate our view that as market demand for gold assets increases, driven by the need to diversify and protect portfolios, gold equities will offer the safety of gold with the potential for higher returns relative to the metal. This is based not only on their gold price leverage and our outlook for higher gold prices in the medium and longer term, but also on the companies’ strong fundamentals and the expectation of a market rerating that reflects the sector’s improved health, profitability and sustainability.